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John Hood: Health care planning shouldn’t be centralized

By John Hood

RALEIGH — According to North Carolina regulators, Mecklenburg County needs 76 more hospital beds. Adding 80 would be excessive. Adding 72 would be inadequate.

I’m sure their 76-bed prediction was made in good faith. I’m sure it reflects their best understanding of the data available. My problem is that state regulators didn’t just offer this prediction to inform free choices by medical providers and patients.

Their prediction has the force of law. No more than 76 beds can be added. It doesn’t matter if local hospitals, reacting to their own understanding of market conditions, disagree.

This is North Carolina’s certificate-of-need (CON) system in action. Medical providers need a permission slip from the state to offer many kinds of services. Sound more like the workings of 1970s-era Bulgaria than of a free society of the 21st century?

My colleagues and I at the John Locke Foundation have long thought so. We believe North Carolina should substantially modify or eliminate CON regulations. We think they fail at their stated task of controlling health care costs while restricting competition and individual liberty.

While CON wasn’t invented by Bulgarian commissars, it did have its origins in the 1970s. After the creation of Medicare and Medicaid in 1965, the share of the nation’s health care spending financed by the federal government began to grow rapidly. Federal regulation inevitably followed.

In 1974, Congress passed the Health Planning Resources Development Act. One of its provisions required states to initiate certificate-of-need systems. The rationale went something like this: health care is fundamentally different from other service sectors. Because of the prevalence of third-party payment, originally private insurers but by the 1970s very much including governments, competition among hospitals and other providers doesn’t have the usual salutary effects. It doesn’t push prices down. It pushes prices up.

For example, if two hospitals in a local area already have MRI machines and a third one acquires an MRI machine, it may not simply compete with the other two for the same patients, resulting in better service at lower prices. Instead, more patients will be referred for MRIs — likely those for whom MRIs are unlikely to be of significant diagnostic value.

Hospitals and the doctors affiliated with them will simply want to keep the expensive new machine busy to justify its cost. This is hardly a ridiculous notion. Indeed, it probably captures some of what happens in some situations, at least in the short run. But it isn’t the whole story.

Markets are dynamic. Innovations with upfront costs often have downstream benefits. Without robust competition, such innovations are less likely to arise.

The idea that controlling the number of state permission slips to offer medical services would control the cost of those services wasn’t just a theoretical proposition. It was a testable one.

After the 1974 legislation, it didn’t take long for the test to produce grades. Researchers found that, for the most part, CON didn’t have its intended effect.

It wasn’t an effective cost-control device. There were even studies showing that restricting competition in health care had a more traditional effect: harming consumers and third-party payers (ultimately, insurance subscribers and taxpayers) by boosting prices and limiting choices.

Having digested the findings, in 1987 Congress repealed its 1974 mistake (that’s right, kids, our federal legislature used to be functional and do things like that). States were no longer required to use CON regulation. Many states subsequently abandoned it. Alas, North Carolina didn’t.

JLF analysts argue that the General Assembly should get rid of the system, either outright or in stages. A Winston-Salem physician, Gajendra Singh, has also filed a lawsuit asking the courts to strike down CON as a violation of Article 1, Section 34 of the North Carolina Constitution, which states that “monopolies are contrary to the genius of a free state and shall not be allowed.”

Planning is essential in a capital-intensive field such as health care. But it shouldn’t be centralized in a state agency and coupled with the power to shove people around.

John Hood is chairman of the John Locke Foundation.

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