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That federal mandate has long ago been repealed.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.
ENDNOTES
- The full essay can be found at: http://liberty.pacificresearch.org/docLib/20070206_What_States_Can_Do.pdf.
- The report bemoans the overall lack of competition
in health care. It can be found at: http://www.ftc.gov/reports/healthcare/040723healthcarerpt.pdf.
- 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.
- Mark Botti's full testimony can be read
at: http://justice.gov/atr/public/comments/223754.htm#N_30_.
