The Unintended and Anticompetitive Consequences of Laws to Control Health Care Costs

From jamanetwork.com.

A lesson in economics.

Good intentions do not equate to good fixes.

Here is the Link,

Here are some excerpts.

An array of federal and state laws, and accompanying regulations, restrict the supply of health care, driving up costs and making health care less affordable and accessible for many in the US. Too few health policy analysts and commentators have paid attention to these supply-side limitations that play a significant role in limiting the number of clinicians and health care facilities.

Even though some of these policies were well-intentioned and designed to control costs, they have, in practice, undermined competition and ironically led to higher prices in the long run.

Nowhere has this policy challenge been more acute than with respect to the available supply of hospitals across the country. Between 1974 and 2015, the number of hospitals in the US decreased by 22%. This shortage has been particularly severe in rural areas, where a 2017 study estimated that nearly 30 million individuals lived more than 1 hour from a trauma care facility.1 There is also a dearth of new hospital construction and expansions or renovations of older facilities (particularly in states with strict seismic retrofitting requirements, such as California). This shortage of health care facilities, coupled with clinician shortages, contributes to extended wait times for patients.

The health care industry has failed to respond with more facilities because policymakers passed laws that were designed to constrain hospital spending, but counterintuitively have done the opposite. For example, during the 1970s, certificate-of-need (CON) laws were passed in 26 states to constrain costs, but also to ensure access to care in rural or other historically underserved communities. As recently as 2022, CON laws require a state health planning agency or other regulatory agency to approve the expansion or construction of new facilities, or the offering of new service lines at a hospital, based on demonstrated community need and financial viability. This regulatory review process was designed to ensure, for example, that services were not duplicated in a single community. CON laws have generally been applied to hospitals, but are also applied to outpatient and long-term care facilities. In some states, CON review extends to mergers and acquisitions or changes in corporate control at some health care facilities.

In 1974, Congress hastened the adoption of state CON laws by passing the National Health Planning and Resources Development Act that tied federal funding to states passing their own CON laws. The results of this policy were predictable as, within years, nearly all states had adopted these rules that were designed to restrict new spending by ensuring an existing need for new medical facilities. In 1987, Congress repealed the federal inducements for CON laws because the laws proved to be ineffective in meeting their original purpose, and also because Congress itself changed the way in which hospitals were reimbursed under Medicare, rendering the laws largely unnecessary. Although 12 states rapidly eliminated their CON laws, they remain widespread, and as of January 2024, 35 states and the District of Columbia still had laws restricting the supply of new or renovated hospitals and other care facilities.

The COVID-19 pandemic illustrated the troublesome consequences of CON laws. During the pandemic, states with CON laws restricting the number of beds had 12% higher use rates and hospitals in those states were 27% more likely to have all their beds filled.3

Beyond the CON laws, other policies have undermined the development of new hospitals and raised prices for consumers. States have increasingly passed so-called certificates of public advantage (COPA) laws, which shield hospital mergers from certain federal antitrust laws. In states with COPA laws, hospitals can combine but, in return, regulators exercise additional oversight of postmerger policies and prices. The Federal Trade Commission recently reported that several hospital mergers conducted under COPA laws resulted in higher prices and reduced quality of care.

In 2010, Section 6001 of the Affordable Care Act (ACA) placed restrictions on physician-owned hospitals (POHs) and other health care facilities because of concerns that the ownership structure would lead to performance of unnecessary procedures and higher health care costs. The restrictions extend to the physicians’ immediate family members as well. The ACA included restrictions on the expansion of existing POHs and a requirement that POHs meet certain criteria to maintain eligibility for Medicare payments. The ACA’s restrictions on POHs include an exception for ownership or investment interests in rural facilities.

But the ACA restrictions on POHs have only served to limit market competition by limiting the creation of new facilities and restricting the size of existing POHs. Even though the ACA does not prohibit the existence of POHs, it has had chilling effects because of the primacy of Medicare payments to clinicians and hospitals. Miller and colleagues have noted that the impending imposition of the ACA restrictions several years ago led to the cancellation of 45 hospital expansion projects, and an additional 75 new hospital projects were “prematurely terminated.” These projects represented billions of dollars in lost economic activity—not to mention the loss of competitive pressure that had the potential to expand competition and lower costs for patients.

Together, CON and COPA laws, as well as the ACA restrictions on POHs, have been associated with a host of unintended consequences, such as the aggregation of market power in increasingly larger health care facilities, limited access to care, and higher costs for patients. Indeed, these supply-side restrictions have been critiqued by analysts across the ideological spectrum. Policymakers at both the state and federal level should take note of the unintended effects of these laws and their accompanying regulatory provisions and consider whether their repeal or modification would benefit patients and the communities where they live.