Certificates of Need: Implications for Hospital and Health System Planning

ERDMAN ALERT:

As hospitals and heath systems transition to Systems of Health, what should planners and leaders do to evolve their strategies given the current realities and future uncertainty of CON laws?

INTRODUCTION
Certificate of Need (CON) laws are used by legislatures in 35 states, the District of Columbia, Puerto Rico, and the U.S. Virgin Islands, to rationalize services by limiting duplication of clinical programs and major capital investments proposed by hospitals. Are they working? How do CON regulations impact a Hospital’s or Health System’s ability to transform into a System of Health?

For most planners, it is evident that the topic cannot be ignored. In his August address at the annual meeting of the conservative American Legislative Exchange Council, Secretary of Health and Human Services (HHS) Azar referred to CON policies a major barrier to new competition and lower-cost market disruptors. Since the meeting, Secretary Azar has announced his plans to overhaul CON laws to promote value-based payment reforms which have become mandatory under the Secretary.3

BACKGROUND
CON regulations were enacted by states in the 1960s as a means for regulating major capital. The laws vary by state and may include inpatient or outpatient facilities, as well as new services and relocation. Essentially, these laws require providers to first seek approval from state regulators before proceeding with new capital investments to ensure local demand is sufficient for the proposed plans.

New York was the first state to enact CON legislation in 1964. A decade later, the federal government passed the Health Planning Resources Act of 1974 that tied state funding to the adoption of CON laws. By 1975, 20 states had passed CON laws and by the early 80s, all states except Louisiana, had implemented CON programs. By the mid-80s, questions about their effectiveness in controlling costs surfaced. The federal mandate was suspended in 1987 based on studies that showed CON policies failed to achieve their intended goals – to control costs and increase access. Since then, 12 states have eliminated their CON programs, leaving 35 states, the District of Columbia, Puerto Rico, and the U.S. Virgin Islands with active CON laws. The most recent repeal of CON was in New Hampshire in 2016. Indiana adopted a new CON policy in July of 2018. Arizona, Minnesota, and, Wisconsin have also modified their CON laws.1

DO CON’s HELP HOLD DOWN HEALTH COSTS?
As CONs were implemented in states, research showed minimal reduction in medical costs, provoking criticism from the Federal Trade Commission (FTC) and the U.S. Justice Department (DOJ). They urged states to repeal their CON laws, concluding they are more harmful than helpful stating, “CON requirements limit consumer choice and give incumbent hospitals a leg up on the competition.” Since 2007, the two agencies have held hearings and issued recommendations to lawmakers in Alaska, Florida, Georgia, North Carolina, South Carolina, and Virginia, among others. In each instance, the agencies have cited the same concerns. Their position is, “CON policies interfere with the market forces that normally determine the supply of facilities and services, can suppress supply, misallocate resources, and shield incumbent healthcare providers from competition from new entrants.”2

ARGUMENTS FOR AND AGAINST CON LAWS 1

LOOKING AHEAD: WHAT TO EXPECT
HHS has made its objective to relax or rescind CON laws clear as hospitals transition to systems of health. In systems of health, value-based payments require providers to compete for contracts with insurers, large employers, Medicare Advantage, and others, while diversifying into wellness and healthy living, senior care services, and retail health.

IMPLICATIONS FOR PLANNERS AND STRATEGISTS: THE ERDMAN VIEW
In states where CON laws remain intact, compliance will continue to be necessary for major capital initiatives, such as facility expansion and technology acquisition. But in each state, changes to CON approvals and compliance are likely. In states where CONs have been vacated, strategists and planners will have greater latitude to address competitive threats and technological innovations more aggressively.

And in every state, the development of strategic plans that maximize access through bricks (facilities) and clicks (digital and virtual), adapt to alternative payment models, price services using total cost of care, expand the scale and scope of programs, and position effectively against traditional and non-traditional competition will be vital. The destination for most will be a vertically integrated system of health that competes across the continuum of care, requiring careful clinical program planning and master facility plan development. Programs and plans will need to extend beyond current locations with modernized facilities, seamless integration in homes and work, and services geared to the population’s needs and values.

For hospital planners and strategists, the role of CON policies will be increasingly complicated. In addition to orchestrating the strategic planning process, more time and energy will need to be dedicated to six areas:

The future for CON laws is relatively clear. State legislative proposals and federal policy initiatives indicate a consensus to scale back or outright repeal CON laws as providers adopt value-based payment models.

For hospital strategists and planners, CON considerations will be more important in the coming few years and will require development of robust competitive capabilities to ensure success of their organizations.

Resources Cited

1.–Cauchi, R. and Noble, A. (Aug., 2018). “CON-Certificate Of Need State Laws.” National Conference of State Legislatures. http://www.ncsl.org/research/health/con-certificate-of-need-state-laws.aspx.

2.–Federal Trade Commission. (Feb. 6, 2018). “Statement of the Federal Trade Commission to the Alaska Senate Committee on Labor & Commerce on Certificate-of-Need Laws and SB 62.” MATTER NUMBER: P859900. https://www.ftc.gov/system/files/documents/advocacy_documents/statement-federal-trade-commission-alaska-senate-committee-labor-commerce-certificate-need-laws/p859900_ftc_testimony_before_alaska_senate_re_con_laws.pdf.

3.–Luthi, S. (Aug. 2018). “Azar eyes overhauling certificates of need, Medicaid drug rebates.”
Modern Healthcarehttps://www.modernhealthcare.com/article/20180809/NEWS/180809906.

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