Opinions differ on whether CON process raises or lowers health care costs

Hank Hayes • Apr 26, 2008 at 12:00 AM

Tennessee policy makers need to examine the state’s Certificate of Need (CON) process that regulates new health care facilities development, Lt. Gov. Ron Ramsey said.

“Bottom line, I think it is something we need to look at in Tennessee and study what other states are doing and see if we really need the Certificate of Need process,” the Blountville Republican said.

The move could have major implications for Tennessee, a state where spending on hospital care accounted for 33 percent of all health expenditures in 2004, according to the Centers for Medicare and Medicaid Services.

The National Conference of State Legislatures (NCSL) says health care competition in 14 states is unchained from the CON process that kept Kingsport-based Wellmont Health System from building a new health care facility in Washington County’s Boones Creek community.

Tennessee’s CON program is run by the Health Services and Development Agency (HSDA), which succeeded the Health Facilities Commission, which ran the CON process from 1973 through 2002. The HSDA unanimously denied Wellmont’s CON bid to construct a Boones Creek facility after Johnson City-based Mountain States Health Alliance (MSHA) opposed the move.

The competing talking points for and against CONs go back more than 30 years in America. Many CON laws were put into effect across the nation as part of the federal “Health Planning Resources Development Act” of 1974.

The basic idea underlying the need for CON regulation, the NCSL said, was that facility overbuilding directly results in health care price inflation. CON programs originated to regulate the number of beds in hospitals and nursing homes, and to prevent overbuying expensive equipment.

Advocates of CON programs insisted health care cannot be considered a “typical” economic product. They argued many market forces do not obey the same rules for health care services as for other products.

To support this argument, the NCSL pointed out that since most health services — like an X-ray — are ordered for patients by physicians, patients do not shop for such services like other commodities. This makes hospital, lab and other services insensitive to market effects on price, and suggests a regulatory approach based on public interest, the NCSL said.

But it is not clear that CON programs actually control health care costs, the NCSL also stressed. By restricting new development, CON programs may reduce price competition between facilities, and may actually keep prices high.

In 2004, the Federal Trade Commission and the Department of Justice both claimed CON programs actually contributed to rising prices because they inhibited competitive markets that should be able to control the costs of care and guarantee quality, plus access to treatment and services.

The HSDA claimed the CON process in Tennessee has saved “millions of dollars” on health care costs, but its executive director could not cite an instance where savings have occurred.

“It would be very difficult to calculate the costs saved by the denial of a Certificate of Need,” HSDA Executive Director Melanie Hill said in an e-mail. “Not only do you have to look at the fixed costs associated with the physical structure, but you would have to attempt to calculate the saving to the payors such as Medicare and TennCare. The Big 3 Automakers have done studies and as a result choose to locate facilities in CON states because they found it lowers their health care costs. Overcapacity increases health care costs. Imaging is a good example. Nationwide, there has been a proliferation of imaging devices that have driven up costs.”

The HSDA concluded Tennessee “cannot afford” health care deregulation. The agency said four of the 14 states eliminating CON programs have experienced difficulties. Nursing home capacity in Arizona, for instance, doubled in less than five years while occupancy rates declined, according to the HSDA.

The federal requirement that states maintain CON programs was lifted in 1986, but 36 states and the District of Columbia now maintain CON programs, the NCSL said.

The HSDA’s mission is that “the establishment and modification of health care institutions, facilities and services, shall be accomplished in a manner that is orderly, economical and consistent with the effective development of necessary and adequate means of providing for the health care of the people of Tennessee.”

The HSDA’s independent 10-member board considers CONs for modifications, renovations or hospital additions valued at more than $5 million. CONs are required for everything from new hospitals to service additions like neonatal intensive care units.

HSDA Chairman Carl O. Koella III said Tennessee’s CON process is working as intended because of the criteria it considers: That the projects are economically feasible and contribute to the orderly development of health care in the state.

Courts can overturn the HSDA’s decisions based on new evidence, Koella also noted.

“I think it would be a lot more efficient and a lot more fair if the courts looked at the evidence we had and only overturned it based upon a grievous error (HSDA) had made,” Koella said. “Now it encourages a lot of legal fees being spent because (appellants) can bring in expert witnesses for weeks and go into areas we haven’t seen.”

The argument that the HSDA doesn’t approve new freestanding facilities isn’t true, Koella said. He said the HSDA approved a Middle Tennessee CON for a new 56-bed hospital in Spring Hill in July 2006. The CON was opposed and subsequently appealed by Maury Regional Medical Center and Williamson Medical Center, but Koella said the HSDA recently reaffirmed the decision.

Since July 2002, the HSDA reported 98 opposed CONs were approved, 71 were denied, 24 were withdrawn, and two were voided.

Ramsey said he believes the health care systems that like CONs are current providers not wanting competition. That was pointed out to him, he said, not too long after the Wellmont-MSHA battle over Wellmont’s proposed Boones Creek facility.

“I’m basically a free-market kind of guy who thinks the market decides whether something is needed,” Ramsey said. “I understand the theory behind Certificate of Need and that being if they build it, they will come, and therefore in the end it costs all of us more in health care. ... I’d like to study the issue.”

State Rep. Matthew Hill, R-Jonesborough, agreed with Ramsey.

“I think that taking a look at the process is always a healthy thing,” Hill said. “I don’t think there’s anything wrong with taking a look at our neighbor states and seeing if there are changes and modifications that might need to be made. We might find out that when looking at the process it needs to be completely overhauled.”

But other Northeast Tennessee lawmakers said they were satisfied with the CON process.

One was state Rep. Jon Lundberg, R-Bristol. MSHA’s Indian Path Medical Center is located in Lundberg’s 1st House District, but his public relations firm does some work for Wellmont.

“Two years ago, I would have said ‘No, the CON should be just like a free market. ... The marketplace will dictate who survives and who fails.’... (But) my thoughts on that changed some time ago,” Lundberg said. “Both of our health care systems spend hundreds of millions of dollars in uncompensated care. In that vein, I think the CON is a viable process.”

House GOP Leader Jason Mumpower, who serves on the House Health and Human Resources Committee, said the CON process works for now.

“It’s not perfect, but it does produce what we need in making sure we have accessible health care for citizens in our state,” said Mumpower, R-Bristol, who noted no pieces of legislation to modify the CON process have come before the committee in years.

State Rep. Nathan Vaughn, D-Kingsport, also said the CON process is working.

“It helps us not allow unnecessary competition and makes sure the facilities being built are necessary to basically take care of the community,” he said. “The process we have now in place is not political anymore for the most part. It is based upon a factual process. Folks do not have the ability to lobby.”

Indeed, Tennessee law mandates that no communications are permitted with HSDA members once a CON letter of intent is filed with the HSDA. So lobbyists are supposed to be prohibited from influencing a CON.

Other lawmakers, such as state Rep. Dale Ford, aren’t knowledgeable about CONs.

But Ford, R-Jonesborough, indicated his phone was ringing after the HSDA turned down Wellmont’s Boones Creek CON.

“I’ve gotten a lot of calls that people are really aggravated that Wellmont didn’t get (the CON),” Ford said.

An e-mail inquiry was sent to Gov. Phil Bredesen’s press office for him to weigh in on this topic. Before entering public service, Bredesen worked in the health care industry.

But the response to the inquiry came from Jeff Ockerman, director of the Tennessee Division of Health Planning.

Ockerman said the state’s CON process is “the only vehicle” that gives Tennessee the opportunity to make a determination whether a proposed expansion of services will provide better access, better affordability and better quality health care in a service area.

“These aren’t always compatible,” he said of access, affordability and quality. “Providing better access may, in fact, drive up the cost of health care (a number of studies have shown this result). Avoiding the costly duplication of services (a major factor in our skyrocketing health care costs) should be a goal shared by everyone.”

One reason people might question Tennessee’s CON process is there isn’t sufficient data on health care services and outcomes, he added.

“The Division of Health Planning is in the process of developing a State Health Plan which has as one of its primary goals the establishment of a centralized health care data warehouse that will develop this data over time and address the issue of transparency and, by extension, of need,” Ockerman said. “This certainly isn’t a short-term process, but parts of the data warehouse will be in place by this fall.”

For more about the HSDA’s CON history and rules, go to www.tennessee.gov/hsda/cert_need_basics.html.

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