Virginia’s Certificate of Public Need Program: Good for Virginia’s “Mega” Hospitals, Bad for Patients
In Virginia, entrepreneurs can’t just operate in health care as they operate in most other industries. Virginia’s Certificate of Public Need (COPN) Program requires entrepreneurs to prove that there is a need for various health care services before they can provide these services. Instead of entrepreneurs acting to provide potentially life-saving services like magnetic resonance imaging (MRI) scanners that consumers demand, regulators dictate the health care services that can be provided.
But this may change soon. A working group organized by Virginia’s legislature has been given the power to recommend whether this program lives or dies, and the program’s fate will be decided this fall. If this working group is interested in giving Virginia’s healthcare consumers more choice and better access to care, it should let COPN die.
John Simpson, Former CEO of Bon Secours Richmond Health System and Chairman of the Virginia Hospital and Health Care Association, disagreed with this assessment in a Richmond Times-Dispatch article in late July. Simpson believes COPN should stick around because it has consolidated hospital systems and reduced “unnecessary” hospital beds. He also favors maintaining the status quo given that Virginia is in charge of a large insurance program (Medicaid) that might become more difficult to administer if eliminating COPN increases costs. Simpson also worries that the public bonds currently used to fund health care facility expansions in Virginia’s ten “mega health care systems” might become too pricey if these hospitals have to compete with other health care providers. This last point makes sense, as lenders would rather lend to privileged firms operating in an oligopolistic market than to health care firms in a competitive market that might be a less certain bet.
Simpson’s reasons for maintaining COPN are not convincing. Hospital consolidation, in and of itself, is not a reason for COPN to remain. In most other markets, state-promoted consolidation is a bad thing, especially when entrepreneurs are kept from innovative attempts to meet consumer demand. Why is health care any different? And in terms of beds, who is to say the amount of beds Virginia’s health care planners pick is correct, or that entrepreneurs would somehow select the wrong number of beds if they were allowed to serve consumers without government permission? Also, predictability is hardly a positive when we don’t know whether the status quo is preferable to a health care system that lets entrepreneurs decide where and when to invest. Finally, arguing against competition simply because the bond ratings of a few privileged hospital systems might suffer is not a good reason to deprive Virginians of the benefits of competition within the health care industry.
How do COPN laws negatively impact patients?
There are other reasons why keeping COPN is a bad idea. We have more than four decades of experience to judge the effects of these types of regulations across the country, and the effects have not been positive. Virginia’s program, which has been around since 1973, requires health care providers to obtain permission for 19 devices and services. Based on a study by Thomas Stratmann and Jacob Russ, it is safe to say these sorts of regulations have restrained the resources available to hospitals to care for patients in Virginia. Looking at states with and without these programs, and controlling for other factors, Stratmann and Russ estimate that Virginia’s COPN program has resulted in about 11,000 fewer hospital beds, about 40 fewer hospitals with MRI machines and about 60 fewer hospitals with computed tomography (CT) scanners.
COPN’s unrealized promise
Proponents of COPN regulations justify reductions in the supply of health care as a means to provide care to indigent patients. Theoretically, the monopoly power given to hospitals might come with an obligation. Hospitals, protected from competition and allowed to make above normal profits, might be required to take these profits and provide charity care to society’s poorest patients. Unfortunately, Stratmann and Russ find no relationship between COPN laws and increased indigent care, meaning privileged hospitals are getting the benefits of monopoly but that their contrived profits are not helping indigent patients get better health care.
Virginia’s experience with COPN illustrates this point. Regulators have been unable to ensure privileged providers actually provide care to indigent patients. Peter Boswell, a spokesperson for the Virginia Department of Health’s Office of Licensure and Certification which administers COPN, notes that health care providers are only required to “self-report” the amount of funds they are devoting toward indigent care, and that the state of Virginia does not audit these reports because they do not have the manpower. This means that no one is sure whether health care providers are making the donations for indigent care they are claiming. Linda Wilkenson, CEO of the Virginia Association of Free Clinics was asked about a reported $35.8 million in “cash and in-kind contributions” made by hospitals to safety net providers in 2013 to provide indigent care. “Their numbers are not exactly consistent with our numbers,” she said.
A better way forward
If Virginia is set on having COPN as a way to subsidize indigent care, some sort of oversight to ensure monopoly providers are actually providing funds to safety net providers is probably preferable to none. But we should be clear that providing oversight is not the first-best option. As Mercatus Center Senior Research Fellow Matt Mitchell notes, “With Government Shekels Come Government Shackles.” The oversight needed to ensure privileged hospitals actually take care of indigent patients might be so debilitating for Virginia’s current health care providers that this solution might be worse than the harm. On the other hand, a health care market without COPN would incentivize health care providers to direct resources toward treating Virginians, instead of pouring resources into securing privileges from Virginia’s health care regulators and complying with the strictures that accompany those privileges.
The tragedy in all of this is that Virginians are left with fewer health care options under COPN. This is different from other states that do not require health care providers to obtain permission before serving patients. If Virginia’s working group is interested in providing patients with more choice in and more access to health care, ending COPN is a quick way to achieve these goals.
