Category Archives: Legislation

Report: Certificate of Needs Laws in North Carolina End Up Raising Health Care Costs

We’ve talked about Certificate of Need (CON) laws before, but here’s a new report showing how damaging they are in a specific state.

The John Locke Foundation published a report explaining the origins of CON laws in North Carolina in 1978, and their track record since then. Here are a few facts from the report.

• North Carolina hosts one of the most restrictive CON programs in the country, regulating 25 different services.

• While patients and rural communities are negatively impacted by CON restrictions (especially the poor, elderly, and those with emergencies), existing hospitals and medical service providers reap the benefits of CON laws insulating them from competition.

• Fewer than one-fourth (23 out of 100) of counties in North Carolina have more than one hospital. Seventeen counties still have no hospital.

• The cost in money and time just to apply to provide health care services in this state can be too great for smaller providers. Limiting beds, services, and competitors leads to higher profits for existing providers.

Does Va. restrict competition for new medical buildings?

Matt Zapotosky at the Washington Post writes about a court case in Virginia challenging the state’s Certificate of Need (CON) laws. We’ve discussed CON laws before; they restrict competition and allow for cronyism within certain industries, particularly the medical field.

Darpana Sheth, an attorney for the companies, said the suit challenges both the certificate of need law as a whole and the specific provisions dealing with medical equipment. She said those laws — largely created in the 1970s to restrict the creation of publicly funded hospitals — have been perverted over time to “eliminate competition and actually drive up health-care costs.” And Virginia’s, she said, are particularly restrictive in that they govern not just facilities but also equipment.

“The commonwealth is erecting this huge wall where out-of-state medical equipment can’t go through,” she said. “There’s no health or safety justification for this.”

CONned Out of Care

Dr. William C. Padgett is a retired optometrist who has been trying to bring an elderly care facility to Beaufort County, North Carolina, for over a decade. “Our senior citizens,” he laments, “are finding that it is difficult and in many cases impossible to find an appropriate long-term care facility locally.” Though he has received several commitments from premiere assisted living companies to open facilities in the county, he cannot procure the Certificate of Need (CON) permit necessary to break ground.

Thirty-six states and the District of Columbia require health care providers to obtain CON permits from their state health planning agencies before they can offer or expand services. As the name suggests, a CON will only be issued if the agency finds that a genuine need for the service exists in a given community.

CON Laws

Though they might sound like something out of Cuba, or the pages of Atlas Shrugged, CONs have a long history in the land of the free. For the most part, state CON laws grew out of the 1974 National Health Planning Resources and Development Act , which—in a misguided attribution of spiraling health care costs to a “maldistribution” of health care resources—required states to set up health planning agencies to control future health care expansion based on need.

Twelve years later, in 1986, the law was unceremoniously repealed for the simple reason that it had failed in it was intended to do—that is, reduce health care costs. Fourteen states subsequently repealed their CON laws, either because they agreed with the federal analysis that CON didn’t work or because they lost federal funding with the repeal. On the other hand, 36 states chose to double down on their CON laws under the by-then discredited premise that health care costs were being driven up by a maldistribution of resources.

Excess Supply Causes Prices to Rise?

CON backers claim that permits based on need restrain costs by eliminating excess capacity that would otherwise lead providers to charge higher fees to the patient. “The basic assumption underlying CON regulation,” according  to the bipartisan National Conference of State Legislatures, “is that excess capacity (in the form of facility overbuilding) directly results in health care price inflation. … [On this basis] CON supporters say it makes sense to limit facilities to building only enough capacity to meet actual needs.” Advocates believe that if a facility is unable to recoup its fixed costs—from adding another 50 beds that might sit empty, for example—it will hike up its existing patient prices on services related to its variable costs to compensate. This is like saying that movie theater expansion should be limited to community need lest existing moviegoers be overcharged should new seats sit empty.

In the economic reality distortion field of health care, increased supply drives prices up—and high barriers to entry, like CONs, control costs. In other words, the economic laws governing health care, CON backers imply, are exactly the opposite of the ones that govern every other industry. As economist Dr. Roy Cordato, writing  about CONs for the Alabama Policy Institute, put it, “There is possibly no proposition in economics that is more accepted than the idea that if you want to reduce the cost of something, you foster an environment that encourages open competition and entrepreneurship and discourages monopoly.”

Nevertheless, this reality-distorting brand of economics is evidenced time and again in the CON permitting process. For example, in 2008 Michigan refused to grant CONs to several hospitals looking to expand their radiation therapy capabilities by offering proton therapy, which can more precisely focus radiation on cancerous tissue than can other types of external beam therapy. The New York Times reported  that the State’s CON Commission denied the request because “The costs of multiple centers, each having the most expensive medical equipment yet developed, would be tremendous.” Larry Horwitz, president of the Economic Alliance for Michigan, provided some intellectual cover for this ruling, saying, “We need to constrain health care costs … We certainly don’t need a mammoth escalation in health care costs, especially if it’s duplicative spending in an area that has not been medically validated.”

The story of dialysis centers in Washington State, however, seems to contradict Horwitz’s contention that expansion of health care services drives up costs. In response to rising rates of type 2 diabetes, which can lead to kidney failure, Washington’s health care providers sought several years ago to open new and expand existing dialysis centers. Their requests for CONs were denied because they did not meet the state planning board’s need requirement. Palmer Pollock, an administrator at Northwest Kidney Centers, says  that as a result of this decision, dialysis prices in Washington State have skyrocketed: “Private carriers used to pay $200 or $300 per treatment … now it’s more than $1,000.”

Health Care Costs in CON States Are 11% Higher Than in Those Without

Across the board, the data show that CON laws not only fail to control health care costs but also that they may even contribute to increasing them. Health care costs are greater in states with CON laws than in states without. As these tables below show, average annual per capita health care costs in states with CON laws are $7,230, 11 percent higher than the $6,526 average in states without CON laws.

Average Health Care Costs Per Capita – CON States vs. Non-CON States 

CON prices

Further, the data suggest that states with more services subject to CON approval have higher average health care costs than do states with fewer services subject to CON approval. The severity of states’ CON requirements vary widely , from Vermont, which requires CONs for 30 services, at one extreme to Ohio, which requires CONs for only one service—the introduction of additional long-term care beds—at the other. States requiring CONs on 10 or more services have average per capita health care costs of $7,396, eight percent higher than the $6,837 average for states requiring a CON for fewer than 10 services. The chart below illustrates the positive relationship between CONs and average per capita health care costs.

Average Health Care Costs Per Capita – Non-CON States vs. CON States – less than 10 restrictions vs. CON States – 10 or more restrictions

CON costs per capita

Lack of Government or Scholarly Support

In addition to the economic logic and empirics demonstrating that they do not bring down health care costs, CON laws have some powerful opponents within the government itself. In 2004, the Federal Trade Commission (FTC) and the Department of Justice (DOJ) submitted a comprehensive joint report  calling for the end of CON laws:

The Agencies’ experience and expertise has taught us that Certificate-of-Need laws impede the efficient performance of health care markets. By their very nature, CON laws create barriers to entry and expansion to the detriment of health care competition and consumers. They undercut consumer choice, stifle innovation, and weaken markets’ ability to contain health care costs. Together, we support the repeal of such laws, as well as steps that reduce their scope.

According to the report, “the best empirical evidence shows that ‘on balance … CON has no effect or actually increases both hospital spending per capita and total spending per capita.”

Furthermore, there is little support for CON to be found in scholarly journals. One high profile Duke University study in the Journal of Health Politics, Policy, and Law, claimed that CON laws lead to higher, not lower, health care costs: CON laws caused a two-percent reduction in bed supply and “higher costs per day and per admission, along with higher hospital profits.” An earlier study in the Journal of Regulatory Economics found that CON was responsible for a 13.6 percent increase in per capita health care costs. Florida lawyer and CON expert, Patrick John McGinley, writing  in the Florida State University Law Review, summarizes the scholarship on CON laws: “In searching scholarly journals, one cannot find a single article that asserts that CON laws succeed in lowering health care costs. CON has elicited a remarkable evaluative consensus—that it does not work.”

Bootleggers, Baptists, Rent-seekers, and Cronies

So with economics, empirics, academic journals, and many arms of the government lining up against them, why do CON laws still exist? One reason could be that CON laws find support from a classic Bootleggers and Baptists coalition. The Bootleggers and Baptists story has its origins in the days of prohibition, when two very powerful yet very different groups, the bootleggers and the Baptists, unwittingly teamed up to keep alcohol illegal. The Baptists favored prohibition for moral reasons while the bootleggers favored it for profiteering reasons. Their joint support for the alcohol ban helped keep prohibition alive. Many of today’s policies are similarly backed by unexpected coalitions, with CON laws being prime examples. CON laws are helped kept alive by a coalition of misguided moralists supportive of any well-intended policy purporting to keep health care costs down and opportunistic cronies looking to use state power to shut out new competitors who might eat into their profits.

State health planning boards are often directly or indirectly under the influence of existing health care establishments whose officials are generally responsible for ensuring a profitable bottom line. McGinley has said that existing hospitals can regulate supply through influence on CON procurement and in this sense their activities are “indistinguishable from the activities of a cartel.” It is therefore unsurprising that the American Hospital Association was an early supporter of CON laws, engaging in a nationwide lobbying effort to pass them at the state level and drafting a model state law in 1972. The FTC and DOJ report highlights this side effect of the misaligned incentives of existing hospital administrators and CON procurement:

In some instances, existing competitors have exploited the CON process to thwart or delay new competition to protect their own supra-competitive revenues. Such behavior, commonly called “rent seeking,” is a well-recognized consequence of certain regulatory interventions in the market. … During our hearings, we gathered evidence of the widespread recognition that existing competitors use the CON process to forestall competitors from entering an incumbent’s market.”

In addition to encouraging a cottage industry of rent-seeking lobbyists and administrators, CON laws also encourage good, old-fashioned cronyism. Perhaps the most famous case of CON cronyism is the sordid 2004 affair of the procurement of a CON for the building of a new hospital in suburban Chicago, which resulted in fraud charges. According to the indictment , an official from the Illinois Health Facilities Planning Board, the contractor of a major construction company, a financier from a major investment bank, and the CEO of the proposed hospital, who was by this time wearing a wire for the FBI, conspired to operate a classic kickback scheme wherein the hospital would receive a CON on the condition that it be built by the aforementioned construction company. In return for granting the CON, the planning board member would receive a cut of the $100 million construction contract. Though this act was despicable, it should not be surprising that when people can’t use the price system to achieve their ends, they will resort to graft and cronyism instead.

Additionally, when market signals are not used, planning decisions often seem arbitrary and capricious. One notorious story comes out of Putnam County, Georgia, where the owners of a proudly locally owned and funded hospital sought to renovate, but not expand, their dilapidated facility. When the hospital owners took their renovation request to the Georgia State Health Agency, it was denied—unless the owners would agree to eliminate 10 beds at the same time.

What would it look like if the CON process were introduced to other sectors of the economy? This is the thought experiment that Georgia State Senator Tommie Williams, a restaurateur, took in his protest of state CON laws. He facetiously proposed the introduction of a CON process in the restaurant business to the Georgia State Legislature. Under his proposed legislation, a restaurateur could apply for a permit to open a new restaurant so long as he or she could prove that there was a need for it. Existing restaurants would be grandfathered in, but “if you make one change to that restaurant,” Williams explained, “if you buy a new grill, create more counter space, pave your parking lot, change the color of your building, you will have to apply for a Georgia Authority for Gastronomic Suppliers (GAG) permit.”

Blunt Questions for Crony Capitalist Tim Geithner

Robert Lenzner a Forbes Staff wrote the following article, in which Mr. Lenzner asks Tim Geithner some direct questions regarding crony capitalism, too-big-to-fail banks and Geithner’s relationship with investment banks.

My grudge about Geithner goes back to a brief scene in the Oscar-winning documentary, “Inside Job,” where he exclaims that he has never had experience as a regulator.

I have another query for Geithner. Why did you eject the tough and bold suggestion from your staff that the senior executives of Merrill Lynch and AIG and others, who received their hefty cash bonuses despite needing federal funds to bail them out, not face a special tax that required them to pay much of their ill-gotten gains back to Uncle Sam? Yes, such a move would have taken guts in playing hard ball with your cronies. 

Lawmakers Benefit From Farm Subsidies Congress Seeks to Overhaul

Laura Litvan from Bloomberg.com recently posted the following post, concerning farm subsidies. The article stresses how last year, fifteen members of the U.S. House and Senate or their respective spouses benefited directly from federal farm subsidies.

Representative Stephen Fincher, a Tennessee Republican and member of the House Agriculture Committee that has approved a rewrite of farm programs, was the biggest recipient of the subsidies last year, according to an analysis by the Environmental Working Group, a group that seeks lower farm subsidies. Fincher and his wife, Lynn, own 50 percent of a farm and received $70,574 in direct farm subsidies last year, the group said.

Video: David Stockman at Reason Magazine discussing crony capitalism

Mr. Stockman has recently launched a very important book call “The Great Deformation”, which highlights the current levels of corruption and cronyism that are hampering America. On this interview you can learn more about his book and cronyism in America.

Why the Government Was Wrong to Shutdown Fung Wah Bus Company

Jim Epstein from Reason.com has written this article concerning the recently closed Fung Wah Bus Company. As the article points out, these small bus companies are often harassed by the government, which allows the larger, politically connected companies to operate freely.

Fung Wah is now defunct. In March 2013, the Federal Motor Carrier Safety Administration (FMCSA) forced the company to cease operations, claiming it was an “imminent hazard to public safety.” Journalists, many of whom are former Fung Wah customers, both mourned and applauded the news. InGothamist, Rebecca Fishbein observed, “the feds might have saved the general public from the wretched grasp of Fung Wah’s duct-taped bus fleet, but people are sad to see them go.” 

The government initiative also fits the classic pattern in which regulation destroys politically weak businesses to the benefit of the politically stronglike Greyhound, Coach USA, and Peter Pan, which have seen their market share grow. Most of Fung Wah’s employees and its owner were Chinese immigrants lacking the language skills and legal muscle required to navigate all the red tape.

Should Bitcoin Cooperate with Government Regulators?

Jerry Brito from Reason.com has recently uploaded the following blogspot  about Bitcoin and government regulations. Should users of this new digital currency ignore the government, or try to work with them to seek special treatment (or avoid unfair treatment)?

As the digital currency Bitcoin continues to grow and evolve, regulators are taking notice. From anti-money-laundering rules issued by the Treasury Department in March, to reports that the Commodities Futures Trading Commission is “seriously” examining the currency, to a recent Government Accountability Office recommendation that the IRS issue guidance on Bitcoin-related income reporting, government seems to be getting serious. The question for the largely libertarian Bitcoin community is, should it engage those regulators or ignore them?

D.C. Wal-Mart battle goes national

Hadas Gold from Politico.com has recently written the following article concerning the anti-Walmart crusade in Washington D.C. There is the possibility that this local event might end up impacting the industry at a national level. The new rules in DC targeted only Walmart, raising the question about laws being crafted simply to help or harm particular companies.

What’s playing out in the nation’s capital has all the hallmarks of a classic union vs. business confrontation — with labor organizations, backed by their Democratic allies in office, pulling out all the stops to block what they view as a fiercely anti-union company that victimizes its workers with low wages during tough economic times. 

Wal-Mart spokesman Steven Restivo told POLITICO the company has canceled plans for three sites in D.C. and is on the brink of pulling out of three remaining locations in Washington after the City Council passed the “Large Retailer Accountability Act” last week.

Microsoft pushes U.S. Customs to enforce phone import ban

Diane Bartz from Yahoo News has recently reported about the new regulatory goals that Microsoft is trying to promote. Microsoft filed a motion in a U.S. court asking the U.S. Bureau of Customs and Border Protection to enforce and apply trade restrictions on importing phones manufactured by Google Inc. subsidiaries overseas; inhibiting broader possibilities to American consumers.

The U.S. International Trade Commission, which hears a long list of high-tech patent complaints, said in May 2012 that Google’s Motorola Mobility infringed a Microsoft patent for generating and synchronizing calendar items. It barred any infringing Motorola Mobility device from being imported into the United States.

“U.S. Customs appropriately rejected Microsoft’s effort to broaden its patent claims to block Americans from using a wide range of legitimate calendar functions, like scheduling meetings, on their mobile phones,” said Matt Kallman, a Google spokesman.