“Certificate of Need” Program: Not Needed


Ft. Belvoir Hospital


Last Wednesday, South Carolina House lawmakers – possibly accidentally – enacted the most pro-liberty reform of the entire 2013 session by sustaining the governor’s veto of funding for the Department of Health and Environmental Control’s (DHEC) Certificate of Need (CON) program, a program that imposes heavy regulations on the building and expanding of health care facilities. Two days after the veto, the director of DHEC suspended the CON program because of the lack of funding. Proponents of the CON program have come out strongly against its suspension, as shown during the House floor debate over the veto when Rep. Walt McLeod claimed that sustaining the veto would create “anarchy” in the health care industry.

Suspension of the program is in no way a done deal: some lawmakers have called for a special session of the General Assembly to make sure the program stays funded, and DHEC has filed a lawsuit with the state Supreme Court to determine if suspension of the program is constitutional.

So what exactly is the Certificate of Need program? Why do we have it? And do we really need it?

What is it?

The CON program is essentially a regulatory process in which various types of health care facilities must prove to the government that there is a need for their services in a given area before building a new facility or expanding an existing one. According to the state law code, a CON is required for the following:

  • The construction or other establishment of a new health care facility.
  • Any change in the number of beds made available.
  • Most capital expenditures.
  • The offering of any new health service.
  • The acquisition of medical equipment if costs are in excess of that prescribed by regulation.

If a project fits these criteria, this process must be followed:

  • Notify the public in the geographic area within 20 days before submitting a CON application by publishing notification in the legal section of a daily newspaper serving the area. This notification, which must be published for three straight days, must announce intent to apply for a CON, describe the scope and nature of the project, and provide the estimated total project cost.
  • Complete a CON application form, print out two copies, on one side only of 8.5 x 11 inch paper with a 3-hole punch on the left side. (None of this is satire.)
  • Calculate your fees, including:
    • $500 initial filing fee.
    • Application fee of up to $7,000, depending on the total project cost.
    • $7,500 issuance fee if project cost is over $1.4 million and if application is approved.
  • Mail in copies of application, proof you notified the public in a local newspaper on time, and your initial $500 filing fee.

If, and only if, the CON is approved, the project may proceed. Examples of current pending CON applications can be found here.

Below is the simplified version of the CON criteria review process used by DHEC officials to evaluate applications, to determine if a health care facility can move forward with its project:

  • Does the project align with the needs of residents and geographic gaps in medical services identified in the South Carolina Health Plan?
  • Does the project duplicate existing services and is there an adequate need for the service in the area?
  • Are the costs for the project reasonable?
Why do we have it?

According to the National Conference of State Legislatures, New York was the first state to enact a type of CON law in 1964, and soon after the American Hospital Association expressed interest in CON laws and campaigned for other states to create their own CON laws. By 1978, 36 states had enacted them. A 1974 federal law required all states to maintain a government approval process for the construction of new health care facilities. However, this law was repealed in 1987, along with its federal funding, and in the next decade 14 states discontinued their CON programs. South Carolina was not one of these states.

According to state code, the purpose of our CON law is to “promote cost containment, prevent unnecessary duplication of health care facilities and services, guide the establishment of health facilities and services which will best serve public needs, and ensure that high quality services are provided in health facilities in this state.”

By keeping tight regulations on the health care industry and restricting competition, the thinking seems to be, health care costs will somehow be lowered and high quality services will be ensured.

Do we really need it?

No, and for two reasons.

Reason 1: Certificate of Need programs haven’t significantly lowered costs.

A report published by North Carolina’s Civitas Institute cites several studies showing that CON programs have been ineffective, and that their repeal hasn’t led to higher costs. Here are some of the findings:

  • CON laws had no effect on total personal health expenditure per capita or on per capita spending on doctor’s services.
  • CON repeal is extremely unlikely to lead to increased Medicaid nursing home expenditures.
  • CON laws haven’t controlled overall health care spending or hospital costs.
  • There is scarce evidence that CON laws resulted in cost reductions and some evidence suggests the opposite.
  • Some agency officials and most providers said that the CON processes have had very little effect on costs. A few respondents noted CON raises the total costs of capital projects.

Reason 2: Certificate of Need programs infringe on your liberty.

Regulations in themselves are barriers to freedom and prosperity, and regulations rarely come bigger and more burdensome than CON laws. There is no logic in assuming that by limiting competition between health care facilities, the end result would be better and cheaper health care for consumers.

Take this example: If Bi-Lo wants to construct a grocery store across the street from a Publix, should Bi-Lo first have to get permission from the state? Would having two grocery stores across the street from each other result in higher prices and lower quality items? Would consumers suffer? While some Publix officials may be upset with the new competition, and some loyal Publix customers may not appreciate the additional traffic, the end result is a win for all consumers, since both stores would try to provide better quality items and cheaper prices in order to get consumers to shop at their store. Of course, the analogy breaks down because health care facilities are not retail stores and aren’t as beholden to quite the same supply-and-demand dynamic, but health care facilities do compete against each other and part of that competition involves lowering the costs passed on to consumers.

The idea that somehow there will be “anarchy” in the health care system is farfetched.  Just because health care providers would no longer need government approval before building a new facility doesn’t mean new hospitals will be popping up on every street corner. It’s not as if these facility developers are going to forgo extensive economic research and market analysis before building a new facility just because they’re no longer forced to. Indeed, company stakeholders with their own money on the line are surely more rather than less likely to make wise decisions about the health care needs of a population than unaccountable bureaucrats with no real stake in the outcome.

These facilities need to make money to survive, and if the new facility isn’t providing better, cheaper services, consumers will not choose this facility and the new facility won’t remain in business. All the same, if a new facility is providing better, cheaper services than an incumbent facility, then consumers win.

The only real “winners” in the CON programs, by contrast, are the incumbent health care facilities that get to keep their prices high due to a government-enforced absence of competition, and the bureaucrats employed to assess CON applications.

What’s the solution to our health care mess?

The solution certainly isn’t Obamacare. Nor is a state-run alternative like “Obamacare Light” or the “Responsible Consumer Health Care Program” (which would use Obamacare funding and use it in a state program instead of a straightforward Medicaid expansion). Nor is the solution some grand alternative reform. The solution, instead, is the destruction of barriers to health care freedom that federal, state and local governments have constructed. Eliminating South Carolina’s Certificate of Need program would topple one of these barriers: a small step, but a necessary one.

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