Hawaii healthcare feeling ‘the wrath of CON’ laws
from Grassroot Institute, October 2023
Probably one of the best critiques of medical certificate-of-need laws you will ever hear was presented last week on Keli‘i Akina’s “Hawaii Together” program on ThinkTech Hawaii.
Matthew Mitchell, a senior research fellow at the Knee Center for the Study of Occupational Regulation at West Virginia University, explained to Akina and the show’s viewers why CON laws exist, why they haven’t worked, how they harm patients and how to get rid of them.
As Akina noted, CON laws require businesses that want to build a new medical facility or offer a new service to go through an arduous state approval process. Moreover, they must prove their service is “needed.”
Mitchell said the “need” requirement especially is unusual because “the aim is not to assess the quality of the provider, the adequacy of their facility, their safety record, anything like that. The entire aim … is to second-guess the provider’s belief that the service that they want to offer is actually needed.”
He said for the vast majority of other goods and services in our economy, “nobody asks a provider or a would-be service provider, you know, ‘Do you think that this service is needed?’ Obviously, by virtue of the fact that they want to offer this service, they must think it is needed.”
Similarly, CON laws allegedly aim to eliminate “duplication” of services, presumably to not waste precious economic resources.
But “what the regulation calls duplication,” he said, “is what economists — and, frankly, what normal people, I think, everywhere — call competition. So it’s essentially mandating that there not be any sort of competitive provision of healthcare.”
Mitchell said the biggest defenders of CON laws are incumbent providers. And he is appalled that many states, including Hawaii, allow these special interests to participate in the approval process and typically oppose the new CON applications.
He said he often hears the analogy of McDonald’s needing permission from Wendy’s to open a new hamburger restaurant — “but it’s worse than that, because we’re talking about life and death here. We’re talking about services that patients want, and that medical professionals are qualified to give.”
Mitchell said there have “over 400 separate tests assessing the effect of CON on access, cost and quality. And it’s really extraordinary in terms of how overwhelming the evidence is, because they almost all point in the same direction” — that it reduces healthcare access and quality.
Mitchell said Hawaii requires CONs for more healthcare services than any other state in the union — including services needed by vulnerable populations, such as substance abuse facilities, psychiatric care facilities, neonatal intensive care, nursing home care, hospice care, ground ambulances — even burn care.
“Whenever I see that one, I scratch my head because one of the original rationales for a CON is to discourage providers from offering care that’s not needed,” Mitchell said. “I don’t think there’s any evidence, anywhere, that has ever been accumulated to suggest that doctors are offering burn care when burn care is not needed.”
Asked where Hawaii could start to reform the CON system, Mitchell said, “One simple step is to raise the thresholds at which CON is triggered.” He said it’s “ridiculous” that “to add a hospital bed … you have to go through a CON.”
Another would be to “get rid of the word ‘duplication’ in the regulations so that a CON isn’t denied just based on the fact that a competitor might duplicate — i.e., compete with — an existing service.”
Another would be to preclude incumbent providers from sitting on a CON board or opposing the applications of would-be competitors.
But ultimately, he said, the best way would be to “tell the human story and talk about how there’s actual constituents in your community, [whose] lives are put in danger by not having access to higher-quality, lower-cost care.”
TRANSCRIPT
10-10-23 Matthew Mitchell with host Keli‘i Akina on “Hawaii Together”
Keli‘i Akina: Aloha, everyone. Welcome to “Hawaii Together” on ThinkTech Hawaii. I’m Keli‘i Akina, your host and also president of the Grassroot Institute of Hawaii.
If you know anything about Hawaii’s healthcare industry, you realize that it’s almost on life support. We have a shortage of doctors and other personnel.
If you live on the neighbor islands, you could wait up to a year to get an appointment with a specialist. Or you may not be able to do that at all on the island, and you’ll have to go to Oahu or to the mainland.
We’ve heard some very sad stories of people dying without the appropriate medical attention simply because they couldn’t get it.
Now, there are many things we can do about Hawaii’s healthcare situation. And at the Grassroot Institute, we have made several proposals.
There’s one thing in particular, and that’s what I’d like to talk a bit about today. That’s making a careful review of the approval process for new hospitals or clinics or medical facilities.
Right now, to build a new medical facility, even a kidney dialysis unit, or add new beds to an existing hospital, healthcare businesses have to go through a whole bunch of hoops. A very arduous state approval process in order to obtain what is called a certificate of need. That’s C-O-N, certificate of need.
So, why do these rules exist? Are they here to help people have access to medical care, or do they hinder? And can we change these rules so that we can have, for our people, the kind of access to healthcare that they deserve?
Those are some of the questions that we’re going to ask today as we talk with my guest. Joining me is Matthew Mitchell, Ph.D. He’s an economist, and Dr. Mitchell is a senior research fellow at the Knee Center for the Study of Occupational Regulation at West Virginia University. Matt, aloha, welcome to the program.
Matthew Mitchell: Aloha. Thank you so much for having me.
Akina: Well, Matt, I’m delighted that you and I are able to see each other from time to time at national conferences. You’re in demand as a speaker, you travel quite a bit.
One of the areas of your expertise happens to be this whole business about certificates of need, or the rules that have to be adhered to if businesses or hospitals or others are going to be able to expand and open facilities.
Now, before we dive into it, can you tell my audience a bit about how you got into this kind of work and what attracts you to this? Maybe a little bit about what you do nowadays.
Mitchell: Yeah, absolutely. So, I mean, part of my interest is just the interest in healthcare in general. My father is a physician, my brother was a physician. So I’ve always had a little bit of a tangential interest in the healthcare industry anyway.
But this one really came up not so much because of healthcare, but just because the nature of the regulation is so obviously anti-competitive. It so obviously exists to protect incumbent providers, those who are already offering care, to the expense of their competitors, but also, unfortunately, to the expense of patients and payers.
And so because of that, that’s really what kind of got me interested in the issue. You know, my view is, we should be trying to amend and reform and eliminate those regulations that are — you know, it’s the most obviously anti-general-welfare type of regulation — are the ones that should be the first ones to go.
And so, you know, there’s reasons for those on the right who are, you know, interested in seeing more markets flourish and seeing more competition, want to get rid of these regulations. But there’s also interest, I think, in those on the left trying to get rid of regulations that benefit, you know, big and wealthy providers at the expense of the little guy. So that’s really kind of what attracted me to the regulation at first.
Akina: Well, there’s something in this, indeed, for everyone, regardless of political background. We’re looking at a real human need. People are not getting the medical care that they absolutely need, and we need to do something about it.
I can’t see anything more worthy to rally around than something like that. And I like your approach.
But first, brass tacks. Let’s talk about what a certificate of need is and why in the world it is required. If you would just speak to our very wide and general audience, give us a little bit of explanation.
Mitchell: Absolutely. So it’s an unusual regulation, and it’s unusual insofar as the aim is not to assess the quality of the provider, the adequacy of their facility, you know, their safety record, anything like that. The entire aim of the regulation is to second-guess the provider’s belief that the service that they want to offer is actually needed.
So as you can imagine, this is pretty strange, pretty unusual, in a market economy to have a regulation like this. You know, the vast majority of other goods and services, nobody asks a provider or a would-be service provider, you know, “Do you think that this service is needed?” Obviously, by virtue of the fact that they want to offer this service, they must think it is needed.
So that sort of makes it unusual right off the bat. But then there are other characteristics that make it quite unusual as well.
So, in their attempt to assess whether a provider, you know, the service is needed, it’s quite costly. And in Hawaii, it’s uniquely costly [is] because there’s no limit. The potential fees are a percentage of the cost of the investment, and so with no cap on it. That’s sort of somewhat unique.
And it can take months — sometimes even years — for the process. But that in itself doesn’t make it all that unusual. There’s a lot of regulations that are like this.
But here’s the part that’s really strange: In your attempt to try to prove that the service you want to offer is needed, your competitors — those who are already in business — actually have a role to play.
So they are allowed to come before the regulator, oppose the application. They are allowed to even sit on the CON boards often in states and play, you know, a role essentially in determining whether or not they get any competition.
Now, remarkably, in a lot of states, it’s pretty common for the incumbent providers to then sort of negotiate with whoever is trying to enter the market. And they may come to an agreement that says, “OK, so long as you don’t encroach on my territory, you don’t offer your needed healthcare service anywhere near me, then it’s OK.”
You know, that’s pretty remarkable. In antitrust, that would be a per se violation of the Sherman Antitrust Act if it were, you know, private people colluding like that or giving up territory. But because it’s encouraged by the state, it’s not illegal.
And then, finally, the regulation itself, the certificate of need will be denied if it can be shown that it will duplicate an existing service. So what the regulation calls duplication is what economists and, frankly, what normal people, I think, everywhere, call competition.
So it’s essentially mandating that there not be any sort of competitive provision of healthcare. It’s a pretty, pretty, bizarre sort of regulation.
Akina: Well, indeed it is. And just so that we understand what you’re talking about, under certificate-of-need laws, if a hospital wanted to add services, or if a group of people in a rural community want to have a clinic started, they have to go before a board that contains, I mean, that has competitors judging whether or not there’s a real need of this service.
It’s kind of like saying, a group of people want to start a hamburger stand, but they have to get the approval of McDonald’s and Burger King to be able to set one up.
Mitchell: Yeah, that’s absolutely right. And, you know, I often make that analogy and I hear other people make the analogy, you know, of McDonald’s having to get Wendy’s, you know, permission.
But it’s worse than that, because we’re talking about life and death here. We’re talking about services that patients want, and that medical professionals are qualified to give. And Hawaii is unique in that it requires a certificate of need for more healthcare services than any other state in the union.
We’ll get to this in a minute, but there’s actually quite a few states that have no certificate-of-need laws whatsoever, which is why we kind of know how they work.
But Hawaii requires it for 28 different services and technologies, including services that are needed by vulnerable populations: substance abuse facilities, psychiatric care facilities, and then, you know, of course, open-heart surgery and organ transplants and neurosurgery and all sorts of other types of services.
Akina: What are some others that people would be surprised to hear Hawaii requires a certificate of need in order to operate?
Mitchell: Well, let’s see. So, ground ambulances. Burn care. Whenever I see that one, I always scratch my head because, you know, one of the original rationales for a certificate of need is to try to discourage providers from offering care that’s not needed.
You know, so there was this idea that, well, maybe providers are offering more care than people need. Maybe they’re sort of like upselling patients, you know, for more expensive and elaborate procedures, especially in light of insurance and the fact that patients often aren’t, you know, actually paying the bills.
So, OK, that makes somewhat sense. But I don’t think there’s any evidence, anywhere, that has ever been accumulated to suggest that doctors are offering burn care when burn care is not needed. You know, that’s just sort of silly.
Same thing goes for neonatal intensive care, which is also regulated; nursing home care; hospice care, which is generally thought to be a low-cost alternative to, you know, end-of-life care in a hospital. This is exactly the kind of alternative care that, we’ve, you know, politicians left, right and middle have been trying to encourage. It’s bizarre that in states like Hawaii, we’re actually trying to limit this low-cost alternative.
Akina: It’s counterproductive as well.
Now, there are a lot of states, as you mentioned, that have reformed or abandoned their CON laws. And one of the reasons is that there has been some research out there showing what the negative impact is of CON laws on various communities. Can you sum up some of that?
Mitchell: Yeah. So, you know, going back to almost your original question of what made me interested in this topic, and one of the things that got me interested in it is just the fact, the sheer number of studies that have been done on this. Really, you don’t encounter this very often.
But what has happened — so basically, you know, the federal government encouraged states to adopt CON laws, dating all the way back to the ’70s. They withheld federal funds from any state that didn’t adopt a CON law. And by the ’80s, they were sort of already amassing some data and some evidence to suggest that they didn’t work, so the federal mandate went away.
And at that point, about 15 states — 12 states did it, like, right away, and then over the next few years, a few more did away with their certificate-of-need laws. So now, we have, essentially, this kind of nice, natural experiment. You know, Louis Brandeis famously talked about the states of laboratories of democracy.
What’s interesting is that that was a certificate-of-need case. It had to do with selling ice. It’s one of the other rare areas where you need a certificate of need. But, it really is truly a laboratory because now, about a third of the country happens to live in a state where there’s either no, or extremely limited, certificate-of-need laws in healthcare.
So these are, you know, high-income, low-income, urban, rural, coastal, intercontinental, all sorts of different varieties of states. And we can look at what’s happened in those states that have either done away [with] or significantly pared back their certificate-of-need laws, compared to states like Hawaii that have them.
And so, as it turns out, it’s been an extremely well-studied topic. There have been over 400 separate tests assessing the effect of CON on access, cost and quality. And it’s really extraordinary in terms of how overwhelming the evidence is, because they almost all point in the same direction.
So, you know, just to take one example, of the tests that look at the effect of CON on spending:
>> So 65% of them find the CON is associated with increased spending per service. Only 7% find that it’s associated with diminished spending per service. And the rest, which is 28%, find negligible results.
>> Availability:. So the availability of services for patients, 79% of studies that have looked at this question find that CON is associated with diminished availability of services. Only six tests, 8% of the entire sample, find that CON is associated with greater availability of services.
>> Quality of care: 49% of tests, almost half, find that CON actually undermines the quality of care. Just 10% of tests that have looked at that question find that it increases the quality of care. And in many cases, in those instances, actually, they’re not finding that it increases the quality of care. It just stops the use of expensive procedures for which there may be, you know, better alternatives.
So, among the tests, you know, that are finding that it’s associated with:
>> Lower quality, though, we’re talking higher mortality rates following heart attack, heart failure and pneumonia.
>> Higher readmission rates following heart attack and heart failure.
>> Lower patient satisfaction levels — patients are less likely to give their hospitals a 9 or a 10 on a 10-point scale.
>> Greater use of physical restraint in nursing homes in states that have CON laws relative to those that don’t.
>> There’s lower nursing staff ratios in certificate-of-need states.
>> Hospitals are more likely to be performed by surgeons that are lower-quality surgeons, based on metrics of the outcomes that they are able to obtain in CON states relative to non-CON states.
So very serious consequences for patients. And, of course, serious consequences for taxpayers who are paying more for services, and for anybody who just wants convenient care. It’s pretty extraordinary.
Akina: Well, it’s quite remarkable that when you take a look at the quality of care, the cost of care, access to care. We definitely received low marks in Hawaii. And what you’re telling us is that that may very well be partly due to CON laws.
Now, why then, do we keep them?
Mitchell: Yeah, so, that’s a great question. So it really probably goes back to what economists, it’s a favorite phrase among economists when they’re teaching political economy, which is this idea of concentrated benefits and diffused costs.
And the basic idea here is that you may have a policy where the costs outweigh the benefits. But if those who bear the costs are so numerous, so diffuse and typically don’t know that they’re bearing the costs, then those who benefit from it are able to get organized and maintain the policy.
So I, you know, go around the country and have testified in about, I don’t know, maybe a dozen, two dozen states on certificate-of-need laws. And every time I show up, there is, you know, me, there might be somebody, you know, an antitrust official from the federal Department of Justice, or the FTC [Federal Trade Commission], because they now have come to the opinion that CON laws are anti-competitive and so they’re happy to tell legislators that these are anti-competitive laws.
But then on the other side, it’s usually, you know, 20-deep hospital association lobbyists who are there to defend the laws, you know, very strenuously. And they have come up with a number of different arguments over the years.
I mentioned, you know, the initial rationale for CON law was that it was going to discourage unneeded or unnecessary procedures. But over the years, they’ve come up with other rationales.
They say that it’s needed to increase access to care for vulnerable populations, which is, there’s zero evidence that it does that. In fact, we have some evidence that it decreases care to vulnerable populations.
It’s associated with higher racial disparities in the provision of certain procedures. It’s associated with less care in rural populations. And it’s associated with lower profitability for safety-net hospitals — hospitals that cater to lower-income populations.
So, you know, the arguments sort of shift over time, but no matter where they shift, the data still suggests that CON laws don’t work.
Akina: Hawaii health officials often point out that the CON laws are not a real problem because CON applications are very rarely denied. Would you agree that this is an indication that our state CON laws work?
Mitchell: So, it may be. I wouldn’t say it’s an indication that they work, but it may be an indication that they aren’t especially severe. We have rate metrics of which states, you know, regulate which procedures. And I mentioned Hawaii, you know, tops the list in terms of the number of services and procedures that it regulates.
We have pretty good metrics, but it’s kind of spotty in terms of looking at things like the cost of the procedures or the cost of the application. One thing that you kind of have to figure out on a case-by-case basis is how often applications are accepted or denied. And so you kind of go through FOIA [Freedom of Information Act] requests, and you can figure that out.
Now, if you have a state that has a pretty high acceptance rate, that still may not be an indication that this is a low barrier to entry. You’d want to look at a couple of other things. So, you know, one of the things you’d want to look at is the number of people that are choosing not to apply because they don’t want to go through the hassle.
If you only have large, you know, players — which is typically the ones that, you know, benefit from CON laws — if you only have them applying, then, you know, and they’re typically able to get through, then it’s exactly doing what they want it to do. But it still is harming patients and harming other providers. So that’d be one question.
Another question would be to look at how long does it take to obtain a certificate of need, and how much time and money do people have to spend in order to do that.
So one of the things I often recommend to people, there are some states that are just, like, ready to get rid of certificate-of-need laws tomorrow. South Carolina, you may know, just passed pretty significant legislation doing away with just about all of their CON laws, except for nursing homes. And they were like Hawaii, they were a pretty high regulator.
But other states are now ready to take that step. And so one of the things I often recommend is: There are a number of things you can do on the way to full repeal. And one of them is you could actually use the legislative process to mandate that the CON regulator gather data that’s helpful for you.
So, require the CON regulator to, on a regular basis:
>> Publish what percentage of CON applications are granted, and what percentage are denied.
>> Report how many, of those that are denied and accepted.
> How many of those are opposed by incumbent providers, so that we have a sense of how much our incumbents [are] able to block their competition.
It would be great even if the regulator gathered data from providers to help illustrate, you know, help us better understand what kind of a barrier is this.
So anytime anybody applies for a CON, the application could ask: How many man-hours did this CON application take you? By your best guess, how much care are you not providing because you had to go through this process?
So kind of gathering some information like that, I think, could help us better understand, you know, the veracity of that claim that you encounter.
Akina: For a state like Hawaii, which has such extensive CON laws, what’s the most practical way to get started reforming the system? What are some lessons we can learn from others?
Mitchell: Yeah. So I think, the types of reforms I just mentioned, I think, would be good easy steps, because nobody really can have an objection to transparency, right? I think a next simple step is always to raise the thresholds at which CON is triggered.
So if it’s a very low threshold that, you know, you just want to spend a thousand dollars to add a hospital bed or whatever, and you have to go through a CON, that’s pretty ridiculous. So that’s kind of simple.
Some other steps, though, that would start moving you closer, I think, to the end goal are worth considering.
So we’ve already mentioned some of the rarely regulated procedures that I think it’s really hard to come up with a rationale for them. So if it’s standing in the way of care for vulnerable patients, I mean, substance abuse CONs, I don’t think they have any business in the year 2023.
Same goes for psychiatric care CONs, burn care, neonatal intensive care, hospice care, home healthcare. Anything that is providing care for people that’s a lower-cost alternative or that’s to vulnerable populations, I think that should easily be looked at. And that’s what a lot of states have done, is they just do away with those types of CONs.
If you want to go more significantly, five states have certificate-of-need laws, but they don’t involve incumbent providers. Incumbent providers aren’t allowed to oppose the application of would-be competitors. They’re not allowed to sit on the CON board. That to me, makes, you know, eminent sense.
Another step in that same direction is to get rid of the word “duplication” in the regulations so that a CON isn’t denied just based on the fact that a competitor might duplicate — i.e., compete with — an existing service.
Akina: Would you share some insights on the potential economic consequences of reforming or abolishing CON laws in Hawaii?
Mitchell: Yeah.
Akina: What way, for example, might it impact job creation or economic growth in the health sector?
Mitchell: So this is actually sort of cutting-edge research. I know of a few researchers that are looking at the jobs question, and I think we’ll have results in the next, hopefully, weeks to months. But I can’t answer the jobs except to say that we know that there are more service providers. So that almost certainly means more jobs. It’ll be interesting to see what kinds of jobs.
But, you know, the average patient in a CON state has access to 30% fewer hospitals. They have access to 14% fewer ambulatory surgery centers. They have access to about 30% fewer rural hospitals and 13% fewer rural ambulatory surgery centers.
So all of those are gonna be, once those CONS are eliminated, that’s more jobs in both urban and rural settings, I think. I’m guessing that’s what these researchers are gonna find.
The other way we can look at the economics of it is to look at the profitability of providers. And so, you know, back to one of your questions, was: Why do we have these? Providers are scared that they’re going to go out of business if they are open to competition.
The evidence actually is that profits go up over the long run. They take a short-term dive as new competition comes in, but over the longer run, profitability actually returns and exceeds what it was before it was repealed.
Akina: In states that have successfully repealed or in some way modified their CON laws, what do you think are some of the more important strategic factors in being able to bring that about?
Mitchell: So I do think it’s very helpful to have a pretty broad coalition. So in South Carolina, for example, you know, there were physicians who were pushing for the elimination of their certificate-of-need laws.
The American Medical Association is opposed to CON laws. There were antitrust officials at the Department of Justice and the Federal Trade Commission that were willing to come and talk about these. There were economists.
There were also people who had a financial stake who could gain from the elimination of CON laws. There were device makers, you know, [that] make like CT scanners and MRI machines and things like that, they, I think, were involved in that, as were insurance companies. CON laws make the cost of care more expensive and as payers, they don’t like that. So they were opposed to it.
I think that helps a lot. But ultimately, I think being able to tell the human story and talk about how, you know, there’s actual patients, actual constituents in your community, who, you know, frankly, their lives are put in danger by not having access to higher-quality, lower-cost care.
You know, why do we want to protect incumbent providers at such an incredible cost? It doesn’t make a lot of sense. And I think helping to tell those stories really does make a difference.
Akina: Very good. Well, Matthew, thank you so much for being with us today. You’ve certainly got a great deal of expertise on certificate of needs, and perhaps we could have you out here in Hawaii helping us to reform our laws. That’s certainly a great need. But glad you were able to be with us today.
Mitchell: Thank you so much, I appreciate it. It’s always great to chat with you.
Akina: Well, my guest today has been Matthew Mitchell, a senior research fellow at the Knee Center for the Study of Occupational Regulation, all the way away at West Virginia University.
Until next time, we wish you an aloha. I’m Keli’i Akina with the Grassroot Institute. You’re watching ThinkTech Hawaii’s “Hawaii Together.” Aloha.
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