Research & Commentary: Tennessee Considering Certificate of Need Reform

Published February 25, 2016

Tennessee is one of 36 states with certificate-of-need (CON) laws. CON laws are intended to slow the growth of health care prices, promote consolidation of health care providers, and limit the duplication of services. Tennessee requires CON commission approval for a wide range of expenditures, including construction and modification of health care facilities, the purchase of major pieces of medical technology, and the offering of new inpatient care beds, services, and medical procedures. Unlike other licensing laws, CON laws generally are not based on quantifiable criteria such as experience or education.

In 2015, legislators considered a proposal that would have removed some CON application requirements for certain health care services and sectors. The proposal would have removed imaging devices and services, certain kinds of cardiac care – including open heart and cardiac catheterization – and hospice services from CON restrictions. In 2016, the debate over reform of these regulations has again come up for discussion.

Recent studies have shown CON laws fail to achieve many of their stated goals and they actually increase costs for consumers by hindering competition and forcing providers to use older facilities and equipment. In a study published by the Mercatus Center at George Mason University, Thomas Stratmann and Christopher Koopman found states with CON programs regulate on average 14 different medical services, devices, and procedures, while Tennessee’s CON program regulates 20.

Mercatus ranked Tennessee’s certificate of need program as the 7th most restrictive in the United States.  The authors found there may be 131 fewer beds per 100,000 people in Tennessee compared to the rest of United States. Tennessee may also offer fewer advanced health care services, including 32 fewer hospitals offering MRI services, and 45 fewer hospitals offering CT scans because of its CON law. The authors concluded this one set of regulations limits health care competition across the state and leaves fewer options for everyone, especially the poor.

The results in Tennessee are similar to those found in other states using CON laws. Data from the Kaiser Family Foundation show health care costs are 11 percent higher in CON states than in non-CON states. The study also found a positive correlation between the number of CON law restrictions and the cost of health care. States requiring certificates of need on 10 or more services averaged per capita health care costs 8 percent higher than the $6,837 average for states requiring certificates of need for fewer than 10 services.

Proponents argue the absence of a CON law will cause providers, especially in rural areas, to come into the market and “skim” the more profitable patients, leaving hospitals left to cover less-profitable cases. According to the Mercatus Center, “If the anti-cream-skimming justification for CON requirements is correct, then we expect to find a higher number of hospitals in states with a CON program versus those without. However, the data show that this is not the case. The regression results show that there are 30 percent fewer total hospitals per capita in states with a CON program when compared to those that do not have a CON program.”

CON laws also give inappropriate influence to competitors during vetting processes. When a company applies to enter a new market, competitors often use the CON process to block potential competition. As a result, CON laws raise the cost of medical care by preventing new medical providers from competing with existing hospitals. The Beacon Center has long championed CON law reform in Tennessee and argues the certificate of need process creates a “hospital cartel,” allowing big hospitals to keep smaller competitors from expanding and increasing the cost of care.

The unintended consequences of CON laws have led many experts and the Federal Trade Commission to recommend the state governments repeal or reform these policies. Tennessee lawmakers should consider reforming the state’s CON program again, which would end burdensome regulations that increase the cost of health care while limiting access and benefitting those with political connections.

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

Beacon Explains: Certificate of Need Laws
Lindsay Boyd of the Beacon Center examines certificate of need laws in Tennessee and argues they should be reformed. “The time has come for Tennessee to join with states that have brought greater healthcare access to more people by repealing their CON laws. The only irrefutable achievement we can directly attribute to CON laws is their successful creation of a robust hospital cartel that restricts competition in the marketplace and decreases the supply of healthcare services. That’s not something to be proud of.”

Entry Regulation and Rural Health Care: Certificate-of-Need Laws, Ambulatory Surgical Centers, and Community Hospitals
Thomas Stratmann and Christopher Koopman of the Mercatus Center at George Mason University evaluate the impact of CON regulations related to ambulatory surgical centers (ASCs) on the availability of rural health care. Their research shows despite the expressed goal of ensuring that rural populations have improved access to health care, CON states have fewer hospitals and ASCs on average—and fewer in rural areas—than states without CON regulations.

Certificate of Need Laws: Implications for Tennessee Examining certificate-of need-laws in Tennessee, Thomas Stratmann and Christopher Koopman of the Mercatus Center at George Mason University argue CON 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 markets for greater entry, more competition, and ultimately more options for those seeking care.

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 prices 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,” Stratmann and Russ write. 

The Great Healthcare CON
Jordan Bruneau of the Foundation for Economic Education says CON laws powerfully distort the health care market. 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 prices, 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 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. 

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 and innovate. Even more troubling, Shapiro says, is the use of CON laws 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 says 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 programs – preventing unnecessary increases in health care costs – by repealing those laws. 

Certificates of Need: A Bad Idea Whose Time Has Passed
In a policy analysis from the James Madison Institute, Peter Doherty argues federal marketplace interventions have proven disastrous and the government’s increased spending on programs has not been a boon. Doherty wrote, “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 desp

ite our successes, vestiges of the past remain.” 

Health Care in the States
Michael Tanner compares health care reform among the states. Without a universal model to follow, states are creating their own reforms. Tanner examines how cost-effectiveness, insurability, and affordability vary between states.


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