FTC backs bill to reform North Carolina certificate of need laws

North Carolina’s strict certificate of need program has hospitals worried, and the FTC excited.

Lawmakers in North Carolina are considering a small reform to healthcare permitting, but one that nonetheless pits hospitals – especially the rurals – against advocates for more competition.

The Federal Trade Commission is throwing its weight behind a bill in North Carolina that would exempt diagnostic centers, ambulatory surgical facilities and psychiatric hospitals from the state's certificate of need law.

North Carolina's CON program covers 25 different services, requiring lengthy application and approval processes to expand everything from cardiac catheterization to dialysis centers, and it is one of of the most stringent of the 35 healthcare permitting laws in the country.

Republican U.S. Rep. Marilyn Avila and Democratic Rep. Mickey Michaux are sponsoring the bill in an effort to make it easier for healthcare organizations and physicians to expand access to the services.

"We want to bring down the cost of healthcare and medical care in this state, and the way to do that is put it on a competitive basis," Michaux told The News & Observer. "I know I'm going to get a lot of flak from the big hospital I've got in my district."

The North Carolina Hospital Association is opposing any changes, arguing that new ambulatory surgery centers could lure away profitable, well-insured patients without having to take the Medicaid and uninsured patients that many hospitals must treat.

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"By creating exceptions to the CON law, the General Assembly is endorsing 'cherry-picking' of privately insured patients," Julie Henry, a spokeswoman for the  NCHA told the News & Observer, noting that only 24 percent of the state's hospital patients are privately insured. As the Association argues in a bulletin online, exceptions for single-specialty providers "will result in neither a free-market health care economy nor a more cost-effective health care delivery system in our state."

The Association also argues that the proposed CON exemptions -- for ambulatory surgery centers especially -- pose a threat to the livelihood of rural hospitals, given the continued charity care they provide to uninsured residents in the absence of Medicaid eligibility expansion.

At the same time, if the state ends up expanding Medicaid coverage to its uninsured, rural hospitals could always try to compete by expanding their own ASCs and other services that patients are looking for.

The bill also includes attempts to protect against those problems for rural hospitals. It would require ASCs to provide at least 7 percent of total revenue in charity care, and require physician groups trying to operate an ASC in rural counties (the 75 percent of state counties with less than 100,000 residents) to first get support from every hospital in the jurisdiction.

The Federal Trade Commission, though, sees reform of CON laws as a much-needed modernization in the healthcare business, and is out supporting the bill.

"CON laws raise considerable competitive concerns and generally do not appear to achieve their alleged benefits for health care consumers," the FTC's director of policy planning, Marina Lao, wrote to Avila.

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For one thing, CON programs "create barriers to entry and expansion, limit consumer choice, and stifle innovation," Lao argued.

"Second, CON laws can be prone to exploitation by incumbent firms seeking to thwart or delay entry by new competitors. Third, as recently illustrated by the Commission's experience in the Phoebe Putney case, CON laws can deny consumers the benefit of an effective divestiture-based remedy following the consummation of an anticompetitive merger.  Finally, CON laws appear to have generally failed to control healthcare costs.

The FTC first came out against CON laws in 1988; again in 2004, the agency and the Department of Justice concluded that certificate of need programs were counterproductive and only led to rising healthcare prices by restraining natural market dynamics.

Now the FTC sees reforming CON laws as part of its "long-range competition and consumer policy initiatives." That includes challenging hospital system consolidation moves like the acquisition by Phoebe Putney in Albany, Georgia, where a four year battle recently ended with the FTC winning in a court case to block a local hospital takeover but losing on the ground, in the heavily-regulated market. Georgia's CON law ended up making a divestiture of the hospital "virtually impossible," so the FTC settled with the nonprofit Phoebe Putney system in exchange for oversight and also the possibility of potential civil lawsuits related to healthcare costs. 

Twitter: @AnthonyBrino