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March 25, 2008

Saying Yes to Choice

Testimony of David Gratzer, MD, Senior Fellow, Manhattan Institute before the Florida Senate Committee on Health

Thank you for the opportunity to present today. My name is Dr. David Gratzer. I am a senior fellow at the Manhattan Institute. The views expressed are my own, and not necessarily those of the Manhattan Institute.

On health care, as with so many other issues, America is a divided nation. In this hearing, we have people with fundamentally different views of health reform. Some see market reforms as the path to meaningful change; others believe in expanding government programs.

But we can all agree on at least one basic principle: during a time of illness, people should be allowed to choose the health provider that best fits their needs.

It's ironic, however, that in Florida, state law violates that basic and important principle when it comes to hospital care. Certification of Need (CON) laws, written with the best of intentions, end up depriving people of choice in hospital services. Fortunately, Governor Crist's administration has put forward a reasonable and intelligent amendment that will address this deficiency.

For this reason, I am in support of Senate Bill 2326.

As we mull this legislation, let's start with a basic question: Why does Florida have Certi-fication of Need? The answer lies, as many of you know, in the National Health Planning and Resources Development Act of 1974, which literally provided incentives for states to adopt CON laws.

That federal mandate has long ago been repealed. Florida, however, still has CON laws on the books. Like other jurisdictions, it was believed that health care was an imperfect market, one needing significantly more regulations than other sectors of the economy. In particular, proponents have argued that costs can be controlled when (and only when) supply is controlled.

This position is well summarized by the National Academy of State Health Policy: "limitations are imposed in an effort… to hold down the volume of services provided and the cost."

If that sounds persuasive, it's not surprising that Florida is not alone in its heavy regulatory environment—many states have CON laws, some 27 in all (for acute-care hospitals).

There are two basic arguments against CON laws. First, that they reduce patient options; second, that they fail to control cost.

Reducing Options

My own view on Certification of Need was solidified in an unusual place: a board meet-ing of a small, private hospital company. Some time ago, I was invited to speak at this company's annual general meeting. My address was after their business discussion. For a couple of hours, I sat at the board table and listened to them discuss a variety of items.

While the company was small, the entrepreneurial spirit remained great. The jargon at the table could have come from any issue of Fortune or Forbes: profit, reward, expansion. To that end, the company looked for "good buys"—hospitals that they could purchase and manage. What made a hospital particularly attractive to this board? There were a variety of factors, but a big one was the existence of CON laws within a state. The regulatory framework, in the board's view, meant that competition to the hospital would be slow to organize and that the costs would be high. Even better: appeals and other litigation could help drag out the process.

It struck me as ironic: in this entrepreneurial setting, regulations were a major asset.

Florida senators are, of course, in a very different position. You're not trying to create or maintain hospital monopolies over local markets, you're trying to encourage options.

CON laws do the opposite.

Here in Florida, we've seen the result, where new facilities may face regulatory hurdles and appeals that take up to 3 years to clear. To address this, you and your colleagues had the good sense of relaxing requirements in 2004. But you should take the next step and scrap CON altogether.

CON, after all, makes little sense from an economic point of view. It's one thing to expect some type of licensing requirements for a health care facility. Certification of Need, however, isn't about basic regulations; it's about attempting to centrally plan part of the economy.

Roy Cordato, an economist, writes in an essay for the Pacific Research Institute what it would be like to apply this philosophy to restaurants:

If a Chinese immigrant family wanted to open a restaurant, it would first have to approach a government commission that would survey the economic landscape for Chinese restaurants to determine if there already were "enough" such eateries in the area. The commission would have a formula regarding how many Chinese restaurants exist in the area, how many of those are strictly take-out restaurants and how many are eat-in es-tablishments, and among those that are sit-down style, how many feature buffets and how many are strictly order-from-menu. The formula might also consider variations in price to determine how many restaurants are serving lower-income families and how many are targeted to the gourmet Chinese food market.

After going through all this—a process that might take several years—the commission would decide whether this Chinese restaurant was "needed" in the area. If not, the immigrant family's request would be refused and the family would be forced to find another way to earn a living. Or, the commission might suggest that the family try another location where the authorities might determine that there were too few Chinese restaurants to serve the existing population.

Cordato continues, suggesting the sort of restrictions that may be placed on the Chinese restaurant: from the type of items on the menu to the possibility of allowing take-out ser-vice.[1]

Cordato's analogy is humorous but pathetic—in fact, we do apply these sorts of restrictions on hospitals. The end result: fewer hospitals and less innovation within the sector.

The Cost Containment Myth

In its exhaustive review of health care competition and regulation, the Department of Justice and the Federal Trade Commission issued a major report in 2004. Their conclusion?

The agencies believe that CON programs can pose serious competitive concerns that generally outweigh CON programs' purported economic benefits. Where CON programs are intended to control health care costs, there is considerable evidence that they can actually drive up prices by fostering anti-competitive barriers to entry (emphasis added)[2].

Researchers at the federal government aren't the only ones to have drawn this conclusion. Duke University professors Christopher Conover and Frank Sloan reviewed the impact of CON laws on costs—their work is probably the most exhaustive to date. They found the laws had the opposite of the intended results: higher overall costs per hospital bed and higher profits for existing providers. Other studies agree.[3]

* * *

Certification of Need doesn't contain costs; it does contain consumer options. Mark Botti of the Antitrust Division of the Department of Justice neatly summarized the problems of CON laws when testifying in Georgia before a joint session of senators and representatives considering exactly the same type of regulatory changes you are considering:

The Antitrust Division's experience and expertise has taught us that Cer-tificate of Need laws pose a substantial threat to the proper performance of health-care markets. Indeed, by their very nature, CON laws create barriers to entry and expansion and thus are anathema to free markets. They undercut consumer choice, weaken markets' ability to contain health-care costs, and stifle innovation. [4]

With that in mind, it's easy to see why the hospital lobby gets a bit steamed under the collar. As Nobel laureate George Stigler once noted, "competition, like exercise, is uni-versally noted to be good for other people."

Competition, though, is a win for consumers.

More hospital competition is not a solution for all the woes of American health care. But it does present an important option. For the gentleman requiring heart surgery or the woman with a herniated disc, Florida legislators shouldn't be in the business of trying to restrict their options.

Would I criticize anything of Gov. Crist's efforts? If anything, they don't go far enough, leaving a licensure system that is too rigid.

For one thing, it doesn't allow specialty hospitals. Focused centers for cardiac care or oncology, however, offer another meaningful alternative to the traditional community-hospital. Take MedCath's 13 cardiac surgery hospitals. In a study, the Lewin Group found MedCath's patients had a Case Mix Index (a measure of patient severity and case complexity) 20 percent higher than their counterparts in general hospitals. In other words, MedCath treated sicker patients. And the outcomes? MedCath patients had shorter stays, fewer complications and lower mortality rates (a full 17% less). All this—and they tend to operate at lower cost.

Florida law keeps companies like MedCath out—how unfortunate.

But praise where praise is due. Senate Bill 2326 is a step in the right direction.


  1. The full essay can be found at:
  2. The report bemoans the overall lack of competition in health care. It can be found at:
  3. Many economic studies have suggested that, at least in terms of cost containment, CON laws are a failure. A DOJ study concluded that: "in researching the scholarly journals, one cannot find a single article that asserts that CON laws succeed in lowering health care costs." Typical of past major analyses would be a study examining data through 1982 and found that CON was associated with a 20.6 percent increase in hospital spend-ing and a nine percent increase in spending on other health care. Overall, the study found that CON was responsible for a 13.6 percent increase in per capita spending on personal health care services. A more thorough review of the literature can be found in Roy Cor-dato's essay on this topic.
  4. Mark Botti's full testimony can be read at:


Center for Medical Progress.


David Gratzer


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