Maine Legislator Seeks Repeal of 1978 CON Law

Published March 1, 2005

The Maine state legislature will consider a bill introduced this session by State Rep. Tom Shields (R-Auburn) to repeal the state’s Certificate of Need (CON) law, originally passed in 1978. CON laws are intended to control health care costs by preventing duplication of medical facilities and equipment.

Primarily applied to hospitals but also affecting nursing homes, imaging centers, and other medically related facilities, CON laws require that new or expanded facilities and equipment be approved by a state government agency or commission. Shields, an orthopedic surgeon before his election to the Maine House of Representatives in 1998, is pushing the bill because he says there is substantial evidence CON laws don’t work.

Shields said he is introducing the bill in order to reduce health care costs by promoting competition among health care providers. He observed that a hospital with CON protection has “a franchise monopoly which in turn provides no incentive for it to exercise cost control or better service.”

The expense of going through the CON process also takes money away from health care services, Shields said. “Hundreds of thousands of dollars have been diverted from patient care in order to construct a CON application, or to oppose an … application for CON by a potential competitor,” Shields said.

Shields also noted the lack of access to care that CON laws cause. “Maine providers have been kept from providing up-to-date technology for their patients. Expenses for medical care are high. Access is limited in certain areas.”

Federal Law Repealed

CON laws were first enacted in 1964 in New York as a response to rising health care costs driven in part by what was then a common health insurance reimbursement system known as retrospective reimbursement, also called “cost-plus.” Under retrospective reimbursement, insurers would pay hospitals an amount equal to their costs, plus a certain percentage above cost for profit and overhead.

With the cost-plus system, long since abandoned in favor of Medicare’s fixed-payment system and managed care, there was little if any incentive for medical providers to become more efficient or for patients to be price-sensitive.

In 1972, Congress passed a law requiring states to review and approve all capital expenditures of $100,000 or more by health care providers, as well as changes in bed capacity or what they termed a “substantial change” in services. The law provided for severe financial penalties for states that did not comply. As a result, all 50 states imposed CON laws by 1980.

In 1986, after it became clear CON laws were not succeeding in keeping health care costs down–and may have been contributing to rising costs–Congress repealed the federal CON requirement. Since then, 14 states have followed suit by repealing CON entirely, and six more have repealed it for everything except nursing homes and long-term care services.

Research Shows CON Ineffective

Research shows CON laws do not reduce health care costs and may even cause costs to rise.

Some of the most extensive research has been conducted by Christopher Conover, Ph.D., and Frank Sloan, Ph.D., both with Duke University’s Center for Health Policy, Law, and Management. Their research, originally done for the Delaware Health Care Commission in 1996, was published in a June 1998 article in the Journal of Health Politics, Policy and Law.

Conover and Sloan found CON laws had no effect on overall health care spending. They did find a modest reduction in hospital costs, but that decline was offset by an increase in physician costs. The 1998 article also noted CON laws “result in a slight (2 percent) reduction in bed supply but higher costs per day and per admission, along with higher hospital profits.”

In a 2003 study prepared for the Michigan Department of Community Health, Conover and Sloan confirmed their earlier findings. They also found repeal of CON laws does not “lead to a ‘surge’ in either acquisition of new facilities or medical expenditures.”

Several other studies have reached similar conclusions. A 1999 report for the Joint Legislative Audit and Review Committee of the Washington state legislature, prepared by the Health Policy Analysis Program at the University of Washington’s School of Public Health and Community Medicine, found “strong evidence” that “CON has not controlled overall health care spending or hospital costs.”

Barriers to Competition Created

The Federal Trade Commission (FTC) and U.S. Department of Justice (DOJ) have also weighed in on CON laws recently. In a July 2004 report jointly prepared by the two agencies, they found “considerable evidence that [CON laws] can actually drive up prices by fostering anti-competitive barriers to entry.”

The FTC/DOJ report cited several examples in which CON laws were used to prevent competitors from offering services that benefit patients. In one case, a doctor applied for a certificate of need to introduce improved cancer radiation therapy equipment. His application was opposed and successfully blocked by existing operators of older, less-effective radiation therapy equipment.

In another case of anti-competitive behavior cited in the report, incumbent providers of home health services in one state have successfully used CON laws for 23 years to prevent a nursing service from entering the market. The owner of the nursing service notes she would charge less for the same services, and that the protection of CON laws has shielded the incumbents from having to offer improved or innovative services.

The FTC/DOJ report concludes, “CON programs are generally not successful in containing health care costs and … pose anticompetitive risks.” It recommends that CON laws be repealed.

Supporters Defend Program

In spite of the large volume of evidence showing CON laws are ineffective at containing costs and may even drive up costs by stifling competition, they do have their supporters. Those who defend CON laws typically claim they have other benefits, such as improved outcomes.

There is evidence that CON laws can result in better outcomes for patients. John Steen, a consultant who has worked for health planning commissions in Georgia, New Jersey, and New York, cites a number of studies showing hospitals with high volumes of certain procedures have better outcomes for patients than hospitals that perform fewer procedures.

“With greater volume comes greater experience and greater proficiency, resulting in better outcomes and lower costs,” Steen wrote in a 2002 online article for the American Health Planning Association. He points to California, which has no CON law, and claims hospitals there performing fewer than 100 open-heart surgeries per year have a mortality rate double that of hospitals that perform more than 500 such procedures each year.

Steen believes CON laws can improve outcomes by eliminating low-volume providers in favor of hospitals that provide a high volume of procedures with presumably better care. “In most states,” he writes, “the conditions necessary to realize these benefits will exist only if the services are regionalized by state regulation.”

Steen’s conclusions are not accepted by many experts on CON laws, however.

The Conover/Sloan study for the Michigan Department of Community Health noted that while higher volumes imposed by CON laws could theoretically result in better outcomes for patients, “the … general evidence that CON actually achieves such specialization is relatively weak.” The University of Washington study prepared for that state’s legislature expressed similar doubts.

Entrenched Interests Fight Repeal

The battle to repeal CON laws promises to be a contentious one, as many have a strong financial interest in keeping them. Shields says that in Maine his bill is being opposed by hospitals that don’t want competition and by bureaucrats who “want CON to maintain control of the health care system.”

Shields vows to press on despite the special-interest pressure. “There has been no evidence that CON reduces the cost of health care,” he says. That alone, he believes, should be sufficient reason to repeal a law designed to reduce health care costs.

Sean Parnell ([email protected]) is vice president of The Heartland Institute.