North Carolina's health-care cartel

RALEIGH -- It's been a busy season for Certificate of Need regulators in Wake County. They enforce a state law requiring hospitals and other medical providers to get government permission before adding new facilities or services. Their notion is that by limiting options for patients, the state can keep costs lower.

In recent weeks, the state has denied applications for permission to build two free-standing emergency departments and two new urgent care facilities in Wake County. Regulators said that the providers in question had not proven the need for the new operations, despite the fact that they would have gone into high-growth areas in the north and southeastern sections of the county.

While all this was going on, the Raleigh Orthopedic Clinic and a cancer treatment clinic in Asheville filed a lawsuit against the state, arguing that the Certificate of Need regulatory procedures are unconstitutional, in part because existing providers -- who have a strong incentive to keep competitors out of their territories -- have too much influence over certificate decisions.

As stated by the state Division of Facility Services, the "certificate of need law prohibits health-care providers from acquiring, replacing, or adding to their facilities and equipment ... without the prior approval of the Department of Health and Human Services." The law is all-encompassing, applying to "new hospitals, psychiatric facilities, chemical dependency treatment facilities, nursing home facilities, adult care homes, kidney disease treatment centers, intermediate care facilities for mentally retarded, rehabilitation facilities, home health agencies, hospices, diagnostic centers, oncology treatment centers, and ambulatory surgical facilities."

As pervasive as this law is, most people are probably unaware of its existence and are even less likely to understand the role that it plays.

First, Certificate of Need laws do not exist in order to ensure the safety, effectiveness or quality of heath-care services. There are other inspection and licensing laws set up to perform this function.

Instead, the process determines whether a proposed facility, expansion or equipment is "needed" in a particular geographical area.

While in nearly all other products and services the question of need is determined by the voluntary decisions of investors, entrepreneurs and consumers, in medical care this decision has been turned over to state government bureaucrats. The goal is not to ensure that there is enough health care provided, but instead to ensure that there isn't too much health care provided.

The argument is that unless the state government is there to make these determinations, the market would generate "redundancies" and there would be an overproduction of health-care services. In other words, the purpose is to restrict supply so that certain services that medical care providers want to produce do not, in fact, get produced.

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THE PROBLEM WITH CERTIFICATE OF NEED LAWS is that they fly in the face of what basic economics suggests must happen if the rising tide in health-care costs is to be reversed. Cost control will require more, not less, competition in the market for health services.

The redundancy that such laws seek to avoid is what competition is all about. A market where there is no redundancy is by definition a monopoly market. The markets for electricity and first-class mail delivery are prime examples. To restrict redundancy is to restrict competition. And it is competition that puts downward pressure on prices.

North Carolina's law turns this basic economic principle on its head. It is premised on the idea that "the proliferation" of what it calls "unnecessary health service facilities" results in higher health-care costs. Of course, what is "necessary" is not determined by the market but by a state central planning bureaucracy that issues the permission slips, often in the service of protecting existing hospitals from having to compete for patients.

We know that the result isn't lower costs because lots of states don't have Certificate of Need laws and their costs are no higher, and are often lower, than North Carolina's.

Our state law acts as a cartel-enforcement mechanism. What business would not love to have a government agency whose main purpose is to keep potential competitors at bay? Much like OPEC tries to do in oil markets, Certificate of Need laws restrict supply, thereby contributing to the high cost of health care.

After studying North Carolina's law, the Federal Trade Commission concluded, in 1989, that "consumers would most likely be better served if Certificate of Need regulations were removed." This is a case where, believe it or not, Washington gets it and our own state officials do not.

(Roy Cordato is an economist and vice president for research at the John Locke Foundation in Raleigh.)