How problems with state certificate-of-need laws can be fixed

[Editor's note: This story originally was published by Real Clear Health.]

By Robert E. Moffit
Real Clear Health

America needs healthy competition. In the healthcare arena, competition expands patient choice, controls cost and stimulates innovation in the delivery of medical care. Anti-competitive policies result in market consolidation—meaning less competition—especially among America’s hospitals.

Consensus on this point transcends Left and Right.  Brookings Institution scholars have observed: The U.S. healthcare system does not work as well as it could or should. Prices are high and rising, there are serious quality problems, and many characterize the system as rigid and unresponsive, lacking dynamism and innovation. A lack of competition is a major contributor to this dysfunction.

Similarly, Alex Azar, HHS Secretary under Donald Trump,  reported, “Reduced competition among clinicians leads to higher prices for healthcare services, reduces choice, and negatively impacts overall healthcare quality and the efficient allocation of resources.”

Among the culprits are certificate-of-need laws on the books in 35 states and the District of Columbia. Not surprisingly, healthcare costs in states with these anti-competitive laws are 11 percent higher than states that do not.

Under these laws, hospital officials or medical providers wishing to build, expand or modify a hospital or medical facility must first prove to a state agency that there is a “need” for their proposed action. Only if the agency agrees do medical providers get a “certificate of need,” a government permission slip allowing them to start the project.

Securing a certificate-of-need often requires detailed studies, analyses and projections which can take months, even years, to complete. Medical providers must hire lawyers, lobbyists, or consultants to help them with this arduous process. It sometimes ends up costing hundreds of thousands of dollars—and not one cent funds patient care.

Academic studies show these laws undercut market competition. The Federal Trade Commission (FTC) and the Anti-Trust Division of the Department of Justice (DOJ), under both Democratic and Republican administrations, have consistently concluded that these laws are  barriers to market entry of new providers, thus limiting consumer choice and stifling innovation. The federal agencies have found that they neither control costs nor improve healthcare quality.

The good news is that in 2019, 10 states, including Florida, Maryland and Virginia, enacted limited reforms. And, during the last year, 18 states have introduced reform legislation.

This is progress, but Congress should encourage states to pursue more aggressive reforms or repeal.

The reason: the cost of these laws is not confined to the residents of the states. They have a “spill-over” effect on federal taxpayers because of the relationship between state healthcare costs and certain federal healthcare subsidies.

State health insurance premiums are influenced by a variety of factors, primarily the cost of delivering medical care. The Affordable Care Act (ACA) provides subsidies ($60 billion in 2021) to insurance companies to offset the costs of persons eligible for the federally subsidized ACA coverage, approximately 90 percent of all exchange enrollees.

The ACA subsidy is benchmarked to the cost of the “silver plans,” the standard health plans in the states’ health insurance exchanges, the higher the cost of the plans, the larger the federal subsidies. Anti-competitive certificate-of-need laws increase a state’s healthcare costs, thus imposing unnecessary costs on the federal taxpayers subsidizing its insurance exchange.

In this same vein, Congress should also scrutinize the formulas for Medicaid and the Children’s Health Insurance Program subsidies ($433 billion in 2021). Federal taxpayers subsidize between 50 and 78 percent of state Medicaid costs. Under current law, federal taxpayers pony up at least a dollar for every dollar a state spends on Medicaid. The higher the state spending, the bigger the federal taxpayers’ tab. It’s open-ended.

While all state taxpayers are impacted by federal health policy, federal taxpayers, regardless of their residence, can also absorb the costs of bad state health policies, including certificate-of-need laws. It cannot be ignored.

Congress can start by authorizing federal actuaries to examine the extent to which these laws, and other anti-competitive state measures, are contributing to excessive healthcare cost increases within the states. As recommended by the Healthcare Consensus Group, a group of conservative analysts and economists, Congress should then consider adjusting the federal health insurance subsidies going to these states.

Federal taxpayers should not be required to paper over the wasteful costs incurred by bad state policy decisions. While Congress has no right to interfere with the formulation of state health policy, Congress should refuse to underwrite anticompetitive state practices that drive up healthcare costs and reduce healthcare options for patients.

That’s the fiscally responsible course. It is also good health policy.

Robert E. Moffit is a senior fellow specializing in the study of healthcare and entitlement programs at The Heritage Foundation.

[Editor's note: This story originally was published by Real Clear Health.]


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