Be skeptical of certificate of need laws [PODCAST]

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“Certificate of need (CON) laws purport to lower health care costs, increase patient access and ensure quality by managing the distribution of private resources, but none of these gains has materialized. A joint report from two federal agencies—the Federal Trade Commission and the Antitrust Division of the Justice Department—finds no evidence that CON laws achieve any public benefit.

A supermajority of studies agrees. More importantly, decades of real-world experience show that CON laws do not work as advertised. Recognizing the policy error, Congress reversed itself in 1986 and repealed CON mandates it had imposed just 12 years earlier.”

Jaimie Cavanaugh is an attorney.

She shares her story and discusses the KevinMD article, “As cancer patients wait, states play favorites.”

This episode is sponsored by the American College of Lifestyle Medicine (ACLM). 

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Hosted by Kevin Pho, MD, The Podcast by KevinMD shares the stories of the many who intersect with our health care system but are rarely heard from.

Transcript

Kevin Pho: Hi, and welcome to the show, where we share the stories of the many who intersect with our health care system but are rarely heard from. My name is Kevin Pho, founder and editor of KevinMD. Rate and review the show at kevinmd.com/rate. Subscribe at kevinmd.com/follow.

Today on the show, we have Jaimie Cavanaugh. She’s an attorney. Her KevinMD article that she co-wrote with Daryl James is titled “As cancer patients wait, states play favorites.” Jaimie, welcome to the show.

Jaimie Cavanaugh: Thanks, Kevin.

Kevin Pho: We’ll get into your article in a little bit. First off, just briefly share your story and journey to where you are today.

Jaimie Cavanaugh: Sure. I’m an attorney at the Institute for Justice. This is a nonprofit public interest law firm, and I’m going to talk about certificates of need today. I’ll explain what that is in a moment, but my journey to become interested in this area was that I first filed a lawsuit in Kentucky about certificate of need laws. These were laws that were preventing my clients from opening a home health agency.

Then later, when COVID started, we realized that certificate of need laws, which are a barrier to growing health care facilities or opening new health care facilities, were standing in the way of existing hospitals, and they weren’t allowing facilities to have flexibility during the pandemic. Courts were closed during that time, and since I’m an attorney, I couldn’t litigate any of my cases. So I put together a pretty comprehensive 50-state survey of all the certificate of need laws across the country.

Kevin Pho: All right, then. Before we jump into the article, tell me about how common certificate of need laws are. What are some common cases that those certificate of need laws obstruct? And how do they generally affect the lives of practicing clinicians?

Jaimie Cavanaugh: Yeah, that’s a great question. First of all, a certificate of need is just a permission slip from the government that someone has to get before they build a new hospital or add new services to a hospital, and it really comes down to something as granular as adding a bed to a hospital. So they’re very strict in most states.

There are 38 states plus D.C. that have certificate of need laws on the books. But it actually turns out that about 40 percent of the nation lives in states without certificate of need laws. That’s because populous states like California and Texas don’t have certificate of need laws.

I talk to physicians all the time, and this really does impact their everyday lives. Lots of clinicians that I’ve talked to would love to open their own centers or offices and expand, and they can’t do so because they can’t get this permission slip from the government.

Kevin Pho: And from the perspective of the government, what’s the reason why they exist?

Jaimie Cavanaugh: The original theory behind certificate of need laws was that if the government limited the amount of health care services, somehow they could control quality, cost, and availability of services. But as you might imagine, putting kind of a stranglehold on the number of facilities and the number of services just doesn’t actually accomplish those goals. It does not increase quality. It does not increase access. It does not decrease cost. It does just the opposite.

We have a plethora of evidence, especially because we can study the differences between what happens in certificate of need states versus what happens in non-certificate of need states. We know that costs are higher in certificate of need states. We know that people travel further distances to get to health care facilities in certificate of need states. And we know that quality is lower in certificate of need states, because there’s less competition, so there’s less reason for facilities to innovate or buy the latest technology. There’s no competition, so there’s no reason for them to offer new services.

Kevin Pho: All right, then. In your KevinMD article, you’re going to be talking about one case that really illustrates your point. It’s titled “As cancer patients wait, states play favorites.” You co-wrote this with Daryl James. Now, for those of you who got a chance to read that story, just walk my audience through it and share why you decided to share it.

Jaimie Cavanaugh: Yeah, so this was a great example of how the certificate of need process works and how the government really picks winners and losers. That’s something that we at the Institute for Justice always say in any context: The government cannot pick winners and losers.

In this case, we had two facilities in Connecticut that wanted to open a proton beam center, and they both applied for a certificate of need. Within two weeks of each other, the government granted one facility the certificate of need and denied the other facility’s certificate of need application.

What’s really interesting is that during the application process, the competitors can intervene in each other’s applications and say to the state agency, “Don’t grant this application to my competitor because it might hurt my bottom line. There are other reasons, I think, that they won’t be as good as me.” But that’s really kind of insane when you think about it. That would be like McDonald’s getting to veto a new hamburger shop opening up somewhere. We don’t really see this in any other markets except health care.

What often happens is that existing huge health care conglomerates are the ones coming in and arguing that they have the market covered, and they’re really keeping new entrepreneurs out of the business, or out of that specific market. That’s something that leads to health care consolidation, or doesn’t help with the problem that’s going on right now.

We see no reason why the state shouldn’t grant both certificates of need and allow both of these facilities to open their businesses, too. They obviously understand that they have to have enough patient volume to stay afloat. And if they both think they can do that, there’s no reason the government should be the one saying, “No, we’re going to pick just one of you.”

Kevin Pho: And in this particular story, where you have two entities applying for a certificate of need for proton beam therapy, can you tell us a little bit in general about each of these entities, about their makeup, and what kind of practices they are?

Jaimie Cavanaugh: Yeah. One was coming from an existing hospital group that wanted to expand their offerings, and that was the group that ultimately got the certificate of need granted. The other was a new group with newer investors that was new to the state. So you can see how, exactly like I was explaining, the established incumbents who have a market share are usually favored in this scenario. And sure, you can make arguments for why that might be, but in the end, what happens is you’re just letting the people who already have certificates of need run the show.

That’s true, for example, in a case I have in Kentucky, where we are representing two Nepali-speaking immigrants who want to open a home health agency for the Nepali-speaking community in Kentucky. The state said, “No, you can’t do that because we already have enough home health agencies.” In fact, a direct competitor, a $2 billion health care conglomerate, intervened in their application and said, “No, we have the market covered. We don’t need your new service that would be specialized for these patients that need this care.” And the state sided with the $2 billion health care conglomerate.

Kevin Pho: How transparent was the decision-making process on behalf of the government in determining who gets that certificate of need?

Jaimie Cavanaugh: Well, the proceedings are all public. Actually, anyone can intervene in the proceedings. So a member of the public who wanted this service, or who said, “This is coming to my city. I want this service in my city,” could intervene. Everything’s public, and all the decisions are made public.

But at the Institute for Justice, we look at these application processes around the country, and we hardly ever see citizens who are affected by the health care decisions. Pretty much never do they intervene and say why this decision would help them or hurt them. We see hospital associations intervening all the time and speaking on behalf of their members. And then we see doctors weighing in, sometimes in favor of their own facilities, their employers, and sometimes opposing a certificate of need because they would like to maybe open their own facilities.

Kevin Pho: Now, once a decision is made about the certificate of need, like in this Connecticut case, does the entity that did not get it have any recourse or repeal options?

Jaimie Cavanaugh: Yes. The facility that was denied the certificate of need is going through an appeal right now. This process in most places can take years, and the same is true in Connecticut. They first appeal to the actual board that denied their application, and then they can go to the courts and appeal further.

In a lot of states, if you’re granted a certificate of need, your interveners, your competitors, can also appeal the decision. So even if you get a certificate of need, you might wind up going through years of litigation just to actually be able to use your certificate of need. That’s another problem with the certificate of need application process.

Kevin Pho: And in general, how successful are these appeals?

Jaimie Cavanaugh: They’re not usually that successful. That’s for a legal reason, because the standard of review that the appeals are judged on is just whether the government made an arbitrary and capricious decision. That’s a hard standard to meet. So they’re not usually that successful.

Kevin Pho: Jaimie, you said earlier that states with certificate of need laws had higher health care costs and that patients have to travel further distances for medical care. Can you talk more about that?

Jaimie Cavanaugh: Like I said, there are hundreds of peer-reviewed journal articles. Matt Mitchell and the Mercatus Center and many of his colleagues are kind of leaders in this area of studying certificate of need laws, and the overwhelming evidence shows that certificate of need laws don’t do what the government says that they do. The federal government also agrees. There have been reports from the Department of Justice, the Department of Labor, and the Federal Trade Commission, all saying that certificate of need is anticompetitive and harms patients.

The original impetus for states to adopt CON laws was a federal law passed in the ’70s that tied certain funding to states having a certificate of need law on the books. But Congress actually realized in the ’80s that certificate of need was a disaster and repealed the requirement that states have a certificate of need law. That’s when we saw states start to repeal and reform their programs.

But sadly, a lot of states still have certificate of need laws on the books, because the hospitals have realized that they benefit from not having competition and have worked behind the scenes to make sure that these laws don’t get reformed and don’t get repealed.

Kevin Pho: We’re talking to Jaimie Cavanaugh. She’s an attorney. Her KevinMD article that she co-wrote with Daryl James is titled “As cancer patients wait, states play favorites.” Jaimie, what do you see as the path forward when it comes to certificate of need laws?

Jaimie Cavanaugh: Well, there is some hope that reform is starting to come. Some states are starting to reform and repeal their laws. New Hampshire was the most recent state to repeal its entire certificate of need law. That was in 2016. But we do see momentum building around the country. Montana recently repealed two-thirds of its certificate of need law program. Florida has repealed most of its certificate of need law program.

So changes are coming. People are recognizing that there are costs that come with certificate of need laws, and the only people who benefit from certificate of need laws are the hospitals, whose bottom line it benefits. So that’s exciting.

In Connecticut, for example, this session the legislature passed a waiver of certificate of need laws for psychiatric care facilities, mental health facilities. That’s in place through June 2026. So it’s a temporary waiver, but that was in recognition that the state needs more health care services available. The state plainly recognized that certificate of need is holding the state back from having enough mental health care facilities, so it needed to pause the certificate of need to be able to meet the demands that it has right now. So legislators know that certificate of need does restrict supply in a way that harms patients.

Kevin Pho: And my final question: What are some of your take-home messages that you want to leave with the KevinMD audience?

Jaimie Cavanaugh: My take-home message is that everyone should be skeptical of certificate of need laws. Hospital associations will tell you about all the good things they do, but the evidence overwhelmingly shows that’s not true. You’ll often hear the argument that certificate of need laws keep hospitals in business and keep rural hospitals in business, and that’s also not true. We have no evidence whatsoever that getting rid of certificate of need laws causes hospitals or rural hospitals to close. Just the opposite.

Many states actually waive their certificate of need program in rural areas. So even states with certificate of need laws don’t apply those laws in rural areas. The evidence all shows that certificate of need laws decrease supply for needed services, and in the end, that harms patients.

Kevin Pho: Jaimie, thank you so much for sharing your time and insight. Thanks again for being on the show.

Jaimie Cavanaugh: Thanks, Kevin.

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