What Georgia Should Do About Certificate of Need

By Dr. Brenda Fitzgerald

Good medical coverage is affected by three components: cost, quality and availability. The true purpose of government in assuring that Georgians have good medical care is to oversee quality through the licensing process and guarantee availability with a public safety net. Whenever government attempts to control the third component, cost, a mess is always created. Cost control is the true purpose of the market.

The current third-party payer system with its out-of-control costs is a direct result of wage and price legislation enacted during World War II. That legislation altered the medical market and cost control for medical care remains a mess. When the cost of medical care kept increasing in spite of greater availability of services, the National Health Planning and Resources Act of 1974 mandated that states enact Certificate of Need (CON) legislation to lower costs by decreasing supply.

This is contrary to usual economic logic. In all other parts of the economy, greater supply generates lower costs. Computers and cell phones are examples of products more widely available and much cheaper now than 10 years ago.

Not surprisingly, CON legislation was declared unsuccessful in lowering costs, and in 1986, Congress repealed the mandate for CON legislation, saying that it had not controlled cost. A 1991 study in the Journal of Regulatory Economics found that hospital costs rose due to CON regulation. A 2004 CATO Institute study reported that the net cost of health services regulation in America is $169.1 billion annually. That equates to $1,500 of increased medical cost per household per year.

In 1999, the state of Washington’s Joint Legislative Audit and Review Committee reported: “Within the body of research on the effect of CON, the findings on cost are most definite. The weight of findings over the last three decades is that CON laws have little or no effect in curtailing general health care expenditures or hospital costs.”

There are some studies that report otherwise, including a 2002 study by Cleverly and Associates that found that patient costs in Georgia, a CON state, are lower than costs in Arizona and  Texas, states without CON.  Also in 2002, Daimler-Chrysler reported that its cost for employees is higher in non-CON states than in states with CON laws.

What should the Georgia Legislature do with this conflicting information? It’s a hotly debated mess. The answer is: Stay with your true purpose.

On the positive side, the data on using CON laws to improve quality are clear. With complex medical procedures, the more you do, the better your results. In a 2002 report to the Florida Hospital Association, the risk-adjusted hospital mortality rate was 21 percent higher for patients undergoing coronary bypass surgery in the 18 states with no CON laws when compared with the 26 states with CON laws.

The Leapfrog Group for Patient Safety clearly identifies several medical procedures where greater volume equals better outcomes. Not only should there continue to be CON laws that regulate the facilities that perform these procedures, but there should be a mandatory periodic renewal of the CON (perhaps every five years) that guarantees that volume is maintained and outcomes are good.

Government’s second role – to establish a true safety net to guarantee availability – needs to be solved in Georgia with Medicaid reform and addressing the issue of the uninsured. Many innovative ideas are being tried in other states. Currently the hospitals, especially the rural ones, are our de facto safety net. To accomplish this, hospitals use the CON rules to suppress competition and retain profitable imaging and surgery services that help offset the losses incurred in their role as safety net.

This method is inefficient and expensive, but hospitals cannot afford to lose this income source until the larger problem of the underinsured is solved. Illustrating the magnitude of the problem, the Georgia Hospital Association reported that for 154 Georgia hospitals in 2004, there was a $1.13 billion loss from taking care of patients with Medicare, Medicaid and no insurance. That meant that patients who had insurance had to pay 22.9 percent above cost to keep hospitals in the black, even though the federal government provides some funds to offset these losses.

Many rural hospitals have a very small percentage of insured patients and are highly vulnerable to any loss of a profitable service. The legislature is currently debating if CON requirements can be relaxed to encourage competition and at the same time protect the safety net hospitals by requiring the for profit new facilities to take a portion of underinsured care. If Georgia decides to approve this plan, there needs to be a very methodical financial analysis to determine the fair share of the cost or some hospitals may fold. A better approach is to solve the problem of the underinsured first.

Once a true safety net is established, the CON laws governing procedures for routine medical care should be abolished to encourage competition and lower costs for everyone.

Strides are being made. The Georgia Hospital Association deserves accolades for establishing a Web site to enable Georgians to compare hospital cost and quality data. Georgia’s major employers are on the right path, too, with more than a dozen employers and Governor Sonny Perdue recently signing a resolution for transparency in health care cost and quality and for implementing consumer-driven health care plans.

Only when the majority of health coverage is consumer-driven, and there is transparency of cost and quality, will the market will be able to control cost.



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Dr. Brenda Fitzgerald is an OB-GYN and the chairman of the Board of Governors of the Georgia Public Policy Foundation. The Foundation is an independent think tank that proposes practical, market-oriented approaches to public policy to improve the lives of Georgians. Nothing written here is to be construed as necessarily reflecting the views of the Georgia Public Policy Foundation or as an attempt to aid or hinder the passage of any bill before the U.S. Congress or the Georgia Legislature.

© Georgia Public Policy Foundation (March 9, 2007). Permission to reprint in whole or in part is hereby granted, provided the author and her affiliations are cited.

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