Certificate of Public Need – Serving Public Interest or Stifling Competition

In the Virginia Beach area, Sentara Healthcare has achieved monopoly status in Virginia Beach, and dominance over the hospitals in a market stretching from Williamsburg to Gloucester, largely through mergers and acquisitions. When Sentara was denied permission to build new hospitals, it grew in the area by acquiring or merging with the competition. Seven out of the 13 hospitals in that area are now Sentara hospitals. Now Sentara has used the Certificate of Public Need (COPN) review process to keep the Maryland-based Bon Secours hospital system from expanding into Virginia Beach. This was covered in a recent editorial by HamptonRoads.com

The question is, does government control through the COPN process serve the public interest or does it primarily serve existing facilities by stifling competition?

THE FEDERAL GOVERNMENT ABANDONED COPN IN 1986

A nationwide mandate in the 1970s that ended in 1986 required states to review all proposed major health care facilities, whether they are new hospitals, surgical centers, or imaging facilities like MRI machines, to determine whether there is sufficient public need. The original rationale for the review process is to locate facilities where they are needed and to prevent overbuilding in areas where there is overcapacity. The hoped-for result is that this maximizes access to health care and lowers costs by avoiding duplication of expensive facilities.

THE FEDERAL GOVERNMENT SAYS COPN DOES MORE HARM THAN GOOD

Over 30 states still operate Certificate of Public Need (COPN) programs, despite a 2004 finding from the Department of Justice and Federal Trade Commission that COPN programs “pose serious anti-competitive risks that usually outweigh their purported economic benefits.” In other words, COPN programs make it too easy for operators of existing facilities to use the process to block competition. While the American Health Planning Association claims that states with COPN programs have lower health care costs, there are many factors that drive health care costs and it is not clear that there is a causal link between COPN programs and lower health care costs.

THE FREE MARKET HAS PROVEN THAT COMPETITION REDUCES COST

What is clear is that where there is unrestrained competition in facilities offering elective medical services, there have been significant cost REDUCTIONS. Look at what has happened as LASIK services have been offered by more practitioners. If we limited the number of LASIK facilities based on a COPN review, eliminating competition and choice within each market, do you think that the cost of LASIK would be higher or lower? Recently ABCnews covered this story and pointed out that, freed of interference and involvement with the government and insurance companies, LASIK is cheaper and more convenient due to free-market competition.

WHAT ARE THE REAL ISSUES AND IS COPN THE REAL SOLUTION TO THEM?

In a free market, more capacity will be built in areas and in specialties that are more profitable, and will continue to be added until competition reduces profitability to the point where new capacity seeks more profitable markets. This means that the owners of the least profitable facilities in a market will suffer harm from competition, and this harm must be weighed against the benefits the public receives from having choice between facilities and having those facilities compete in terms of cost and quality of services.

COMPETITION IS NOT WHY EXISTING HOSPITALS ARE FAILING

Likewise, in a free market, new capacity will not be built in areas that are unprofitable and existing facilities that are unprofitable will eventually fail and close unless they are adequately supported by the public as a vital service, or taken over by new owners that are able to overcome the challenges that previous management was unable to deal with.

The classic case often cited has been the inner-city general hospital that depends on public subsidy to cover charity care, yet the recently reported string of hospital bankruptcies in suburban New Jersey fly in the face of the assumption that this issue is limited to poor urban hospitals. The uninsured, including “undocumented workers”, are not confined to the inner cities anymore, and the cost savings from the low wages and benefit savings from these people are shifted to the rest of us in the form of charity care, (the current politically-correct term is “uncompensated care”). In some cases, incompetent or corrupt management has added to a hospital’s woes:
• University of Medicine and Dentistry of NJ
• Pascack Valley Hospital, Westwood, NJ

EMERGENCY SERVICES SERVE CRITICAL LOCAL NEEDS

As long as the public needs to subsidize emergency and critical care services to ensure that each area is adequately served, it has an interest in regulating and/or sponsoring the construction and maintenance of facilities that provide those emergency and critical care services.

In a 1995 interview with the Virginian-Pilot, David Bernd, then scheduled to become President of Sentara Health System, predicted that the classic local hospital may be transformed into an emergency department with an intensive care unit, and that non-emergency procedures will likely be performed in other settings.

CUTTING THE GORDIAN KNOT

Emergency services are often unprofitable but vital to the health and safety of an area, and the current operating paradigms of a general hospital assume that a large central facility should have a mix of profitable and unprofitable services that hopefully achieve some sort of balance.

In the long run, cross-subsidization only works in a highly regulated environment that operates outside normal economic forces. Instead, it will ultimately be necessary to cut this financial Gordian knot and place the emergency and critical care functions of community hospitals under the control of separate management and separate the finances of this “emergency medical center” from the rest of the hospital.

Part of the reason why Emergency Departments are overloaded is because they handle a significant amount of non-emergent cases as a kind of 24-hour clinic. This is a separate but important issue, related to the underserved needs of a changing workforce. A properly managed emergency medical center would either be able to handle the non-emergent cases along with emergency cases through proper staffing and triage, along with negotiation of adequate compensation from the health plans that it contracts with, or triage them to a free-standing clinic located nearby.

NON-EMERGENCY SERVICES DO NOT REQUIRE ANTI-COMPETITIVE RATIONING

If the private sector is willing to shoulder the risk of developing and operating non-emergency medical facilities, and suffer the losses if such a facility is unsuccessful, then government should be less concerned about regulating the supply of those facilities, and more concerned about safety, staffing, backup. These concerns are not limited to free-standing surgical centers – there are too many cases where general hospitals have been permitted to perform angioplasty without a vascular surgeon on hand, and patients have died when a “routine” angioplasty developed complications.

MOVING IN THE RIGHT DIRECTION

Rather than adhering to the current paradigm that the countryside should be dotted with local community hospitals that should be all things to all patients, dependent on a tangled web of cross-subsidies, opaque pricing, and artificially high pricing of some care to cover losses in other areas, why not move toward a system of right sized entities that provide emergency and critical care services to meet local needs?

I’m not suggesting that we take a wrecking ball to existing hospitals, but the emergency and critical care, and possibly a connected clinic, should be owned and managed by a separate organization subject to hightened government oversight because its costs would be subject to subsidy. Operating room facilities, lab facilities, parking, and some other shared facilities would need to be worked out through an equitable arrangement, possibly through some kind of condominium reorganization of the facility.

The rest of the facility, freed of the loss-leader emergency and critical care responsibilities, would also be freed of protection from new competitive free-standing facilities. Most likely, the non-emergency part of the hospital would continue to benefit from the synergies and proximity of being connected to the emergency medical center, and, if properly managed, should be in a good position to compete with free-standing facilities.