September 19, 2018

The Failure of Georgia’s Certificate-Of-Need Laws

Testimony before the Georgia House of Representatives Rural Development Council
Key materials

Thank you for the opportunity to share my recent work on certificate-of-need laws as they are applied to healthcare in Georgia.

My name is Thomas Stratmann. I am a university professor of economics and law at George Mason University in Virginia and a senior research fellow at the Mercatus Center at George Mason University.

Introduction

Certificate-of-need (CON) laws, which require healthcare providers to obtain permission by proving “need” of their services in the community before they open or expand their practices or purchase certain devices or new technologies, currently exist in some form in 35 states. In four different academic, data-driven studies, my coauthors and I examined the effect of CON laws by comparing economic and health measures in these 35 states to those in states that do not have CON laws.[1] These studies, and additional data analysis and research, show that CON laws have largely failed to achieve their stated objectives of increased access to healthcare services, particularly to the poor. On the contrary, our research shows that CON laws do the following:

  1. Harm patients by reducing healthcare quality.
  2. Harm patients by reducing access to healthcare. They reduce the availability of medical care by making it difficult for medical providers to offer their services.
  3. Harm patients by reducing the availability of medical equipment such as MRI machines and CT scanners that help to diagnose illnesses and thereby prevent premature death.

Our findings are consistent with the positions of the Federal Trade Commission and the US Department of Justice under both Democratic and Republican administrations,[2] which have argued that CON laws fail to meet their stated goals and that CON laws are harmful to patients. Also, the largest association of physicians, the American Medical Association, favors repeal of all CON laws.

All four of these peer-reviewed studies (see footnote 1) are attached as part of my submitted written testimony. These studies use state-of-the-art statistical methods that are well accepted in social sciences, health sciences, and many other areas that analyze data, such that the conclusions are based on apples-to-apples comparisons—that is, we perform the analysis in such a way that states with and without CON laws are comparable. All data we use are publicly available so that our results can be replicated by anyone who chooses to do so.

Background

Certificate-of-need laws require state agency approval before an already-licensed healthcare provider can establish a new healthcare facility and before an already-licensed healthcare provider can expand. In some states, CON laws require permission from state regulators to provide medical services or to purchase medical equipment to which the government otherwise has no objections.

Con Laws in Georgia

CON laws in Georgia require medical providers to obtain government permission to compete for 20 medical services (out of 35 medical services regulated across the US states by CON). Among the states with the highest number of CON laws, Georgia ranks 12th. Some examples of CON laws are the following:

  • In Georgia, a hospital needs permission to add a new hospital bed.

  • In Georgia, permission is required for a new provider to open a new hospital.
  • In Georgia, permission is required to purchase an MRI machine, CT scanner, or PET scanner.
  • In Georgia, permission is required to open an ambulatory surgery center.

Rationale for and Conceptual Ineffectiveness of Con Laws

While there are many justifications made for CON laws, the typical goals include

  • ensuring an adequate supply of healthcare resources,
  • protecting access in rural and underserved communities,
  • promoting high-quality care,
  • supporting charity care, and
  • controlling cost.

Certificate-of-need laws were well intentioned when they were first introduced in states in the mid-1960s. Their effectiveness, however, should be measured by their outcomes. Even the best-intended laws might not lead to the desired results and, indeed, might yield unintended consequences that should have been foreseeable.

The failure of CON laws might have been expected because CON laws grant a government-protected monopoly to incumbent providers. Both basic economics and common sense tell us that government-protected monopolies tend to have negative consequences, particularly for poor consumers.

Moreover, CON laws do not have a public health justification. That is, CON requirements have nothing to do with public health or safety. Separate state and federal laws govern who is allowed to practice medicine, what type of qualifications are required to do so, and what kind of medical procedures are or are not permitted.

CON laws are designed to restrict competition. And in a manner unheard of in any other industry I know, in healthcare, existing hospitals and other medical providers have the opportunity to oppose the CON application of a would-be competitor, simply by claiming that there is no need for that additional medical service. This is akin to McDonald’s needing permission from Burger King to open a restaurant in Georgia.

By requiring permission from regulators prior to any change, these state laws limit the ability of healthcare providers to offer cost-effective and innovative healthcare. The wholly undesirable result is that CON laws prevent innovation that would otherwise result in less costly, less invasive medical procedures, and safer medical procedures.

One example of a less costly, less invasive, and safer medical procedure is the virtual colonoscopy—as opposed to the traditional optical colonoscopy. When a state requires a certificate of need for MRI machines, as does Georgia, it discourages providers from offering new procedures like virtual colonoscopies. This is because providers first have to get permission from state regulators, which is not easy to obtain. The subsequent lack of adequate screening to detect cancer early probably contributes to unnecessary deaths.

Empirical Evidence of the Failure of Con Laws

My colleagues and I started a project several years ago to analyze data to rigorously test whether each of the stated goals of CON was being achieved.

Specifically, we examined the following claims made by CON proponents, which were often stated expressly as objectives in CON legislations:

  • CON laws increase access to medical care facilities.
  • CON laws improve access to diagnostic services, such as medical imaging services.
  • CON laws ensure that more indigent care is provided.
  • The adoption of CON laws increases quality of medical care.

We found that CON laws do not deliver on these promises. There has not been increased patient access to medical care, and the quality of medical care has not been improved. In fact, CON laws have backfired. It turns out that states with CON laws have less patient access to medical care and lower quality of medical care.

Con Reduces Access to Medical Care in Facilities Across the State

One measure of access to medical care is the number of hospitals in a state. To control for the state population served, we measure hospitals per 100,000 population. More hospitals means shorter travel times to hospitals and greater access.

However, the data show that there are fewer hospitals per 100,000 in CON states than in states without CON. In 2017, Georgia had about 175 hospitals. A comparable state without CON has 227 hospitals. So a state without CON has more than 30 percent more hospitals. And this estimate controls for confounding factors—such as age distribution, healthiness of the population, and percentage of the population on Medicaid and Medicare—in order to do an apples-to-apples comparison. This finding suggests that CON reduces access to medical care.

Our research also uses another metric to determine the effect of CON on access to medical care—the number of hospital beds available in CON states versus states without CON. Here we compare states with a CON law that regulates hospital beds with states that do not regulate beds.

Our findings unambiguously show that states without CON have more beds per patient. Why is this important? Well, it means that patients have more choices. They are less likely to be turned away from a hospital. And it might mean that there are hospitals closer to patients.

Georgia also has a CON law for ambulatory surgery centers. Comparing Georgia to statistically similar states without CON laws shows that without a CON, Georgia likely would have over 500 centers instead of the 356 it had in 2017.

CON proponents also say that CON laws increase provision of medical care and access to medical care in rural areas. But instead of providing more help for the rural population and better access for the entire state population, as CON proponents claim, CON in fact does the opposite. Georgia has fewer ambulatory surgery centers and fewer hospitals, thus fewer choices. Georgians in both urban and rural areas have fewer choices because of CON. For example, states comparable to Georgia without CON have 7 additional rural hospitals instead of the current roughly 58 rural hospitals as of 2011.[3]

Patients in States with Con Have Less Access to Medical Imaging and Other Services

The negative effect of CON on medical supply is not restricted to facilities. Medical inputs such as MRI, CT, and PET scans are also negatively affected. This is because there are CON laws that require permission to purchase such imaging equipment. This reduces access to medical care. For example, per year, Georgia residents have about 90,000 MRI scans. Our estimates show that residents in states comparable to Georgia but without CON have more access to MRI scans. They receive almost one-third more MRI scans—that is 120,000 MRI scans. States without CON also have more access to CT scans. That is, states without CON have about 30 percent more CT scans than states with CON.[4] This gives us a glimpse at how access to medical care in Georgia would improve, if Georgia were to drop its CON laws.

Quality of Hospital Care Is Lower in States with Con

In states without CON laws, hospitals have an incentive to compete to attract patients. Hospitals cannot compete as well on prices as most industries do because many of their patients are Medicare and Medicaid patients who can only be charged fixed amounts. But hospitals can compete on different margins, such as quality of service. So there is a strong incentive for hospitals in states without CON to compete for patients by providing better quality of medical services. This incentive does not exist to the same degree in states with CON laws, because in these states, hospitals are shielded by law from competition.

In contrast to this reasoning, some proponents of CON claim that it is good to have fewer hospital providers. They argue that when procedures are concentrated in a few hospitals, physicians have more experience performing operations because they have more volume, and this translates into higher quality of medical services.

To analyze which of these competing views is correct, we used data on the quality of medical services delivered by hospitals. These data come from a publicly available database maintained by the Centers for Medicare and Medicaid Service. The evidence from the analysis of this data shows that CON does not improve quality of medical care.[5]

Unfortunately, however, the numbers are much more alarming than this. The numbers show that CON laws actually reduce hospital quality. Comparing states with CON laws to those with no CON laws shows that states with CON laws have lower quality of service, as measured by their hospital mortality rates and hospital readmission rates. Specifically, states with CON laws have

  • 0.5 percent more deaths for surgery patients with serious complications,
  • A 0.6 percentage point higher pneumonia mortality rate,
  • A 0.3 percentage point higher heart failure mortality rate, and
  • A 0.4 percentage point higher heart attack mortality rate.

This evidence shows that CON is harmful to patient health and survival.

Quality of Indigent Care Is Not Better in States with Con

CON proponents sometimes claim that CON increases indigent care because successful applicants might commit themselves to increase their medical services to the indigent. However, the data fail to support such optimism. It turns out that hospitals in CON states have only as much indigent care—measured as uncompensated care—as hospitals in states without a CON law. Thus, CON does not lead to additional services for the poor.[6]

Conclusion

If all states had CON laws, studying the effect of CON laws would be very difficult because we would not know what the world would look like without CON laws. Fortunately, 15 states do not have CON laws. This allows us to get a glimpse into the world without CON. And when comparing these two worlds, the data show that CON states have reduced access to medical care in both rural areas and urban areas. CON states have fewer providers, such as hospitals and ambulatory surgery centers. CON results in fewer medical inputs, such as MRI and CT scans and the number of hospital beds. CON does not live up to the claim that it increases indigent care. Moreover, CON reduces quality of medical services.

The takeaway from these findings is that CON laws are bad for Georgia residents because they reduce the quality of medical care in Georgia, they reduce access for Georgians, and they reduce opportunities to obtain medical services such as MRI and CT scans. Georgians would be better off if the Peach State would join the 15 states that do not have CON laws.

 

[1] Thomas Stratmann and Jake Russ, “Do Certificate-of-Need Laws Increase Indigent Care?” (Mercatus Working Paper, Mercatus Center at George Mason University, Arlington, VA, 2014); Thomas Stratmann and Matthew C. Baker, “Are Certificate-of-Need Laws Barriers to Entry? How They Affect Access to MRI, CT, and PET Scans” (Mercatus Working Paper, Mercatus Center at George Mason University, Arlington, VA, 2016); Thomas Stratmann and David Wille, “Certificate-of-Need Laws and Hospital Quality” (Mercatus Working Paper, Mercatus Center at George Mason University, Arlington, VA, 2016); Thomas Stratmann and Christopher Koopman, “Entry Regulation and Rural Health Care: Certificate-of-Need Laws, Ambulatory Surgical Centers, and Community Hospitals” (Mercatus Working Paper, Mercatus Center at George Mason University, Arlington, VA, 2016).

[2] Certificate of Need: Evidence for Repeal (Chicago, IL: American Medical Association 2015); US Department of Justice and Federal Trade Commission, Improving Health Care: A Dose of Competition, July 2004, 22. See also Maureen K. Ohlhausen, “Certificate of Need Laws: A Prescription for Higher Costs,” Antitrust 30, no. 1 (2015): 50–54; Federal Trade Commission and US Department of Justice, Joint Statement of the Federal Trade Commission and the Antitrust Division of the U.S. Department of Justice on Certificate-of-Need Laws and South Carolina House Bill 3250, January 11, 2016; Federal Trade Commission and US Department of Justice, Joint Statement of the Federal Trade Commission and the Antitrust Division of the U.S. Department of Justice to the Virginia Certificate of Public Need Work Group, October 26, 2015; Letter from Federal Trade Commission Staff to Marilyn W. Avila, North Carolina State Representative, July 10, 2015; US Department of Justice and Federal Trade Commission, Competition in Health Care and Certificates of Need: Joint Statement of the Antitrust Division of the US Department of Justice and the Federal Trade Commission before the Illinois Task Force on Health Planning Reform, September 15, 2008; Daniel Sherman, The Effect of State Certificate-of-Need Laws on Hospital Costs: An Economic Policy Analysis (Washington, DC: Federal Trade Commission, January 1988); Monica Noether, “Competition among Hospitals” (Washington, DC: Federal Trade Commission, 1987), 82.

[3] Stratmann and Koopman, “Entry Regulation and Rural Health Care.”

[4] Stratmann and Baker, “Are Certificate-of-Need Laws Barriers to Entry?”

[5] Stratmann and Wille, “Certificate-of-Need Laws and Hospital Quality.”

[6] Stratmann and Russ, “Do Certificate-of-Need Laws Increase Indigent Care?”