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CONned Out Of Health Choices In Florida

David Gratzer
Investor's Business Daily
June 3, 2008

Florida's popular governor, Charlie Crist, has a personal–approval rating roughly double those of his legislative colleagues. He also has a reputation for getting results; for example, he has reformed insurance and held the line on taxes.

But when he forwarded a proposal to increase choice for patients and potentially cut health care costs while—best of all—not spending a single penny out of the state treasury, he ran into a big obstacle: the hospital lobby.

Gov. Crist's struggle to scrap his state's obsolete Certificate of Need law, which limits competition among hospitals, speaks volumes about not only Florida politics but the nation's health care.

The CON law requires that any organization seeking to build a hospital must apply to a government committee and prove that the facility is needed.

As in 26 other states, Florida passed CON laws as a response to the National Health Planning and Resources Development Act of 1974, which provided incentives for states to adopt these laws.

In that era of wage and price controls, many believed that a centrally planned hospital sector could tame spiraling health costs. With a cap on hospital beds, supporters argued, costs would be contained.

It's not simply that the legislation is dated—the federal act itself was repealed more than two decades ago—but the reasoning behind it was wrong.

Evidence shows that the CON process doesn't help keep hospital costs down. In its thorough review of health care competition and regulation, the Department of Justice and the Federal Trade Commission concluded: "CON programs can actually drive up prices."

Work done by Duke University professors Christopher Conover and Frank Sloan to review the impact of CON laws on cost—probably the most exhaustive effort to date—found, again, that the laws cause the opposite of their intended results: higher overall cost per hospital bed and higher profit for existing providers.

An earlier federal government review claimed that "in researching the scholarly journals, one cannot find a single article that asserts that CON laws succeed in lowering health care costs."

These discoveries are hardly surprising, for restricting the supply of hospital beds to save money on hospital services is like restricting the supply of oil to a handful of countries and hoping to save at the gas pump. Whether by OPEC for oil or by CON laws for hospital beds, costs are not contained by restricting supply.

The CON laws' cumbersome approval process is another crucial weakness. Economist Roy Cordato notes the absurdity of the CON concept if applied to, say, restaurants. In an essay for the Pacific Research Institute, he writes:

"If a Chinese immigrant family wanted to open a restaurant, it would first have to approach a government commission that would survey the economic landscape for Chinese restaurants to determine if there already were 'enough' such eateries in the area."

What would the commission consider? "How many Chinese restaurants exist in the area, how many of those are strictly take–out restaurants and how many are eat–in establishments, and among those that are sit–down style, how many feature buffets and how many are strictly order–from–menu."

This absurdity carries a price: The process (with appeals) can last years and cost hundreds of thousands of dollars to applicants. This barrier to entry undermines competition.

The DOJ–FTC report's authors gathered sobering testimony on the law's effects across the country:

One hospital used the threat of legal appeals to the CON process to keep a heart surgery facility out of its city; two hospitals, protected by CON laws, divided up acute care services, rather than competing against one another.

And, of course, the most significant effect of CON law is the deprivation of choices to patients. For the patient with an ailing heart or a bad hip, the legal restrictions mean fewer hospital options.

Nonetheless, the hospital lobby successfully urged Florida legislators—and their counterparts in Georgia a few years ago—not to overturn the existing laws, arguing that the hospital sector faces enough challenges.

Their resistance brings to mind Nobel laureate George Stigler's observation that "competition, like exercise, is universally noted to be good for other people."

If anything, Gov. Crist's proposal didn't go far enough in injecting competition and choice into the system. His legislation, which would have replaced CON with a licensing requirement, wouldn't allow stand–alone hospitals specializing in fields like cardiac care or orthopedics, for example.

In the end, he managed to achieve only a step in the right direction: a modest streamlining of the existing law.

CON laws undermine the competition and innovation that Americans deserve with their health care. Gov. Crist should dust himself off and try to pass meaningful reform in the next legislative session. Other governors should take note and take action.

Gratzer, a physician, is a senior fellow at the Manhattan Institute. His most recent book, "The Cure: How Capitalism Can Save American Health Care," is now available in paperback.
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