The Real-World Costs of the Certificate of Need Program

February 18, 2014

Inside Insight

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hospital certificate of need“Yes, but what does that mean for the average person?”

That’s the question public policy debates usually come down to, and it’s rarely an easy one to answer. The chain of cause-and-effect between the implementation of a government policy and its consequences for the average taxpayer is usually a long and complex one, and if the policy has a certain prima facie plausibility to it, demonstrating the policy’s counterproductivity can be a difficult business. It’s often hard to see the connection between a government regulation, say, and and the income needlessly lost by a small business as a result of that regulation.

The Certificate of Need (CON) program, over which there is an ongoing debate in South Carolina, is a fine example. Without going into the program’s details, the idea is this: In order to build a health care facility in a certain area, you’ve got to get the state’s permission. At a superficial level, it makes sense. The intent is to ensure that health care facilities are more or less evenly distributed throughout the state. So, for instance, in order to avoid having three cardiology centers within a mile of each other, the state – specifically the Department of Health and Environmental Control – would require that those cardiology centers be spread out, thus serving the state more effectively.

Sounds great. Unfortunately, it’s a terrible idea that contributes to the high cost of medical care.

Here’s why. Government bureaucrats have no idea what the market will bear in a certain area. Nor does anyone else – although it’s a far safer bet to trust the investors whose money is on the line than it is to trust regulators who have no personal financial stake in the success of the facility at a given location.

Consider an analogy with, oh, breakfast restaurants. There are some places where a Waffle House, a Denny’s, and a Cracker Barrel could co-exist within a block or two of each other, and all three do well enough financially. There are other places, seemingly with the same market potential, where not even one of those breakfast restaurants could survive.

The reason for the success in one case and failure in the other may not be obvious, even after extensive demographic analysis. The market is a tricky thing, and for a variety of reasons one area can support three pancake joints and another won’t support any. The real question is this: who would you trust to make the decision of where to put a Denny’s or a Cracker Barrel: a team of state bureaucrats, or people whose money and jobs depend on success? Clearly, the latter.

Essentially the same is true, making obvious allowances for the different services offered, with medical care facilities. Investors in a new cardiology center may not have a flawless sense of where the facility should be located, but they will almost certainly have a better sense for it than a few DHEC employees.

But this is all very abstract, and eventually you return to the question we began with: What does it mean for the average person?

We happened on an answer to that question last week in a conversation with Thomas Willcox, a board member of the South Carolina Policy Council (The Nerve’s parent organization). In August of last year, Willcox had minor surgery done on his arm. It was a fairly routine surgery; he went in at 7:45 a.m. and was out by noon.

For this surgery, he received three bills. The first, from doctor’s medical practice, was $702. The second, from the anesthesiologist, was $750. And the third, from the surgery center – owned by the St. Francis Health System – was $5,222. All three were sent after insurance kicked in.

Now, the first two may be defensible amounts to charge for the surgery, all things considered. But most readers will suspect that the third – the $5,222 charged by the surgery center – borders on outrageous.

Understandably, Willox asked his doctor about the surgery center bill, and the reason had everything to do with the Certificate of Need program. The doctor’s practice has tried to open its own surgery center because its doctors can carry out surgeries at far less cost than the St. Francis center charges. But the request has been denied on the grounds that two surgery centers in close proximity wouldn’t serve health care consumers well. So instead of encouraging competition and bringing costs down, the well-intended CON program gives one hospital system a monopoly and allows it to charge exorbitant prices.

The debate over South Carolina’s CON program may at times sound theoretical. It becomes practical, however, the minute the mailman brings the bill.