Taking the CON Out of Certificate of Need Laws
Most industries are open to all firms willing to make the necessary initial investments to enter the market. If I want to open a bar in my neighborhood, can clear the zoning restrictions, and have the necessary capital to rent a space, fill it with booze, and market it to my prospective customers, then that bar will open, with me as its proprietor. This open process creates an environment in which businesses compete for customers, encouraging the innovation that leads to higher quality and lower prices. Requiring a prospective bar owner to obtain a permission slip showing a need for another bar in their neighborhood would obviously be ridiculous. Unfortunately, this is exactly the requirement made by the state of any entrepreneur looking to offer health care services.
Presently, any firm wishing to create a new service or spend a certain amount of money on improving an existing service must apply for and receive a Certificate of Need from the state demonstrating a need for that particular service within the health care market. This procedure was introduced by the federal government in the 1970s to control the rising costs of healthcare by eliminating duplication of services. But costs continued to soar, and the federal legislation was repealed in the 1980s, though many states, Missouri among them, still maintain CON requirements. The process of fulfilling these requirements is both costly and time consuming, creating an unnatural barrier to entry that stifles innovation and inflates prices.
Proponents of maintaining current CON laws make two key arguments. First, they assert that CON laws keep prices down and assure both quality and availability of service. Evidence for these claims is spotty at best. Success with and without the program varies greatly from state to state, and it is extremely difficult to separate the differences in care created by CON laws from differences created by other variations in healthcare systems between states. Additional study is required before any solid conclusions can be drawn as to the affect of CON laws on price, quality, and availability. However, conventional economic wisdom holds that when multiple firms compete, quality rises and prices drop. There’s no reason to assume that the health care industry would be exempt from this effect.
Proponents of current CON laws also argue that eliminating those laws would result in a “cherry-picking” effect, in which new specialty hospitals and services would systematically drain the most profitable patients away from the general service hospitals most likely to serve the poorly insured and indigent. They argue that this would render those hospitals incapable of administering those less profitable services. These proponents essentially argue that removing CON laws would foster unfair competition that would further marginalize those already unable to afford decent general health care. The data surrounding this issue is largely inconclusive. However, reforms could be structured to provide incentives for firms serving those customers, thus curbing any “cherry-picking” effect, should one actually emerge.
The cost of care for those who cannot afford it ultimately gets passed on to those who can, driving up the overall cost of health care for everyone. The ideal system provides a variety of options, in both price and quality, for all. Such a system is best achieved in a market where firms are free to specialize to meet consumer demand. Such a market depends on consumers with a variety of options making informed decisions. As such, CON law reforms should focus on increasing the transparency of the market while simultaneously fostering competitive growth within it. A balanced approach to competition, in which artificial barriers to entry, such as CON laws, are eliminated and the healthcare needs of all are well represented, offers the best chance for guaranteeing all Missourians access to affordable, quality health care.
Steve Bernstetter is an intern at the Show-Me Institute and a graduate student in Public Policy Administration at the University of Missouri-St. Louis.