Virginia Policy Puts Special Interests above Patients

Are you a licensed psychiatrist interested in offering services in the Shenandoah Valley? Or are you an obstetrician trying to open a neonatal intensive care unit in Roanoke? Want to buy a CT scanner or add an additional hospital bed to your Northern Virginia facility? Thanks to Virginia’s “certificate of public need” (or COPN) law, you will need permission first.

The law has long been controversial for limiting the supply of something Virginians could generally use more of: health care. A large body of research has shown that it does so without improving the quality of care or reducing health-care spending. Now, new research shows that special interests may be able to use campaign donations to get an edge in the COPN process.

To understand the full extent of the problem, it’s important to know some background on COPN.

The law regulates the introduction or expansion of 20 medical services and technologies by requiring a regulator to assess whether or not a community “needs” a provider’s service. This is rather unusual. In a market economy such as ours — and even in many highly regulated health-care markets around the country — service providers themselves determine need by assessing whether enough people (patients, in this case) will use the service. But in Virginia, the state’s health commissioner gets to make the decision.

He’s not alone. The system ensures that he will be aided by the would-be competitors of the provider who is applying — in other words, those already offering services in the area. They are invited to contest new applications, stating why they would prefer to not have any competition.

If you think this sounds like your government protecting monopolies, you are in good company. Antitrust authorities at the Federal Trade Commission and the Justice Department have long taken this position. So, too, have most health-care economists who have looked at the issue.

We and several of our colleagues have documented the effects of COPN laws (known as “CON” laws outside of Virginia). Controlling for other factors, researchers have found that, on average, states with these laws have fewer hospitals, fewer hospital beds, fewer ambulatory surgical centers, fewer dialysis clinics, fewer hospice care facilities, fewer rural hospitals and fewer rural ambulatory surgical centers.

Patients in CON states must travel longer distances to obtain care and are more likely to seek out-of-county care. There appear to be greater racial disparities in the provision of care in CON states. The laws are associated with higher health-care costs and more spending, without increasing charity care. And, on top of everything else, there appears to be a connection between CON and diminished quality of care.

From an economic viewpoint, none of this is particularly surprising. Neither, for that matter, is the latest finding.

New research suggests that Virginia’s COPN laws may be favoring politically active health-care providers over other, less influential providers. Hospitals’ campaign contributions to gubernatorial and state senate candidates are associated with greater likelihood of obtaining a certificate of public need. These policymakers are important because they oversee the appointment of the state health commissioner, who has the authority to sign off on COPN requests.

Specifically, contributing health-care providers are 32 percentage points more likely to have their COPN application approved, even when one controls for the region, year and application type. For every 1 percent increase in contributions, an applicant’s approval chances increase by 3 percentage points. This may explain why the most politically active hospitals tend to favor COPN restrictions and seek to keep them on the books.

Virginia is now more than four decades into its certificate of public need experiment. We need not wonder about the results. After comparing health-care availability, spending and patient outcomes in CON and non-CON states, the harm these types of laws are doing is abundantly clear. Now it appears we can add political cronyism to that list.