Research & Commentary: Rolling Back South Carolina’s Certificate of Need Law

Published January 21, 2016

South Carolina is one of 36 states that limits the ability of health care providers to expand their businesses through an approval process known as certificate of need (CON). Certificate of need laws were first passed in the 1960s by states in an attempt to slow increasing health care prices by limiting duplication and promoting health care consolidation. Recent studies have shown CON laws fail to achieve many of their stated goals and have instead reduced the availability of health care services and caused cost increases. According to data from the Kaiser Family Foundation, health care costs are 11 percent higher in CON states than in non-CON states. 

South Carolina is currently debating whether it should roll back these restrictions. In November 2015, Gov. Nikki Haley (R) requested to have the Department of Justice and the Federal Trade Commission evaluate the need and effectiveness of the state’s certificate of need program. Their response argued certificate of need laws impede competition and make health care expansion projects more expensive. 

“Competition in health care markets can benefit consumers by containing costs, improving quality, and encouraging innovation,” said DOJ and FTC in their written response. “Indeed, price competition generally results in lower prices for, and thus, broader access to, health care products and services, while non – price competition can promote higher quality care and encourage innovation. CON laws may suppress these substantial benefits of competition by limiting the availability of new or expanded health care services.  For these reasons, the Agencies historically have suggested that states with CON laws repeal or narrow those laws, and now respectfully suggest that South Carolina repeal its CON program.” 

In 2015, the South Carolina House of Representatives voted 103‒1 to approve a bill that would loosen the strict mandates of the current CON system by creating several new exemptions. The bill would exempt capital expenditures by health care facilities from CON approval requirements if the funds are used for expanding existing health care services or those previously approved. It would also remove the required CON regulation limiting new hospital beds and redefine expenditures by a person or health care facility exceeding $5 million as “capital projects.” The proposal would go a long way towards making health care expansion projects easier to launch, and it could end the permission requirement entirely in 2018. The proposal still needs approval by the South Carolina Senate. 

CON laws give inappropriate influence to competitors during the vetting process. When a company seeks to enter a new market, competitors often use the CON process to block potential competition. Smith’s proposal would shift the responsibility for guiding CON decisions from the state health plan to the Department of Health and Environmental Control (DHEC). To limit the advantages CON laws give to competitors in the approval process, the bill would require a letter to be sent to DHEC prior to the filing of CON applications and would award attorneys’ fees and other costs to parties proposing CON projects who are forced to respond to frivolous or obstructive appeals of a CON decision. This change would make it more expensive for existing companies to block their competitors from expanding through frivolous CON appeals. 

South Carolina’s CON laws currently require medical providers to obtain government approval before offering new medical services, expanding the size of a health care facility, or purchasing certain medical equipment costing more than $600,000. 

In a study by the Mercatus Center at George Mason University, Christopher Koopman, Thomas Stratmann, and Mohamad Elbarasse found CON laws not only raise the price of medical care by preventing new medical providers from competing with existing hospitals, they also reduce the availability of medical equipment and hospital beds. The authors say South Carolina’s CON laws resulted in approximately 6,331 fewer hospital beds in the state and fewer hospitals offering advanced services, including between 10 and 19 fewer hospitals offering MRI services and between 33 and 41 fewer hospitals offering CT scans. 

South Carolina lawmakers should consider repealing or reforming the state’s CON laws to end these burdensome regulations that increase the cost of health care while limiting access and benefitting the politically connected. 

The following articles examine certificate of need laws from multiple perspectives.

Certificate-of-Need Laws: Implications for South Carolina – Before the South Carolina Department of Health & Environmental Control
Christopher Koopman, Thomas Stratmann, and Mohamad Elbarasse of the Mercatus Center at George Mason University say South Carolina’s certificate of need laws do not control costs and instead decrease the supply and availability of health care services by limiting entry and competition. They recommend legislators repeal these laws and open the market for greater ease of entry, more competition, and ultimately more options for those seeking care.   

Feds: South Carolina Should Stop Regulating Health Care Investments
Meg Kinnard of the Associated Press examines a letter from two federal agencies, the Department of Justice and the Federal Trade Commission, which recommends a repeal of requirements for health care facilities to get state permission for many kinds of construction and expansion in South Carolina. 

Amending CON Laws
The South Carolina Policy Council examines state Rep. Murrell Smith’s (R-Sumter) CON law proposal and argues it would be a positive reform for the state: “This would be a positive reform considering CON laws have both failed to restrain health care spending or hospital costs (their stated goal), and harmed consumers by reducing competition in the health care market, and limiting the supply of important medical services. True reform, however, would be eliminating South Carolina’s CON laws altogether.” 

‘Certificate of Need’ Program: Not Needed
The South Carolina Policy Council studies the state’s certificate of need program, why it was implemented, and whether it is really needed. 

Are Certificate-of-Need Laws Barriers to Entry? How They Affect Access to MRI, CT, and PET Scans
A new study from the Mercatus Center at George Mason University examines how CON regulations affect imaging services provided by hospitals and other medical providers. The results show CON regulations adversely affect non-hospital providers; hospitals largely remain unaffected. Residents of CON states are also more likely to travel out of state to obtain imaging services than residents of non-CON states. CON regulations can change the market for imaging services by setting up barriers to entry for providers that are not hospitals, consequently harming consumers. 

Do Certificate of Need Laws Increase Indigent Care? 
Thomas Stratmann and Jacob Russ of the Mercatus Center at George Mason University examine certificate of need laws and their effects on pricing and health care access. “While certificate of need laws significantly reduce available health care services for everyone, they do not lead to an increase in care for the needy.” 

The Great Healthcare CON
Jordan Bruneau of the Foundation for Economic Education finds CON laws raise health care prices and reduce availability. He advises, “Rather than pinning our hopes on grand plans to overhaul the system, we should first look at where we can make changes on the margin that would move us in the right direction. Abolishing CON laws – a barrier to entry that drives up price, restricts access, and is maintained by cronyism – would be a great place to start.” 

Certificate of Need: State Health Laws and Programs
The National Conference of State Legislatures outlines the various state CON laws and the positions of CON law proponents and critics. 

Ten Principles of Health Care Policy 
This pamphlet in The Heartland Institute’s Legislative Principles series describes the proper role of government in financing and delivering health care and provides reform suggestions to remedy current health care policy problems. 

CON Job: State ‘Certificate of Necessity’ Laws Protect Firms, Not Consumers 
Writing in Regulation magazine, Timothy Sandefur of the Pacific Legal Foundation argues certificate of need laws are designed to restrict competition and boost prices existing companies can charge. Sandefur says despite the claims made by CON proponents, CON laws are not intended to protect the public. 

You Shouldn’t Have to Ask Your Competitors for Permission to Start a Business
Ilya Shapiro of the Cato Institute argues CON laws make it more difficult and expensive for companies to create new jobs or innovative businesses. Even more troubling, Shapiro says CON laws are used by existing businesses to bar newcomers from competing against them. 

Certified: The Need to Repeal CON: Counter to Their Intent, Certificate of Need Laws Raise Health Care Costs 
Jon Sanders of the John Locke Foundation argues CON laws fail to lower health care costs and in many instances actually increase costs. Sanders says state leaders could best honor the intent behind CON – preventing unnecessary increases in health care costs – by repealing those laws.

The Failure of Government Central Planning: Washington’s Medical Certificate of Need Program
John Barnes of the Washington Policy Center describes the history of certificate of need regulations, summarizes how the Washington State CON law works, compares its stated goals with actual performance, and offers practical policy recommendations for improving access to affordable health care for the people of Washington State. 

Certificate of Need Laws: It’s Time for Repeal
Roy Cordato of the John Locke Foundation (JLF) examines certificate of need regulation in the first of a series of annual research papers from JLF devoted to explaining the principles of free markets and applying them to current controversies in North Carolina. 

Certificates of Need: A Bad Idea Whose Time Has Passed
Writing for the James Madison Institute, Peter Doherty argues federal interventions into the health care market have proven disastrous. Doherty says the government’s increased spending on programs has been anything but a boon. “In the past 20 years, many of us have battled to moderate or eliminate the most egregious of these programs and the artificial controls they place on free markets, but despite our successes, vestiges of the past remain,” wrote Doherty. 

Health Care in the States
Cato Institute Fellow Michael Tanner compares health care reform among the states. Tanner says because there is no universal model available for states to follow, states create their own reform models. Tanner examines how these various efforts differ in cost-effectiveness and insurability, documenting states’ successes and failures.


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