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The Big Health-Care CON


For decades governments have been passing laws and regulations with the stated goal of bringing down health-care costs. For just as long libertarians have been pointing out that government policies such as Medicare, Medicaid, physician licensing, pharmaceutical regulations, and insurance mandates are at the root of the problem and that every attempt to fix the problem without addressing those underlying causes only makes matters worse.

Back in the 1960s, for instance, politicians decided that health-care costs were rising because of an oversupply of hospital beds and expensive medical equipment. The theory was that hospitals with too many beds or costly gadgets would end up raising the rates on the beds or gadgets that were used in order to recover their fixed costs.

Of course, anyone who has taken Economics 101 knows that excess supply tends to drive prices down. A hotel with too many beds will have to reduce its rates if it doesn’t want all those beds to go unused. The same goes for a hospital. While it can’t increase the number of people in need of hospitalization (the way lower hotel rates might induce some people to travel), it can at least attract prospective patients by reducing its rates relative to those of neighboring medical facilities.

Politicians being typically ignorant of the laws of economics — or foolish enough to believe they can legislate them away — their solution to the alleged problem of “excess capacity” in the medical field was to force hospitals and doctors to prove to the state’s satisfaction that they needed more beds or new equipment before they would be permitted to purchase them. In other words, they sought to reduce prices by restricting supply.

New York passed the first such Certificate of Need (CON) law in 1964. The American Hospital Association, sensing an opportunity to limit competition, got on the CON bandwagon four years later; and in 1974 the federal government mandated that states implement CON laws, with Washington supplying funding for the programs. By 1980 all states except Louisiana had passed CON laws. The federal law was repealed in 1986, but like most government programs, CON didn’t go away. Today 35 states and the District of Columbia maintain CON laws in some form.

Should the plaintiffs in a recently filed federal lawsuit prevail, however, those locales may soon become ex-CON jurisdictions. The Institute for Justice, a public-interest law firm, is suing to overturn Virginia’s CON law on behalf of a coalition of medical professionals. According to the firm’s press release,

The target of the lawsuit is Virginia’s certificate of need (or CON) program, which actually makes it illegal to offer new medical services or purchase certain types of medical equipment without first obtaining a special permission slip from the government. Under the program, licensed medical professionals who want to offer new services must first persuade government officials that their new service will be “needed” — and they must do so in a process that verges on full-blown litigation in which existing businesses are allowed to participate and oppose new competition. This process can take several years and cost hundreds of thousands of dollars. Frequently, the process results in new services’ being forbidden from operating at all.

The release highlights two of the doctors involved in the lawsuit.

Dr. Mark Baumel offers an advanced, noninvasive colon-cancer screening system called Integrated Virtual Colonoscopy (IVC) at his office in Delaware and will soon be expanding into New Jersey. “But,” says the press release, “he cannot operate in Virginia because the state’s CON program will not allow him and his partners to open a new colon health center that would offer IVC or even permit them to buy the CT scanners necessary to do virtual colonoscopies.”

Progressive Radiology, a partnership headed by Dr. Mark Monteferrante, wants to build a new facility in Virginia but is unwilling to submit to the arduous CON process, having suffered through it before to the tune of five years and $175,000 just to add a second MRI machine to its existing office.

Because of Virginia’s CON law, residents of the Old Dominion are currently being denied the ability to obtain the life-saving treatments those physicians have to offer; and if they are able to obtain similar treatments from existing Virginia-based providers, they are forced to pay the providers’ potentially higher rates.

The doctors’ lawsuit challenges Virginia’s CON law on two grounds. First, the doctors allege that the state is violating the U.S. Constitution’s Commerce Clause, which gives Congress, not state legislatures, the power to regulate interstate commerce. Second, they claim that since the law is not enforced uniformly, it is also a violation of the Fourteenth Amendment.

Whether one agrees with the specific charges in the lawsuit or with the idea of challenging state laws in federal court, there is no question that CON laws are a bad idea and ought to be repealed.

CON proponents argue that such laws are necessary because the health-care market does not function like other markets. Most costs are paid by insurance companies, and most procedures are ordered by doctors, not patients. Patients, therefore, have little incentive to seek out the most cost-effective treatments. Indeed, one of the reasons politicians gave for creating CON laws in the first place was that hospitals could charge pretty much whatever they wanted and insurers would simply pay it, which may have been truer in the 1960s than it is now.

Still, the charge that the health-care market is somehow different from all other markets, especially because it involves one of the essentials of life, remains a popular one among CON supporters. But as John Barnes of the Washington Policy Center observed,that argument fails on two counts:

First, the realities of the economy make no distinction between things deemed “essentials of life” and any other product or service. The harmful impact of overregulation on both is the same. Health care is no different than any other product or service in our economy and the same dynamic market forces determine the quality, availability and price of it. In fact, the more essential a product or service is to meeting basic human needs, the more important it is for policymakers not to place artificial restraints on it.

Second, the “essentials of life” argument for regulating health care overlooks the even more fundamental needs of life that are bountifully provided through vigorous competition in the free market. Food, clothing, housing and transportation are vital and immediate human needs. For the vast majority of [people] these needs are met through a vibrant system of private buying and selling. In these cases the government’s role is properly limited to protecting public safety, enforcing voluntary contracts and assisting the needy. Everyday experience shows that when the market is free to operate under minimal government oversight, the result is abundance, quality service and low price.

In addition, though CON fans maintain that restricting the supply of medical facilities and equipment somehow reduces health-care costs, the fact that politicians are still promising to bring down spiraling health-care costs despite decades of CON laws ought to put that notion to rest. Even the federal government, not exactly known for its laissez-faire approach to health care, foundthat “CON programs generally fail to control costs and can actually lead to increased prices” by “shielding incumbent health care providers from new entrants.”

In short, like most other attempts to rein in health-care costs, CON laws failed to address the root of the problem and ended up exacerbating it. Had politicians in the 1960s and 1970s recognized that existing government policies were driving prices above the average person’s ability to pay and making employer-sponsored health insurance the norm, thereby reducing consumers’ sensitivity to health-care prices, they might have repealed the earlier policies and actually reduced prices. Instead, they proceeded to pile on more policies that could result only in even higher medical costs. Their attempts were soon followed by more government intervention to “fix” the distortions brought about by the last round of fixes, and so on, ultimately leading to the present-day monstrosity of Obamacare.

CON laws have demonstrably flopped. Whether the Virginia lawsuit succeeds or not, Americans would be wise to end the big CON and reintroduce some competition into the health-care market.

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    Michael Tennant is a software developer and freelance writer.