Opinion – Christopher Parr: The certificate of need, like everything that hinders the free market, needs reform

A major issue in Kentucky’s 2024 legislative primaries is one that many outside of Northern Kentucky may not be familiar with: certificate of need (CON) reform. CON laws were formulated in the 1950s with good intentions: to keep health care costs down. The theory was that a large amount of unused medical resources would drive up costs. Currently, medical providers cannot build or modify their facilities without a government permit confirming that they meet a market need. Unfortunately, data soon proved that rationale to be inaccurate, and states began repealing or reforming their CON laws.

This is not simply an academic policy dispute; it affects all people, both in terms of the cost of health care and access to it. In practice, CON has increased health care costs by artificially limiting market competition and limiting access to people in areas without a pre-existing variety of providers. In Kentucky, the CON issue is particularly relevant to two groups: people living 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 medical care or specialists, with some even driving across the Ohio River. So this was a major 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 prompted many states to update them, some remain in place largely because of hospital lobbyists. They are also intended to protect limited public health resources. But critics question the effectiveness of their own laws. The Kentucky Hospital Association was active in the state’s primary elections last month in support of pro-CON candidates.

It makes sense that large hospital groups would oppose reform that would lead to competition, but they are not alone. Rep. Steve Meredith (R-Litchfield), a retired hospital executive, made a compelling argument for the benefits of CON for rural communities at a recent joint committee hearing on the issue.

He said: “There is no free market. There has been no free market since July 30, 1965, when Medicare was created and Medicare… people don’t like the word ‘monopoly,’ but it’s necessary to protect that small commercial payment base that we have. Otherwise, services like emergency services are not going to be provided because it’s the most subsidized service within the hospital.”

Rep. Meredith is correct in pointing out that Medicare and Medicaid significantly distort the health care market, especially in rural areas. More than 60-70% of Kentuckians participate in both programs. But is the right response to market distortion to create more distortion? The data (and what we would expect under free market principles) do not suggest this conclusion. Artificially restricted supply continues to drive up costs.

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 is also no evidence that CON laws improve the quality of care, although they do harm competition and encourage monopolies, such as 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 also need more research on how CON affects rural hospitals. So far, there is no empirical evidence that it benefits them. As good as the intentions of protecting rural hospitals are, our policy decisions must be driven by research, and research does not support CON.

CON laws actually hurt medical providers seeking to serve their communities. First, Kentucky providers must appeal to the Cabinet for Health and Family Services, empirically proving that their facilities are in compliance with specific regulations. This process requires a lot of effort, money, manpower, and time. When it comes to increasing medical access in a community and lowering the cost of health care, is months or years of government regulation and analysis really the best policy? According to Rep. Marianne Procter (R-Union), a potential competitor spent two years and more than a million dollars seeking a CON in Northern Kentucky. When it was finally granted, the dominant provider filed suit and a circuit court ruled against the newcomer. Ironically, while the dominant provider initially claimed there was no need for the new facility, it is currently building a facility of its own at that very location.

Good health care policy should be based on data, not self-interest. The Federal Trade Commission’s economic data do not support the arguments of anti-competitive policy advocates. They are a barrier to competition and innovation.

Good health care policy must also benefit all Kentuckians. Well-meaning people have argued that we should serve rural hospitals first despite concerns in Northern Kentucky because, unlike the former, the latter have at least one hospital option. But that is not a good way to shape public policy. The common good should not penalize the minority.

CON needs reform, as does Medicaid, Medicare, and anything else that stands in the way of free market principles, expanded health care options, and a patient-first approach.

Christopher Parr is Research Director at the Commonwealth Policy Center.