FTC Staff Comment to the Hon. Culver Kidd Concerning Georgia S.B. 133-137 to Reduce the Scope of Certificate of Need Regulation

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February 	6, 	1989
The 	Honorable 	Culver 	Kidd
State 	Senate
Room 	453
State 	Capitol
Atlanta, 	Georgia 	30334
Dear 	Senator 	Kidd:
The 	staff 	of 	the 	Federal 	Trade 	Commission! 	is'pleased 	to
comment 	on 	Senate 	Bill 	133 	("S.S. 	133"), 	Senate 	Bill 	134 	("S.S.
134"), 	Senate 	Bill 	135 	("S.B. 	135"), 	Senate 	Bill 	136 	("S.B.
136"), 	and 	Senate 	Bill 	137 	("S.B. 	137"), 	each 	of 	which 	would
partially 	reduce 	the 	current 	scope 	of 	Certificate 	of 	Need 	("CON")
regulation 	in Georgia. 	Although 	the 	proposed 	legislation would
only 	partially 	relax 	Georgia's 	CON 	requirements, 	passage, 	in 	our
view, 	may 	lead 	to 	greater 	diversity 	and 	better quality 	in 	health
care 	services 	and 	increased price 	competition 	in 	the 	health 	care
market. 	The 	bills' 	successful 	implementation might 	also 	pave 	the
way 	for 	further 	raductions 	in Georgia'S 	"need-based" 	regulation
of 	health care.
We 	will 	focus 	our 	comments 	on 	the 	five 	proposed 	bills 	as
well 	as 	the 	general 	ineffectiveness 	of 	CON 	laws 	in 	promoting 	the
welfare 	of 	health care 	consumers. 	For 	the 	reasons 	discussed
below, 	we 	believe 	that 	Georgia'S 	current 	CON 	regulatory 	process
may, 	on 	balance, 	harm 	health care 	consumere. 	Ongoing
improvements 	in 	health care 	financing 	are 	resolVing 	the 	principal
problems 	that 	allegedly 	prompted CON 	regulation. 	Moreover, 	the
benefits 	of 	CON 	requlation, 	if 	any, 	are 	likely 	to 	be 	outweighed
by 	its 	adverse 	effects 	on competition 	in 	health care 	markets. 	AS
a 	result, 	CON 	regulation 	may 	have 	a 	negative effect, 	increasing
the 	price 	and 	decreasing 	the 	quality 	of 	health 	services 	in
Georgia.
1 	These 	comments 	represent 	the 	views 	of 	the 	staff 	of 	the
Federal 	Trade 	Commission's 	Atlanta 	Regional 	Office 	and 	of 	the
Bureau 	of 	Competition, 	and 	not 	necessarily 	thoee 	of 	the
Commission 	itself 	or 	any 	individual 	Commissioner.

1. 	lNTEBEST 	AND 	EXPERIENCE 	OF 	THE 	[~PERAL 	TRADE 	COM~XSSIQN
For 	more 	than 	a 	decade, 	the 	Federal 	Trade 	Commission 	has
engaged 	in 	extensive 	efforts 	to 	preserve 	and 	promote 	competition
in 	health 	care 	markets. 	The 	Commission 	and 	its 	staff 	have 	been
active 	both 	in 	antitrus~ law 	enforcemQnt 	and 	in 	advocacy 	of
regulatory 	reforms, 	inC~udinq CON 	reforms 	previously considered
or 	proposed 	in Georgia. 	Those 	efforts 	have 	been 	based 	on 	the
premise 	that 	competition 	in 	health 	care 	markets, 	as 	in 	other
markets, 	benefits 	consumers 	by 	strengthening 	incentives 	for
providers 	to 	satisfy 	health 	care 	consumer 	demands. 	Although 	we
have 	not 	conducted empirical 	studies 	of 	the 	effects 	of 	CON
regulation 	in Georgia, 	the 	staff 	of 	the 	Commission 	have 	studied
the 	effects 	of 	CON 	regulation 	in 	general 	and 	gained 	considerable
experience 	with 	the 	economics 	of 	health care 	competi~ion and 	with
how 	CON 	regulation 	affects 	that 	competition. 3 	Indeed, 	a
significant 	part 	of 	the 	Commission's 	antitrust 	law 	enforcemen~
effort 	in 	the 	health 	care 	field 	focuses 	on 	competitive 	probltms
that 	would 	be 	less 	severe 	if 	there 	were 	no 	CON 	regulations.
2 	On March 	4, 	1988 	we 	submitted 	comments 	to 	Senator Kidd 	on
then 	- 	pending 	Senate 	Bill 	398. 	The 	bill 	would have exempted
from 	the 	CON 	process 	for 	a 	period 	of 	one 	year 	~he offering 	of 	new
clinical 	health 	services 	by 	health 	care 	facilities. 	Much 	of 	the
analysis 	contained 	in 	that 	letter 	is 	repeated 	here.
3 	saa, 	~., 	O. 	Sherman, 	~be Effect 	of 	State Certificate-of-Need
~ays on 	Hosgital 	CORt81 	An Economic 	Policy Analysio 	(1988) 	(FTC
etaff 	report); 	M. 	Noether, 	Competitign 	Among 	Hospit41~ 	(1987)
(FTC 	staft 	report); 	and K. 	Anderson 	& D. 	Kasa, 	Certificate 	of
Heed Ragylotioo 	of 	Entry 	Into 	Home 	Health Care 	(1986) 	(FTC 	staff
report) •
4 	~ 	~., 	Hospital 	Corp- 	of 	America 	[Chat~anooga
acqUisitions], 	106 	F.T.C. 	361, 	489-96 	(1985), 	aff'd, 	807 	F.2d
1381 	(7th Cir. 	1986), 	~. 	ggnied, 	107 	S.Ct. 	1975 	(1987);
Hospital 	Corp. 	of 	America 	[Forum 	acquisitions], 	106 	F.T.C. 	298
(1985) 	(settled 	by consent order); 	and 	American Medical 	Int'l,
Inc., 	104 	r.T.C. 	1 	(1994).
2
.. -- -~ ... _..

1
II. 	THE 	PROPOSED 	LEGISLATION
S.B. 	133 	would 	exemp § from 	CON 	requirements 	the 	acquisition
by 	a 	he4lth care 	facility 	of 	diagnostic 	or 	therapeutic 	equipment
to 	replace 	or 	upgrade 	existing 	equipment 	if 	(4) 	the 	replacement
or 	upgrading 	equipment 	dges 	not 	result 	in 	the 	offering 	of 	any 	new
clinical 	health 	services 	and 	(b) 	the 	value 	of 	the 	replacement 	or
upgrading 	equipment 	does 	not 	exceed 	$1.2 	million. 	Passage 	of
this 	bill 	would 	enable 	hospitals 	and 	other 	health 	care 	facilities
to 	replace 	or 	upgrade 	their 	present 	equipment 	with 	the 	newest,
most 	innovative 	equipment 	whenever 	they 	believe 	it 	is 	in 	the 	best
interest 	of 	their 	patients 	and 	their 	competitive 	positions 	to 	do
10.
S. 	B. 	134 	w9uld 	exempt 	from CON 	coverage 	"new 	institutional
health 	services" 	provided 	by 	nursing 	homes 	or 	specialty
5 	Georgia 	law 	defines 	"health care 	facility" 	to 	include 	seven
kinds 	of 	facilities: 	(1) 	hospitals; 	(2) 	other 	special 	care
units, 	including 	podiatric 	facilities, 	skilled 	nursing
facilities, 	and 	kidney 	disease 	treatment 	centers, 	including
freestanding 	hemodialysis 	units; 	(3) 	intermediate 	care
facilities: 	(4) 	personal 	care 	homes 	not 	in existence 	on 	the
effective 	date 	of 	this 	chapter; 	(5) 	ambulatory 	surgical 	or
obstetrical 	facilities; 	(6) 	health 	maintenance 	organizations: 	and
(7) 	home 	health 	agencies. 	Georgia 	Code 	(1985) 	S 	31-6-2(8).
6 	"Clinical 	health 	services" 	means 	diagnostic, 	treatment, 	or
rehabilitative 	services 	provided 	in 	a 	health care 	facility, 	or
parts 	of 	the 	physical 	plant 	where 	such 	services 	are 	located 	in 	a
health 	care 	facility, 	and 	includes, 	but 	is 	not 	limited 	to,
radiology; 	radiation 	therapy; 	surgery; 	intensive 	care, 	whether
intermediate, 	skilled, 	or 	extended 	care; 	cardiac 	catheterization;
open-heart 	surgery; 	inpatient 	rehabilitation; 	and 	alcohol, 	drug
abuse, 	and mental 	health 	serv~ces. 	Georgia 	Code 	(1985) 	S 	31-6-2(5)
In 	general, 	"new 	institutional 	health service" 	meansl
(A) 	The 	construction, 	development, 	or other 	establishment
of 	a 	new 	health care 	facility;
(B) 	Any expenditure 	by or on behalf 	of 	a 	health 	care
facility 	in excess 	of 	$600,000 which, 	under 	generally 	accepted
accounting 	principles 	consistently 	applied, 	is 	a 	capital
expenditure;
(e) 	Any 	increa.e 	in 	the 	bed 	capacity 	of 	a 	health 	care
3
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facility:
(0) 	Clinical 	health services 	which 	are 	offered 	in 	or
through 	a 	health 	care 	facility, 	which 	were 	not 	offered 	on 	a
reqular 	basis 	in 	or 	through 	such 	health 	care 	facility 	within 	the
24 	month 	period 	prior to 	the 	time 	such 	services 	would 	be 	offered;
(E) 	Any 	conversion or upgrading 	of 	a 	facility 	such 	that 	it
is 	converted- from 	a 	type of 	facility 	not 	covered by 	[CON} 	to 	any
of 	the 	types 	of 	health 	care 	facilities 	that 	are 	covered by 	[CON];
or
(F) 	The 	purchase 	or 	lease 	by 	or 	on 	behalf 	of 	a 	health 	care
facility· of 	diagnostic 	or 	therapeutic 	equipment 	with 	a 	value 	in
excess 	of 	$400,000. 	Georqia 	Code 	(1985) 	S 	31-6-2(14)
8 	The 	present 	statute 	defines 	"personal 	care home" 	as 	a
residential 	facility 	havinq at 	least 	25 	beds 	and 	providinq, 	for
compensation, 	protective care 	and 	oversight 	of 	ambUlatory,
nonrelated 	persons 	who 	need a 	monitored 	environment but who 	do
not 	have 	injuries 	or 	disabilities 	which 	require 	chronic 	or
convalescent 	care. 	personal 	care 	homes 	may 	provide medical,
nursinq, 	or 	intermediate care. 	Personal 	care homes 	include 	those
facilities 	which 	monitor daily 	residents· 	functioning 	and
location, 	have 	the 	capability 	for 	crisis 	intervention, 	and
prOVide 	supervision 	in areas 	of 	nutrition, 	medication, 	and
provision 	of 	transient medial 	care. 	5.B. 	135 would 	also 	remove
the 	25 	bed 	restriction. 	Georqia 	Code 	(1985) 	S 	31-6-2(19) 	It 	is
our 	understanding, 	based on conversations 	with Senator Kidd's
staff 	and 	our 	own 	reading of 	the 	statute, 	that 	this 	definition
does 	not 	cover 	traditional 	nursing 	homes.
4
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whether 	to 	grant 	a 	certificate 	for 	a 	new 	institutional 	health
service 	offered 	or 	developed 	by 	a 	hospital 	if 	that 	service 	would
not 	increase medical 	or 	surgical 	bed capacity. 	Based 	on 	the
definition 	of 	"new 	institutional 	health services," 	this 	provision
would 	appear 	to 	permit 	hospitals 	to 	offer new 	clinical 	health
services, 	make 	capital 	expenditures 	in excess 	of 	$600,000, 	offer
new 	health care 	facilities, 	and 	purchase 	diagnostic 	or
therapeutic 	equipment 	with 	a 	value 	in excess 	of 	$400,000 	without
CON 	approval 	so 	long 	AS 	there 	is 	no 	increase 	in bed 	capacity.
Passage 	of 	this 	bill 	would 	appear 	to 	greatly 	increase 	the
discretion 	of 	hospitals 	as 	to 	how 	best 	to 	allocate 	their
resources 	to 	meet 	consumer 	demand.
S.B. 	137 would 	exempt 	from 	CON coverage 	capital 	expenditures
to 	renovate 	a 	hospital 	or 	replace 	any part 	of 	a 	hospital 	if 	the
project 	does 	not 	result 	in 	any 	new 	clinical 	health 	service 	or 	any
increase 	in bed capacity. 	Passage of 	this 	provision 	would 	allow
hospitals 	to 	make 	their 	own 	judgments 	as 	to 	when 	renovation 	would
enable 	them 	to 	compete 	for 	and 	provide better 	services 	to
potients.
For 	the 	reasons 	discussed 	below, 	we 	believe 	that 	Georgia's
CON 	regulation may 	be 	contrary 	to 	the 	interests 	of 	health 	care
consumers. 	Thus, 	reductions 	in 	the 	scope of 	that 	regulation
(such 	as 	those 	contained 	in 	SBs 	133 	- 	137), 	are 	likely 	to 	benefit
Georgia 	health 	consumers.
III. 	CON REGULATION 	IS 	INEFFECTIVe 	AND 	PQSSIB~Y 	COUNTER-
PBQQYCTXVE 	IN 	PROMOTING 	EFPICI~NCY 	IN 	HEALTH 	CARE 	MARKETS
A. 	CON Regulation 	is 	Unnecessary 	~o Remedy 	Deficiencies 	in
Health Care 	Reimbursement.
CON 	regulation 	of 	health 	facilities 	was 	introduced
principally on 	the 	theory 	that 	unregulated competition 	would
result 	in 	the 	construction 	of 	unnecessary 	facilities 	or
unnecessary 	capital 	expenditures 	by existing 	health 	facilities.
The 	assumption 	underlying 	this 	theory was 	that 	health 	facilities
had 	a 	tendency 	to 	expand 	excessively or purchase 	unnecessary
equipment. 	The 	proponents 	of 	CON regulation 	argued 	that 	this
tendency was 	not 	sufficiently constrained by market 	forces
because most 	consumers 	of 	health care 	were 	insured 	by 	policies
that 	required 	little 	or 	no 	out-ot-pocket payment, 	making
consumers 	generally 	insensitive 	to 	the 	price of 	health 	care
5
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8ervices. 9 	Moreover, 	third-party 	payers 	often 	reimbursed 	health
facilities 	on 	a 	retrospective 	cost 	basis, 	removing whatever
incentive 	the 	facilities 	might 	have 	had 	to 	contain costs.
Health 	care 	facilities 	allegedly 	had 	incentives 	to 	compete
on 	the 	quality 	rather 	than 	the 	price 	of 	their 	services, 	although
limited 	price 	competition 	existed. 	Health care 	facilities 	thus
faced 	artificially created 	incentives 	to 	expend 	resources 	to
pro~ide wider 	ranges 	of 	diagnostic 	and 	therapeutic 	services 	and
equipment, 	and 	more 	comfortable 	accommodations. 10 	The 	concern
expressed 	by 	health 	planners 	when 	CON 	regulation 	was 	created 	was
that 	the 	cost 	of 	underutilized, 	albeit 	improved, 	facilities 	would
be 	passed 	along 	to consumers, 	thereby 	increasing 	the 	cost 	of
health 	care. 	The 	principal 	purpose 	of 	CON 	regulation 	was 	not 	to
assure 	that 	needed 	facilities 	would 	be 	built 	when 	they 	otherwise
would 	not 	have 	been: 	rather, 	it 	was 	to 	control 	the 	perceived
tendency 	to 	provide 	facilities 	or 	services 	that 	were 	not
needed.~l
In 	light 	of 	substantial 	changes 	in 	health care market~, many
of 	the 	assumptions 	underlying 	the 	various 	arguments 	in 	favor 	of
CON 	regulation 	now 	have 	lost 	any 	validity 	they miqh~ once 	have
had. 	Third-party payers 	and consumers 	have 	shown 	increasing
sensitivity 	to 	the 	prices 	of 	hospital 	services. 	Health
maintenance 	organizations 	and 	preferred 	provider organizations,
through 	selective 	contracting, 	channeL subscribers 	to 	physicians
and 	hospitals 	offering quality 	care 	at 	economical 	rates.
Improvements 	in conventional 	health 	benefit 	programs 	also 	provide
their 	subscribers 	with 	financial 	incentives 	(such as 	co-payment
requirements) 	that 	channel 	~hese subscribere 	toward economical
providers, 	including 	nonhospital 	providers. 12 	The 	increasing
sensitivity 	of 	health care 	purchasers 	to 	the 	prices 	of 	hospital
9 	~ 	Health 	Planninq 	and 	Resources 	Development Amendments 	of
1979, 	Pub. 	L. 	No. 	96-99, 	S 	l03(b), 	93 	Stat. 	592 	(1979),
.epealed, 	Pub. 	L. 	No. 	99-660, 	S 701(a), 	100 	Stat. 	3799 	(1986).
10 	see Hospital 	Corp. 	of 	America 	[ChattanoogA 	acquisitions], 	106
l.T.C. 	at 	478-79; 	H. 	Noether, 	supra 	note 	3, 	at 	12-13.
11 	sea P. 	Joskow, 	Controlling Hospital 	Costs~ Th@ Role 	of
GQyeXnm~nt Regulation 	at 	78-79 	(19Bl).
12 	sae Insurance 	Coy@rage 	prives 	Consumer 	frices, 	Hospitals,
Nov. 	1, 	1985, 	at 	91; 	~ ~ 	W. 	Manning, 	at 41., 	Health
Insurcnce 	and 	the 	pemand 	for 	Medical 	Care: 	Evidence 	from 	a
Bondom1zQd 	Experiment, 	77 	American 	Bcon. 	Review 	251 	(1987).
6

services 	limits 	the 	ability of 	hospitals 	to 	pass 	on 	to 	consumers
the 	costs 	of 	facilities 	and 	services 	that 	are 	not 	useful 	in
meeting 	consumer 	demands. 	There 	has, 	accordingly, 	bgen 	a 	trend
toward 	increased 	price 	competition 	among 	hospitals. 13
Programs 	such 	as 	Medicare'S 	"irospective 	reimbursement"
system will 	reinforce 	this 	trend. 1 	Medic4re 	presently
reimburses 	hospital 	operating costs 	at 	prospective 	rates 	that
are 	based 	principally 	(and 	soon 	exclusively) 	on 	flat 	rates 	for
specific 	diagnosis 	related 	groups 	(DRGs), 	rather 	than 	the 	actual
coets 	inCu!red 	by 	a 	particular 	hospital 	for 	its 	Medicare
patients. 1 	As 	this 	system, 	and 	others 	like 	it, 	are 	implemented,
the 	costs 	of 	any 	inefficiencies 	will 	be 	paid 	increasingly 	out 	of
the 	hospitals' 	own 	budgets 	rather 	than 	those 	of 	third-party
payers 	and 	individual 	consumers, 	providing 	hospitals 	the
incentive 	for 	cost-effective 	provision of 	services. 	Indeed, 	the
prospect of 	future 	reimbursement 	reforms 	is 	!tready 	encouraging
greater 	efficiency 	on 	the 	part 	of 	hospitals. 	Similarly, 	price
13 	see, 	~., 	Hospital 	Corp. 	of 	America 	[Chattanooga
acquisitions), 	106 	F.T.C. 	at 	480-82; 	Hosgital 	Indust~ Pri~e War~
HQAt 	Up, 	Hospitals, 	Oct. 	1, 	1985, 	at 	69.
14 	sae J. 	Robinson, 	~ A!., 	Hospital 	Competition 	aDd 	Surgical
Length 	of 	Sta~, 	239,J. 	Am. 	Mad. 	A. 	696,700 	(Feb. 	5, 	1988). 	(One
of 	the 	ways 	that 	hospitals 	compete 	for 	surgeons 	is 	by 	offering 	to
allow 	the 	surgeon 	to 	hospitalize 	his 	patients 	longer 	than 	he
could 	hospitalize 	them 	in 	other 	hospitals. 	Prospective 	payment
systems 	counteract 	the 	tendency 	to 	compete 	in 	this 	way.
lS 	Of 	course, 	the 	issue 	in CON 	regulation 	is 	capital 	costs, 	not
operating 	costs, 	but 	in 	1991 Medicare 	plans 	to 	begin 	reimbursing
capital 	costs 	in 	a 	somewhat 	similar manner. 	~ 	42 	U.S.C.A. 	S
1395ww(a)(4), 	(d) 	(west 	Supp. 	1987), 	52 laa. 	~. 	18840 	(1987)
(proposed 	regulation 	to 	phase 	in 	flat 	prospective 	rates 	for
capital 	costs 	over 	three years 	for 	movable equipment, 	and 	over
ten 	years 	for 	other 	capital 	costS); 	Omnibus 	BUdget
Reconciliation Act 	of 	1987, 	Pub. 	L. 	No. 	100-203, 	Section
4006(b)(1), 	101 	Stat. 	1330-52 	(1987) 	(amending 	42 	U.S.C.A. 	S
139Sww; 	delays 	implementation 	until 	1991). 	S&e AlaQ Modern
Healthcare, 	Aug. 	1, 	1986, 	at 	20; 	Health Care 	Competition 	Week,
Jan. 	12, 	1981, 	at 	4.
16 	~ Raske, 	AQsociatiQn Seeks 	SQund Capital 	Pay 	PQliky,
Modern 	Healthcare, 	Nov. 	7, 	1986, 	at 	120 	(uncertainty 	about 	future
of 	reimbursement 	for 	capital 	expenses 	is 	encouraging 	hospitals 	to
make 	more 	conservative 	capital 	investment 	decisions 	for
7

competition 	and 	well-structured 	governmental 	and 	private
reimbursement 	programs 	appear 	to 	limit 	incentives 	for 	over-
investment 	and 	other 	wasteful 	expenditures 	for 	at 	least 	some 	of
the 	other, 	nonhospital 1 types 	of 	health 	facilities 	sUbject 	to 	CON
regulation 	in Georgia. 	7
B. 	CON 	Regulation 	Has 	Been 	Ineffective 	as 	a 	Coet-
Containment 	Mechanism.
It 	is 	not 	clear 	that 	CON 	regulation 	has 	had 	the 	intended
effect 	of 	containing 	health 	care 	costs.1 8 	A number 	of 	empirical
studies 	suqgest 	that 	CON 	regulation 	has 	not 	controlled 	general
acute 	care 	hospital 	costs. 	Early 	studies 	of 	CON 	regulation
found 	that 	instead 	of 	constraining 	overall 	hospital 	costs, 	it 	may
have 	simply 	caused 	hospitals 	to 	reallocate 	their 	resources. 	Thus,
while 	some 	types 	of 	hospital 	costs 	were 	constrained 	by CON
regulation, 	other 	costs 	increased. 19 	Later 	studies 	reached
inpatient 	services).
17 	saa, 	~., 	52 	~. 	Rag. 	20466 	(1987), 	52 	fad. 	Rag. 	20623
(1987) 	(Medicare 	reimburses 	freestanding 	ambulatory 	surgery
centers 	at 	flat 	prospective 	rates, 	and will 	soon 	provide 	half 	the
reimbursement 	for 	hospital 	outpatient 	surgery on 	the 	same 	basis
(With 	the 	other 	hal~ cost-based».
18 	It 	is 	true, 	of 	course, 	that, 	if 	the 	CON 	process
significantly 	reduces 	the 	level 	of 	capital 	investment 	in
hospitals, 	equipment, 	and other 	assets 	below 	the 	level 	that 	would
otherwise 	obtain, 	total 	health 	care 	costs 	will 	be 	lese. 	Whether
this 	is 	desirable, 	however, 	depends 	on 	the 	extent 	to 	which 	the
reduction 	in 	the 	output 	of 	particular 	health 	care 	services 	due 	to
the 	CON-imposed constraint 	i5 	due 	to 	limitations 	on 	capital
investments 	that 	are 	feasible 	only 	because 	costs 	can 	be 	shifted
to 	thirdpparty 	payers. 	If 	additional 	investment 	is 	curtailed,
then 	the 	regulation 	will 	harm 	consumers. 	Some 	health care
services 	for 	which consumers 	would have 	been willing 	to 	pay
enough 	to 	cover the 	capital 	and 	other 	attendant 	costs 	of
prOViding 	will 	not 	be 	supplied. 	In addition, 	the 	prices 	of 	each
of 	the 	particular 	services 	whose 	supply 	is 	curtailed 	by 	the
requlation will 	rise 	above 	competitive 	levels.
19 	Salkever 	& aice, 	Hospital 	Certificate-of-Need Controls.
Impact 	on 	Investment. 	Cost, 	and 	Use 	(1979); 	Salkever 	& Bice, 	~
ImpAct 	of 	CertifiCAte-of-Need Controls 	OD 	Hospital 	Inyestment, 	54
Milbank 	Memorial 	Fund 0 	185 	(Spring 	1976).
8
? , ........ _ .... , -.

similar 	conclusions, 	finding 	that 	S8N 	regulation 	did 	not 	reduce
costs 	per 	unit 	of 	hospital 	output. 	Finally, 	several 	studies,
including 	two 	recent 	FTC 	staff 	reports, 	concluded 	th,t 	CON
requlation 	is 	associated 	with 	higher 	hospital 	costs. 	1 	These
studies 	suggest 	that 	as 	a 	means 	of 	cost 	containment, 	CON2~aws may
be, 	at 	best, 	ineffective 	and, 	at 	worst, 	cost-increasing.
Supporters 	of 	CON 	regulation 	sometimes 	point 	to 	the 	dollar
amount 	of 	projects 	denied, 	withdrawn or 	modified 	as 	a 	result 	of
the 	CON 	process 	as 	demonstrating 	the 	regulation'S 	utility.
However, 	these 	amounts 	do 	not 	necessarily 	represent 	a 	savings 	in
the 	overall 	cost 	of 	health 	care. 	Nor 	do 	they necessarily
represent 	an 	accurate 	measure 	of 	the 	amount of 	"excessive"
capital 	investment 	deterred. 	While 	CON 	regulation may 	deter 	some
capital 	spending 	that 	would 	occur 	in 	an 	unregulated 	environment,
the 	amount 	of 	this 	deterrence 	is 	difficult 	to measure 	because 	CON
20 	Policy Analysis, 	Inc.-Urban 	Systems 	Engineering, 	Inc.,
Exaluation of 	the 	Effects 	of 	Certificate-of-Need 	Programs 	(1980);
Steinwald 	, 	Sloan, 	Ragu1atory 	ApprQaches 	to 	Hospital 	CQit
Containmentr 	A Synthesis 	of 	the 	Em~iricAl Evidence, 	in A New
APproo;h 	to 	the 	Econgmics 	of 	Health 	CAte, 	American 	Enterprise
Institute 	(1981).
21' 	o. 	Sherman, 	IYpra 	note 	3, 	at 	iV, 	78; 	and M. 	Noether, 	supra
note 	3, 	at 	74, 	82. 	These 	studies 	used 	data 	frOM 	all 	50 	states
but 	from 	different 	time 	periods, 	each 	comparing 	states 	by 	type 	of
requlation. 	F. 	Sloan' 	B. 	Steinwald, 	E~fects of 	RegulAtion 	on
HospitAl 	Cost, 	and 	Input 	Use, 	23 	J.L. 	& Econ. 	81-109 	(1980); 	and
C. 	Coelen , 	O. 	Sullivan, 	An Analysis 	of 	the 	Effect= 	of
ErQspectiye 	Reimbur=ement 	on 	Hospital 	Expenditures, 	3 Health 	Care
Financing Review 	1-40 	(1981). 	These 	studies, 	in 	addition 	to
comparing 	data 	across 	states, 	also 	compared 	costs 	before 	and
after 	the 	enactment 	of 	CON 	regulation 	in various 	states. 	~
AlAQ K. 	Anderson' 	O. 	Kass, 	supra 	note 	3, 	at 87-92 	(CON 	does 	not
decrease, 	and may 	increase, 	the 	costs 	of 	home health care 	aqencies).
22 	In 	addition, 	a 	1986 	FTC 	staff 	report 	reached 	a 	similar
conclusion 	about 	the 	effect 	of 	CON 	requlation on home 	health 	care
services. 	K. 	Anderson' 	O. 	Kass, 	supra 	note 3, 	at 	87-92 	(1986).
Also, 	a 	1983 	study 	of 	the 	economic 	behavior of 	nursing 	homes
found 	evidence 	that 	CON 	regulation 	increases, 	rather 	than
decreases, 	the 	average 	cost 	of 	nursing 	home 	services. 	A. 	Lee, 	H.
Birnbaum' 	C. 	Bishop, 	How 	Nursing 	Homes 	2ehaye: 	A Mult~-Ea~ation
lodel 	of 	Nurl~Dg Home 	Behayior, 	17 	Social 	Science 	and 	Medicine
1897, 	1906 	(1983).
9
T I t-.T ""''''11 I 	• ,

re9ulation 	may cause 	an 	increase 	in 	the 	filing 	of 	project
applications. 23
Similarly, 	CON 	supporters 	point 	to 	the 	number 	of 	denied
applications 	to 	show 	that 	CON 	regulation 	is 	helping 	to 	hold 	down
health 	care 	costs. 	But 	CON 	regulation 	simply 	forces 	firms 	to
compete 	for 	a 	limited 	number 	of 	certificates 	of 	need. 	Just
because 	several 	applicants 	pursue 	one 	available 	CON 	certificate
does 	not 	mean 	that 	in 	the 	absence 	of 	CON 	regulations 	all 	proposed
projects 	would 	be carried 	out, 	because 	demand 	for 	more 	than one
such 	project 	may 	not 	exist. 	Thus, 	the 	denial 	of 	all 	applications
but 	one 	would 	not 	represent 	actual 	savings 	in capital 	costs.
Moreover, 	some 	of 	the 	applicants 	may 	not 	be 	committed 	to 	carrying
out 	the 	project 	even 	if 	selected. 	An 	applicant 	may 	be 	simply
filing 	an 	application 	to 	delay or 	frustrate 	another 	applicant.
Thus, 	the 	number of 	applications 	denied, 	modified 	or withdrawn
may 	substantially overstate 	actual 	deterrence. 	Furthermore,
deterrence 	of 	some 	capital 	spending 	by CON 	regulation may 	not
yield 	an 	overall 	savings 	in 	health 	care 	costs 	since 	costs 	may
increase 	in 	other 	areas 	not 	covered by 	CON 	regula~!on, 	as
suggested by 	some of 	the 	studies 	mentioned 	above.
C. 	CON Regulation 	Interferes 	with Competition 	and
Innovation 	in 	Health Care Markets.
CON 	regulation, 	on 	balance, 	may 	be 	counterproductive to
efforts 	to 	control 	health 	care 	costs. 	As 	discussed 	below, 	the
CON 	regulatory 	process 	itself 	imposes 	substantial 	costs 	on
applicants, 	in 	terms 	of 	both the 	effort 	required 	to 	obtain
regulatory 	approval 	and 	the 	delays 	occasioned 	by 	the 	regulatory
process. 	To 	the 	extent 	that 	CON 	regulation 	reduces 	the 	supply 	of
particular 	health 	services 	below 	competitive 	levels, 	the 	prices
of 	thes. 	services 	can 	be 	expected 	to 	be 	higher 	than 	in 	an
23 	Because 	need must 	be 	demonstrated, 	applicants 	may 	assume
that 	any 	CON 	granted 	reduces 	the 	likelihood 	that 	a 	similar CON
will 	be 	granted 	to 	another 	applicant. 	Such 	an 	Assumption
generates 	pre$sure 	to 	file 	pre-emptively 	or 	defensively.
24 	~ 	sources 	cited 	iupra, 	notes 	19 	and 	20, 	and 	Anderson'
Kass, 	supra 	note 	3, 	at 	87-92. 	sea AlaQ 	C. 	Havighurst,
Regulation Of 	Health 	Facilities 	and Services 	by 	"Ce~tificate of
~,II 	59 	Virginia 	L. 	Rev. 	1143, 	1218 	(1973).
10
T J OT """LJ ...... I I

unrequlated 	market. 25 	Curtailment 	of 	available 	services 	or
facilities 	may 	create 	shortages, 	forcing 	some consumers 	to 	resort
to 	more 	expensive 	or 	otherwise 	lees 	desirable 	substitutes, 	thus
increasing 	costs 	for 	third-party 	payers 	or 	patients. 	For
example, 	a 	shortage 	of 	nursing 	home 	beds 	can delay 	the 	discharge
of 	p~~ient. from 	more 	expensive 	general 	acute care 	hospital
beds 	or 	force 	patients 	to 	u!e 	nursing 	homes 	far 	from 	home.
CON 	regulation 	can 	substantially 	interfere with 	competition
in 	health 	care 	markets 	in 	three 	additional 	ways. 	First, 	the 	CON
regulatory 	process 	may 	increase 	prices 	to 	consumers 	by
protecting 	fi~ms in 	the market 	from 	competition by 	innovators 	and
new 	entrants. 27 	The CON 	process 	reduces 	the 	possibility 	of
entry 	by 	more 	efficient 	firms 	that 	could 	provide higher 	quality
or 	lower 	cost 	services, 	and, 	possibly, 	replace 	less 	efficient
providers. 	Although 	the 	CON 	process 	does 	not 	always 	prohibit 	the
entry 	or 	expansion of 	health 	facility 	enterprises, 	or 	the
development 	of 	new 	services, 	it 	generally 	places 	the 	burden 	on
new 	entrants 	to 	demonstrate 	that 	a 	need 	is 	not 	being 	served 	by
those 	currently 	in 	the market. 	In 	addition, 	the 	process 	of
preparing 	and 	defending 	a CON 	application 	is 	often costly 	and
time-consuming .(particularly 	if 	the 	application 	is 	opposed 	by
2S 	Where 	prices 	are 	regulated, 	the 	"price 	increase" 	may 	take 	the
form 	of 	reductions 	in 	service 	quality, 	so 	that consumers 	receive
services 	of 	lesser 	value 	for 	the 	same 	price, 	instead 	of 	paying
more 	money 	for 	the 	same 	service8.
Severe 	shortages 	of 	capacity 	can 	protect 	firms 	that 	prOVide
substandard 	service, 	not 	only 	from 	competitive pressures 	to
upgrade 	performance, 	but 	also 	from 	regulatory pressures 	to 	adhere
to 	licensure 	standardS. 	For 	example, 	a 	state agency 	may 	be
reluctant 	to 	close 	a 	nursinq 	home 	for 	major violations 	of
licensure 	standards 	if 	the 	patients 	cannot 	be placed 	elsewhere.
sea J. 	Feder, 	W. 	Scanlon, 	Regulating 	tbe 	Bed Supply 	in 	Nursing
Hgmea, 	58 	Milbank Memorial 	Fund 	Q. 	54, 	at 	76 	(1980).
26 	U. 	S. 	General 	Accounting Office, 	Constraining 	Health 	Car~
ixpengiturel, 	Achieving 	Quality 	Care 	at 	Affordable 	Cost, 	at 	93-94
(1985).
27 	R. 	Posner, 	Certificate 	of 	Need 	for 	Health Care 	Facilities: 	A
Qissenting View, 	in RegulAting 	Health 	Facility CODstruction 	at
113 	(C. 	H8vighurst, 	ed. 	1974); 	M. 	Noether, 	supra 	note 	2, 	at 	82
(CON 	restrictions 	on entry 	are 	associated with hospital 	price
increases 	of 	approximately 	4 	to 	5 	percent, 	as well 	as 	increases
in 	hospital 	costs 	of 	apprOXimately 	3 	to 	4 	percent).
11
v.crr n>-lH ,1-1 	?C\')T 	C.CC.T/)I:'\/;:>'f"::Il

firms 	already 	in 	the 	market).28 	CON 	regulation 	may 	also 	create
opportunities 	for 	existing 	firms 	to 	!~use the 	regulatory 	process
to 	prevent 	or 	delay 	new 	competition. 	CON 	regulation, 	therefore,
makes 	entry 	and 	expansion 	less 	likely, 	or 	at 	least 	less 	rapid.
Firm. 	in 	any 	given market 	need 	not 	be 	as 	competitive 	in 	price 	or
as 	sensitive 	to 	consumer 	demand 	for 	new 	eervices 	if 	they 	know
that 	it 	will 	be 	difficult 	and 	expensive 	for 	new 	firms 	to 	enter
the 	market 	and 	offer 	competitive 	prices 	or 	services.
By 	increasing 	the 	cost 	and 	time 	required 	for 	new 	entry 	and
expansion, 	CON can 	interfere 	with competition 	in 	a 	second way.
Incumbent 	prOViders, 	insulated 	from 	new 	competition, 	may 	be
better 	able 	to 	exercise 	whatever 	market 	power 	they 	have, 	either
individually 	or collectively, 	and 	rai~~ prices 	above 	(or 	reduce
quality 	below) 	the 	competitive 	level. 	The 	entry 	barrier
created 	by CON 	regulation 	was 	a 	factor 	significantly
contributinq 	to 	the 	potential 	for 	anti-competitive 	effects 	from
the 	mergers 31 	at 	issue 	in 	both of 	the 	hospital 	merger 	decisions
rendered 	by 	the 	Federal 	Trade 	Commission 	in 	litigated 	cases. 	In
the 	ChattanoogA 	acquisitions 	opinion, 	the 	Commission 	found 	that
28 	An evaluation of 	the 	CON program 	in Michigan 	found 	that 	the
number 	and compleXity 	of 	CON appeals 	increased dramatically 	from
1979 	to 	1986. 	Comparative 	reviews 	were 	found 	to 	be 	particularly
protracted. 	Michigan 	Statewide Health Coordinating 	CounCil, 	An
~voluAtiQn 	of 	tbe 	Certificate 	of 	Heed 	ProgrAm, 	(March 	19, 	1987)'
at 	29-34; 	Aea AlaQ Hospital 	Corp. 	of 	American 	(Chattanooga
acquisitions), 	160 	F.T.C. 	at 	490-92.
29 	T. 	Calvani 	, 	N. 	Averitt, 	~he Federal 	Trade 	Comm1ssion And
Cgmpetition 	in 	the Deliyery of Healtb 	Ca~e, 	17 	Cumberland L.
Rev. 	283, 	298-99 	(1987) 	(discussing 	potential 	for 	health
prOViders 	to 	use 	CON 	process 	for 	"non-price 	predation"); 	St.
Josephls 	Hospital 	v. 	Hospital 	Corp. 	of 	America, 	795 	F.2d 	948, 	959
(11th 	Cir. 	1986) 	(defendants' 	misrepresentations 	to 	state health
planning body concerning 	plaintiff1s 	CON 	application 	not
protected 	from 	antitrust 	scrutiny); 	Hospital 	Corp. 	of 	America
(Chattanooga 	acquisition], 	106 	P.T.C. 	at 	492.
30 	This 	is 	most 	likely 	to 	occur where 	there 	are 	few 	competing
providers 	in 	a 	particular market, 	~ 	Hospital 	Corp. 	of 	American
[Chattanooga 	acquisitions), 	106 	l.T.C. 	at 	487-89, 	such as 	in
rural 	areas, 	or 	for 	certain 	hospital 	specialty 	~ervices.
31 	American Medical 	Int'l, 	104 	F.T.C. 	at 	200-01 	(1984);
H08pital 	Corp. 	of 	American 	[Chattanooga 	acquisitions], 	106 	F.T.C.
at 	489-96, 	aff'd, 	807 	F.2d 	1381, 	1381 	(7th 	Cir. 	1987).
12
TJCT n~ ...... , I 	--_ .. ~I- ... __

the 	combination of 	Tennessee's 	CON 	process 	and Georqia'. 	CON
restrictions 	on 	hospital 	entry 	inhibited 	new entry 	that 	might
have 	deconcQntrated 	the 	Chattanooga 	hospital 	market.
The 	third 	way 	in which 	CON 	regulation may 	interfere 	with
competition 	is 	by 	delaying 	the 	introduction 	of 	new 	treatment
methods 	because 	regulators 	may 	lack 	the 	information 	necessary 	to
determine 	how 	many 	such 	facilities 	are 	needed. 	For 	example,
action 	on 	all 	CON 	applications 	for 	freestanding 	ambulatory
surgical 	centers 	(FASCs) 	in 	Pennsylvania 	was 	delayed 	by 	six
months 	while 	a 	CON 	task 	force 	reviewed 	the 	need 	for 	these
facilities. 32 	Demand 	for 	ambulatory 	surgery can 	be 	difficult 	to
predict 	because 	the 	market 	is 	changing 	and changing 	rapidly.
Providers 	have 	market 	incentives 	that 	regulators 	lack 	to 	gather
information 	and 	to 	adjust 	rapidly 	to 	unexpected changes 	in 	costs
or 	demand. 	For 	these 	reasons, 	reliance 	on market 	forces 	is
likely 	to 	provide 	greater 	flexibility 	in 	adapting 	to 	changing
conditions 	while 	the 	need 	to 	meet 	CON 	requirements 	will 	delay
adjustments 	in 	rapidly 	growing 	and 	changing markets.
IV. 	ENACTMENI 	OF 	SENATE 	BILLS 	133, 	134, 	135, 	136, 	AND 	137 	WOULD
REPRESENT A BENEFICIAL, 	THOUGH 	LIMITED, 	REDUCTION 	IN
GEORGIA'S 	CON REGULATION. 	IF 	THE 	CON PROCESS 	IS 	TO 	BE
RETAINED. 	IT COULD 	BE 	FURTHER 	IMPROVEP SO AS 	TO MINIMIZE 	ITS
UEGATIYB 	IMEACT ON 	COMPETITIQN 	AND CONSUMBRS
For 	the 	reasons 	discussed 	above, 	continua~ion of 	the 	CON
process 	in 	Georgia may 	have 	an 	adverse 	effect 	on 	competition 	in
the 	state'. 	health care 	markets, 	increasing 	the 	price 	and
decreasing 	the 	quality 	of 	health care 	services. 	If 	eo, 	then
repeal 	of'the 	CON 	process 	would 	be 	advantageous. 	In 	the
meantime, 	passage 	of 	each 	of 	the 	pending 	bills 	is 	likely 	to
result 	in 	a 	beneficial 	reduction 	in 	the 	costs 	that 	CON 	regulation
imposes 	on 	health care 	consumers 	in Georgia.
Several 	other 	improvements 	short 	of 	outright 	repeal 	of 	the
CON 	process 	might 	also 	be 	considered. 	One 	such 	reform 	could 	be
to 	raise 	the 	monetary 	thresholds 	above which CON 	approval 	is
required. 	This 	could reduce 	the 	burden of CON 	regulation 	by
32 	BUdget 	& Finance 	Committee 	of 	the 	Pennsylvania 	Legislature,
B~pQrt on 	a 	StUdy of 	Pennsylvania's 	Cert~ficate of 	Need 	Proqram,
Feb. 	1987 	at 	14. 	FASes 	offer 	an 	innovative, 	less 	costly
alternative 	to 	hospital 	surgical 	facilities. 	E~idence suggests
that 	the 	growth 	of 	FASCs 	generally 	has 	been 	hampered 	by 	the 	CON
proces!. 	Ermann 	& Gable, 	The 	Changing Face of 	American 	Health
~, 	Medical 	Care, 	1985, 	at 	401.
13

eliminating 	the 	need 	to 	review minor 	capital 	expenditures 	and
equipment 	purchases 	and 	facilitaje 	the 	development 	of 	lower-cost
alternatives 	to 	inpatient 	care. 3 	A 1988 	report 	by 	the 	FTC's
Bureau 	of 	Economics 	suggests 	that 	hospit!lS 	in 	states 	with 	higher
CON 	thresholds 	have 	lower 	overall 	costs.
A second 	reform 	would 	be 	for 	the 	legislature 	to 	limit 	the
number 	of 	new 	kinds 	of 	health 	services 	subject 	to 	CON 	review.
This 	may 	also 	lower 	costs 	by 	removing 	restrictions 	on 	entry.
A 	third 	reform 	would 	be 	to 	delete 	from 	CON 	coverage 	certain
kinds 	of 	facilities 	that 	appear 	most 	likely 	to 	encourage
competition 	and 	innovation 	in 	health 	care. 	For example, 	a 	staff
report 	by 	the 	Commission's 	Bureau 	of 	Economics, 	concluded 	that
CON 	regulation 	of 	entry 	into 	home 	health 	care 	did 	not 	result 	in
lower 	~gsts, 	and 	may 	have 	increased costs 	and 	restricted
entry. 	Therefore, 	home 	health 	care 	may 	be 	a 	good 	prospect 	for
deletion 	from 	coverage. 	The 	legislature 	may 	thus 	wish 	to
consider this 	and 	other 	facilities 	for 	elimination 	from 	CON
coverage.
CONCLUSION
w. 	believe 	that 	the 	continued 	existence 	of CON 	requlation
may 	be 	contrary 	to 	the 	interests 	of 	health 	care consumers 	in
Georgia. 	Ongoing changes 	in 	the 	health 	care 	financing 	system,
including 	prospective 	payment 	mechanisms 	and 	increased 	consumer
price 	sensitiVity 	fostered 	by private 	insurers, 	are 	eliminating
the 	principal 	problems 	that 	prompted CON 	regulation. 	Moreover,
the 	CON 	regulatory 	process 	does 	not 	appear 	to 	serve 	its 	intended
purpose 	of 	controlling 	health 	care 	costs. 	Indeed, 	CON
regulation may 	be 	counter-productive 	because 	it 	interferes 	with
competitive 	market 	forces 	that 	would 	otherwise 	help contain
costs. 	CON 	regulation 	tends 	to 	foster 	higher 	prices, 	lower
quality, 	and 	reduced 	innovation 	in 	health 	care markets. 	We
conclude 	that 	enactment 	of 	Senate 	Sills 	133, 	134, 	135, 	136, 	and
137 	by 	the 	General 	Assembly would 	likely 	have 	beneficial
consequences 	for Georgia 	health care 	consumers.
33 	M. 	Lerner, 	~ 41., 	Investigation 	of 	Certain 	Issues 	in
cQnnectign With 	the 	Virginia Certificate 	of 	Need 	Law 	at 	VII, 	12
(final 	report, 	Aug. 	10 	1987).
34 	o. 	Sherman, 	aupra 	note 	3, 	at vi, 	7, 	59-60, 	78.
3S 	K. 	Anderson' 	D. 	Kass, 	aUPrA 	note 	3.
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9t"d ll:::flOl
We 	would 	be 	happy 	to 	answer 	any 	questions 	you 	may 	have
regarding 	th.se 	comments 	and 	to 	provide 	any 	other 	assistance 	you
may 	find 	helpful.
Si~er.1Y YO~~
paulY Of~iS 	It:>a -sa,"
Director
Atlanta 	Regional 	OfficeS:
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