These State Laws Stand in the Way of Lower-Cost, Higher-Quality Healthcare in Vermont

In 2017, average healthcare prices rose by 3.6 percent, a full percentage point above GDP growth. Nationally, we spend well over $10,000 per person per year on healthcare. Prescription drugs are part of the problem, but at around $1,000 per person, they don’t constitute the major driver of total healthcare spending. A much larger share comes from hospitals and from physician and clinical services, totaling over $6,000 per capita. Healthcare markets have no shortage of problems: third-party payor, price controls, insurance mandates, and so on.

But while these well-known problems get lots of coverage, protectionist regulations in 35 states and the District of Columbia have been quietly wreaking havoc for over three decades,. Known as certificate-of-need (CON) laws, they limit access to care, raise costs, and are associated with lower quality of care. While proponents claim they protect patients and taxpayers, they actually protect large hospitals from competition.  

A CON law requires anyone who wishes to provide a new healthcare service or expand an existing service to first obtain government approval. In Vermont, a CON is needed for some 30 different services—more than in any other state in the union—including burn care units, hospice care facilities, neonatal intensive care units, and drug rehabilitation centers. The approval process is not designed to assess quality or safety. Instead, regulators are primarily interested in whether or not the service is “needed.” In places without CON laws, need is assessed by providers themselves.

The process can take years and can cost providers tens or even hundreds of thousands of dollars in compliance costs. Remarkably, those who already serve the market are invited to come before the regulator and make their case against their would-be competitors.

Certificate-of-Need Laws Miss the Point

What’s the point of a certificate-of-need? Over the years, the incumbent providers who benefit from these laws have offered a handful of justifications. These laws that limit supply are somehow supposed to increase access to care. They don’t.

They are supposed to rein in costs. They don’t.

They are supposed to (indirectly) improve quality. They don’t.

They are supposed to increase access to care in rural areas. They don’t.

They are supposed to increase access to care among the poor and uninsured. They don’t.

And they are supposed to encourage hospital substitutes. They don’t.  

In Vermont, as in other states, if the service is deemed “duplicative,” (economists would use the word “competitive”) the application can be denied. One metric that regulators use to assess need is bed utilization. They count the number of healthcare beds in an area, the number of patients occupying those beds and divide the second number by the first. There are two significant problems with this procedure. First, incumbent hospitals know that would-be competitors can be denied a CON if their own bed occupancy rate is low. This gives them an incentive to load up on beds that they know will never be used. So, ironically, the practice encourages wasteful investment, exactly the sort of thing it was designed to limit. Second, the metric is useless if patients know what services are or are not provided by a particular facility. If a pregnant woman goes into premature labor and the local hospital lacks a neonatal intensive care unit, she is likely to skip a visit there and go to the nearest hospital with such a unit. She therefore isn’t going to show up in either the numerator or the denominator of the state’s statistics. 

This might be less of a problem if applications were easy to place and granted on the basis of appropriate criteria. Unfortunately, this isn’t true of the current system. Obtaining a certificate is time-consuming and expensive, and not all applicants receive a green light at the end of the process. This means that established healthcare institutions with robust public relations operations and significant amounts of money on hand are advantaged relative to newcomers when they apply for a certificate. This pushes smaller players out of the healthcare delivery market, and it protects those at the top, leading to higher prices and diminished incentives to improve quality. This explains why incumbent providers are the main advocates for CON. It also explains why antitrust authorities in the federal Department of Justice and the Federal Trade Commission have for decades taken the position that CON laws are anticompetitive.

Beyond the Statistics

Thirty-eight percent of Americans live in non-CON states. Health outcomes in these communities—which are rich, poor, urban, and rural—can be compared with outcomes in CON states to estimate the effects of these rules. Econometric tests allow researchers to control for other factors, such as demographics or local economic conditions, that might also affect outcomes. For more than three decades now, economists have been performing these sorts of tests and that is how we are able to say with confidence that CON laws do not work as their proponents claim they do.

But beyond the point estimates are human lives. As we’ve noted, Vermont requires a certificate-of-need for more services than any other state in the country. Not far behind, with 20 regulated services, is Virginia. There, a few years ago, a mother tragically lost her baby for lack of access to an NICU at the rural hospital where she sought to receive emergency care. A couple of years prior, the state regulatory board had decided against granting that hospital, LewisGale Medical Center, a certificate for a new NICU. A swarm of businesspeople, politicians, and influential local residents had come out in support of the hospital’s request. Just one person opposed the project—a professor of medicine who had ties to Carilion Hospital, the other, larger hospital in the area. She was successful in convincing the board not to grant the request, and Carilion continues to be the only hospital with an NICU in the region. The mother couldn’t be transported there in time to save the baby’s life.

Vermont, just like Virginia, continues to control the building of NICUs. Not only NICUs, but also home health services, MRI scanners, and rehabilitation services, to name just a few of the 30 services that require a certificate. We and our colleagues at the Mercatus Center have estimated a Vermont without CON could save well over $200 per capita annually. Moreover, it would see a decrease in deaths from postsurgery complications and an increase in access to care. A Vermont without CON would be a Vermont with greater access to higher quality and lower cost care.

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