Opinion – Christopher Parr: Certificate of need, like anything that hinders a free market, needs reform

A major issue in Kentucky’s 2024 legislative primaries is one that many outside of Northern Kentucky may not know about: certificate of need (CON) reform. CON laws were formulated in the 1950’s with good intentions: to keep healthcare costs down. The theory was that a large number of unused medical resources would drive costs up. Currently, medical providers are not allowed to construct or modify their facilities without a permission slip from the government confirming that they meet a market need. Unfortunately, data soon showed that rationale to be inaccurate, and states began repealing or reforming their CON laws.

This isn’t just an academic policy squabble; it affects all people through both the cost of healthcare services and access to them. Practically, CON has raised healthcare costs by artificially limiting market competition and limited access to people in areas without a preexisting array of providers. In Kentucky, the CON question is particularly relevant for two groups: people who live in rural areas and in Northern Kentucky.

In rural communities, consumers often have no choice; there is only one hospital. Many of these rural facilities have been acquired by major hospital groups. And in Northern Kentucky, unlike Lexington and Louisville, there is only one major hospital group. Even though residents live in urban and suburban neighborhoods, they may be forced to travel long distances to find affordable care or specialists, with some even driving across the Ohio River. That’s why this was a significant issue in several Republican primaries in Northern Kentucky this year.

CON laws are common; 35 states and the District of Columbia have them. While new data has led many states to update them, some remain in place largely because of hospital lobbyists. They’re also intended to protect limited public health resources. But critics challenge the efficacy of their own laws. The Kentucky Hospital Association got heavily involved in the commonwealth’s primary elections last month in favor of pro-CON candidates.

It makes sense that large hospital groups would oppose reform leading to competition. But they aren’t the only ones. Rep. Steve Meredith (R-Litchfield) — a retired hospital executive — presented a compelling argument in favor of the benefits of CON for rural communities at a recent joint committee hearing on the issue.

He said, “There is no free market. Hasn’t been a free market since July 30, 1965, when Medicare and Medicare were started… folks don’t like ‘monopoly’ as a word, but you have to have it to protect that small commercial pay base that we have. Otherwise, you’re not going to provide services like the emergency services because that’s the most heavily subsidized service within the hospital.”

Rep. Meredith is right to point out that Medicare and Medicaid significantly distort the healthcare market, especially in rural areas. Over 60-70% of Kentucky residents participate in both programs. But is the right response to market distortion the creation of further distortion? The data—and what we would expect based on free market principles — doesn’t suggest this conclusion. Artificially restricted supply still increases cost.

According to scholar Robert Moffit, states that have CON laws have health care costs that are about 11% higher on average than states without CON. There’s also no evidence that CON laws improve quality of care, though they do harm competition and encourage monopolies, like in Northern Kentucky. Many underlying statistics like these are available in the Kentucky-specific white paper Striving for Better Care, produced by the Institute for Justice.

Policymakers are also in need of more research on how CON affects rural hospitals. As of yet, there’s no empirical evidence that it benefits them. As good intentioned as the desire to protect rural hospitals is, our policy decisions must be driven by research, and the research doesn’t support CON.

CON laws actually harm medical providers seeking to serve their communities. First, Kentucky providers must appeal to the Cabinet for Health and Family Services, empirically demonstrating that their facility meets specific regulations. This process takes great effort, money, manpower, and time. When trying to increase medical access in a community and lower healthcare cost, is months to years of government regulation and analysis really the best policy? According to Rep. Marianne Procter (R-Union), one potential competitor spent two years and over $1 million seeking a CON in Northern Kentucky. When it was finally granted, the dominant provider sued, and a circuit court ruled against the newcomers. Ironically, while the dominant provider initially claimed that there was no need for the new facility, they are currently building a facility of their own in that very place.

Good health care policy must be data driven, not based on special interests. The economic data from the Federal Trade Commission doesn’t support the arguments of CON proponents. It’s a barrier to competition and innovation.

Good health care policy must also benefit all Kentuckians. The argument has been advanced by well-meaning people that we must serve rural hospitals first despite the concerns in Northern Kentucky because, unlike the former, the latter have at least one hospital option. But this isn’t a good way to shape public policy. The common good shouldn’t penalize the minority.

CON needs reform. So does Medicaid, Medicare, and anything else that hinders free market principles, more healthcare options, and a patient-first approach.

Christopher Parr is director of research at the Commonwealth Policy Center.