Revisiting CONventional Wisdom on State Hospital Licensure
posted by Frank Pasquale
If there is one aspect of contemporary health care regulation that conservatives have decried, it’s “certificate of need laws.” These laws require licensure of new health facilities (and sometimes expansions of facilities) in thirty-seven states. Denounced as relics of socialist central planning, they were a prime target of the Bush-Era Dose of Competition report. But, as David Leonhardt notes, it appears that CON laws are reducing costs without impairing quality in some areas.
First, a bit of background. As health costs rose in the 1960s, many policymakers believed that a surplus of health services was to blame. Policymakers worried that health care costs were rising due to “induced demand:” the more doctors and hospitals there were, the more these actors would try to counteract the normal price-depressing effect of increased competition by finding more wrong with patients, thus “inducing” demand for their services. Although such a strategy could rarely work in a normal market, health care is a credence service—it is very hard for the average consumer to “second guess” his or her provider about the amount or nature of care needed.*
In 1974, Congress passed the National Health Planning and Resources Development Act. The Act required new health care facilities, and additions to existing facilities, to obtain a Certificate of Need (CON) from the appropriate state agency as a prerequisite to receiving federal funds via the Medicare and Medicaid programs. As a result of these laws, those opening new health care entities needed to demonstrate to state commissions that their services are actually needed by the community.
Over time, state boards started addressing concerns beyond “induced demand,” including social goals of equity and fair distribution of health resources. When I emailed a New Jersey policymaker who has worked in this area, he told me that the state would be unlikely to license specialty hospitals that concentrate on the most lucrative cases because they would threaten the ability of safety net hospitals to use revenue from such cases to cross-subsidize uncompensated care. He called such egalitarian concerns “explicit and leading factor[s] of discussion at all levels in CON proceedings.”
Leonhardt is more concerned about the classic CON goal of cost-control, and sees CON laws as a key reason for positive developments in Richmond, Virginia:
Since 1996, the Richmond area has lost more than 600 of its hospital beds, mostly because of state regulations on capacity. . . . Richmond has gotten rid of 15 percent of its hospital beds, and its health care still looks a lot like the rest of the country’s, only cheaper and a bit better. . . .
[Meanwhile, health facilities vastly expanded in South Dakota after it scrapped its CON law in 1988.] In other industries, all that new capacity might have led to a glut, in which workers and equipment sat idle. But health care is different. Doctors and patients tend to believe that more care is better, and patients often don’t pay much extra for any additional care. So new doctors, nurses and equipment generally stay busy.
Dr. John Wennberg of the Dartmouth Medical School refers to this phenomenon as supply-sensitive care. Dr. Marlon Priest, the chief medical officer of Bon Secours, puts it this way: “If you build 100 beds, they’ll get used.” . . . [But] [m]ore care is not always better care. Sometimes, in fact, it’s worse. Just consider the recent research showing that radiation from CT scans will eventually kill thousands of patients a year.
I’m not fully sold on the Dartmouth studies (here’s one critique of them), and I do worry that efforts to fight overtreatment will lead to some “meat ax” rationing that denies care to the poorest (rather than motivating those who don’t need the attention of the health care system to avoid it). But when cost saving initiatives are combined with a commitment to preserve access to care for all, they may be as close to a “Pareto optimal” health policy as we can get.
*(Lawyers have their own version of this “induced demand” problem, encapsulated in the old saw: “When there was one lawyer in town, he had no business; when another moved in, he was swamped with cases.” I suppose laws against barratry are offer a loose parallel to CON in the legal profession. Antitrust may stand in the way of legal and medical professionals’ own actions to avoid “induced demand.”)
January 2, 2010 at 2:51 pm
Posted in: Economic Analysis of Law, Health Law
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Dan Culley - January 3, 2010 at 12:01 am
Your skepticism of the Dartmouth studies, and of other arguments about “induced demand,” is well justified. The Richmond example is a nice story, but the number of potentially confounding variables is pretty high.
For these arguments to be correct, two things must be true:
- Health care providers will try to use all available facilities, regardless of their utility for the patient (creating the problem in the first place)
- Patients will not shop around, or be induced to shop around, for the lowest cost additional service that the health care provider is recommending (preventing downward price competition from happening in any case)
Doctors and nurses may certainly have an emotional bias toward doing something rather than nothing, but these arguments presume that they will be so overcome by emotion (or, I suppose, greed) and out of sight of reason that they will always use up all available supply of any facility. That is hard to believe. Since most doctors and nurses want to give patients the right treatment, it seems likely that they would take studies showing overtreatment seriously.
On the second point, there are certainly situations in health care where search costs are very high, such as emergencies. But there are many situations where search costs are not very high, particularly when assisted by an sophisticated insurer.
But you don’t have to believe either of these counterarguments, because induced demand is testable. If providers really do have an insatiable urge to make use of all available facilities, then deviations such show up according to the level of search costs in a given situation. For example, comparing jurisdictions with stricter and looser certificate of need panels, we should see looser jurisdictions have longer hospital stays (because it is nearly impossible to choose where to spend an additional day in the hospital) but similar numbers of admittances (because it is much easier to choose where to be admitted in the first place). Granted, restrictive practices in hospital privileges have made choosing where to be initially admitted much harder, but still not nearly as hard as switching hospitals mid-stay.
It would be nice to see some research trying to tease out these principles by applying economic theory, not by gathering up an agglomeration of anecdotes.
As far as care being “supply sensitive,” it generally should be. Facilities like hospital beds have very high fixed costs, but very low variable costs. If a bed is just sitting there, and a night’s stay could have any benefit for the patient at all, then it is efficient to use it. (Of course, a certificate of need panel could always decide to impose a reimbursement ceiling on additional facilities, rather than barring them from being built, to ensure they reduce costs rather than induce demand…)
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