FTC Staff Comment to the Hon. Bernice Labedz Concerning Nebraska L.B. 429, 439, and 745 to Liberalize or Repeal Certificate of Need Regulation

BUREAU OF COMflET1T1ClN
UNITED STATES OF AMERICA
FEDERAL TRADE COMMISSION.
WASHINGTON. D.C. 20580
•....
V890a25
February 	22, 	1989
The 	Honorable Bernice Labedz
State 	Senator
Room 	2010, 	State 	Capitol
Lincoln, 	Nebraska 	68509 	COMMISSION AUTHORIZED
1
Dear Senator Labedz:
The 	staff 	of 	the 	Federal 	Trade 	Commission l 	is 	pleased 	to
respond 	to 	your 	invitation to 	comment on 	the 	effectiveness 	of
Nebraska's 	certificate of 	need 	("CON") 	regulation of 	health
facilities, 	and on 	proposals 	presently before 	the 	Nebraska
Legislature 	to 	repeal 	or reform CON 	regulation. 	For the 	reasons
discussed 	below, 	we 	believe 	that 	Nebraska's 	current 	CON 	regu-
latory process 	may, 	on balance, 	harm 	health care 	consumers.
Ongoing 	improvements 	in 	health care 	financing 	are 	resolving 	the
principal 	problems 	that 	prompted CON 	regulation. 	Moreover, 	the
benefits 	of 	CON 	regulation, 	if 	any, 	are 	likely 	to 	be 	outweighed
by 	its 	adverse 	effects 	on competition 	in 	health care. 	As 	a
result, 	continuing CON +egulation 	is 	likely 	to 	harm consumers 	by
increasing-the' price 	and decreasing 	the 	quality of 	health
services 	in Nebraska.
The 	following 	comments 	discuss 	pending Legislative 	Bills
429, 	439, 	and 	745, 	all 	of which 	propose 	the 	substantial
liberalization or 	outri~ht repeal 	of 	CON 	regulation of 	health
facilities 	in Nebraska. 	These comments 	also 	discuss 	the
general 	ineffectiveness 	of CON 	regulation 	in promoting 	consumer
welfare. 	While 	we 	believe 	the 	outright 	repeal 	of 	CON 	regulation
proposed 	in LB 	745 	would 	likely best 	serve 	the 	interests 	of
health care 	consumers, 	we 	believe 	that 	passage 	of 	either 	of 	the
other CON 	reform 	bills 	would 	likely 	also 	have 	significant
positive 	effects 	on 	health care markets. 	However, 	we 	have 	reser-
vations 	about 	certain 	aspects 	of 	LB 	429 	and LB 	439 	that 	would
tighten CON 	regulation on 	some 	types 	of 	health 	facilities 	and
services.
These 	comments 	represent 	the 	views 	of 	the 	staff 	of 	the
Bureau 	of 	Competition of 	the 	Federal 	Trade 	Commission, 	and 	not
necessarily 	those 	of 	the 	Commission 	itself 	or 	any 	individual
Commissioner.
2 	Our comments 	focus 	on 	the 	provisions 	of 	the 	bills
affecting 	the 	scope 	and 	stringency of 	CON 	regulation. 	We 	do 	not
address 	the 	administrative 	procedural 	reforms 	proposed 	in 	LB 	429
and LB 	439.

~ Honorable Bernice Jeabedz 	Page 	2
I. 	INTEREST AND EXPERIENCE OF THE 	FEDERAL TRADE 	COMMISSION
To 	promote competition 	in 	health 	care markets, 	the
Commission 	and 	its 	staff 	have 	been 	active 	both 	in antitrust 	law
enforcement 	and 	in competition advocacy. 	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 consumer demands. 	As. a 	result 	of 	these
efforts 	and 	general 	economic 	analyses, 	the 	staff 	of 	the
Commission has 	gained considerable 	experience with 	the 	economi~s
of 	health 	care 	competition, 	and 	the 	effects 	of 	CON 	regulation.
Indeed, 	m~ny of 	the 	Commission's 	antitrust 	investigations 	in 	the
health care 	field 	focus 	on competitive problims 	that 	would 	be
less 	severe 	if 	there 	were 	no 	CON 	regulation.
II. 	THE 	PROPOSED LEGISLATION
LB 	745 	is 	both 	the 	simplest 	and 	farthest-reaching 	proposal
before 	the 	Legislature. 	That would 	totally 	repeal 	Nebraska's 	CON
statute. 	It would also 	amend other 	statutes 	to 	eliminate 	CON
approval 	requirements 	for 	new 	health 	services 	or:organizations.
LB 	429 	would 	retain 	Nebraska's 	system of CON 	regulation,
but 	with extensive 	changes. 	LB 	429 	would completely 	remove 	home
health care 	services 	from 	CON 	regulation. 	It would 	also 	increase
the 	capital 	expenditures 	that 	would 	trigger CON 	approval 	require-
ments, 	from 	zero 	to 	$1.5 	million 	for 	a 	"substantial 	change 	to 	an
institutional 	health 	service," 	and 	from 	$500,000 	to 	$1.5 	million
for 	other types 	of 	capital 	expenditures. 	It 	would 	also 	increase
from 	$250,000 	to 	$550,000 	the 	annual 	operating expenditures 	that
would 	trigger 	CON 	approval 	requirements 	for 	a 	new 	health 	service.
LB 	429 	also 	contains 	a 	partial 	"sunset" 	provision 	that 	would
automatically 	terminate CON 	regulation 	of:health 	services 	other
than 	nursing 	home-type 	care 	on August 	I, 	1992, 	unless 	the 	Legis-
3 	~,~, 	Hospital 	Corp. 	of 	America 	[Chattanooga
acquisitions], 	106 	F.T.C. 	361 	(1985), 	aff'd, 	807 	F.2d 	1381 	(7th
Cir. 	1986), 	cert. 	denied, 	107 	S. 	Ct. 	1975 	(1987); 	Hospital 	Corp.
of 	America 	[Forum acquisitions], 	106 	F.T.C. 	298 	(1985) 	(settled
by consent 	order); 	American Medical 	Int'l, 	Inc., 	104 	F.T.C. 	1
(1984); 	D. 	Sherman, 	The 	Effect 	of 	State Certificate-of-Need Laws
on Hospital 	Costs: 	An Economic 	Policy Analysis 	(1988) 	(FTC 	staff
report); 	M. 	Noether, 	Competition Among 	Hospitals 	(1987) 	(FTC
staff 	report); 	K. 	Anderson 	& D. 	Kass, 	Certificate of 	Need Regu-
lation 	of 	Entry 	Into 	Home Health Care 	(1986) 	(FTC 	staff 	report).
Copies 	of 	the 	three 	FTC 	staff 	reports 	are enclosed with 	this
letter.
4 	See 	Section 	III.C. 	below.

IJ.'he Honorable Bernice Lahed.z 	Page 	3
lature chooses 	to 	continue such 	regulation. 5 	On 	the 	other 	hand,
LB 	429 	would expand CON coverage 	to 	certain conversions 	of 	beds
in 	h02pital 	and 	non-hospital 	facilities 	to 	nursing 	home-type
care. 	In addition, 	LB 	429 	would eliminate 	a 	partial 	exemption
from 	CON requirements 	for 	health maintenance organizations 	("HMOs").
LB 	439 	proposes 	many of 	the 	same changes 	as 	LB 	429, 	but 	is
generally more modest 	in 	scope. 	Like LB 	429, 	LB 	439 	would
eliminate CON regulation of 	home 	health care 	services, 	make
extensive changes 	to 	CON procedures, 	and eliminate 	the 	partial
exemption 	for 	HMO 	facilities. 	LB 	439 	would 	also 	increase 	the
capital 	and 	operating expenditure-thresholds 	triggering CON
requirements, 	though not 	as 	much as 	would LB 	429. 	However, 	LB
439 	would continue CON 	review 	for 	certain new 	health 	services,
regardless 	of 	their 	capital 	or operating costs. 	Those 	services
include 	not 	only certain 	highly 	sophisticated 	services 	usually
offered only 	at major 	teaching 	hospitals 	(~, 	organ 	transplants
and magnetic 	resonance 	imaging), 	but 	also 	renal 	dialysis 	and
ambulatory 	surgery centers.
III. 	CON REGULATION 	IS 	INEFFECTIVE AND 	POSSIBLY COUNTER-
. 	'PRODUCTlVE 	IN PROMOTING EFFICIENCY 	IN HEALTH CARE 	MARKETS
A. 	CON Regulation 	Is 	Unnecessary 	to 	Remedy
Deficiencies 	in Health Care Reimbursement
CON 	regulation was 	introduced principally on 	the 	theory 	that
in 	the 	absence 	of 	regulation health 	facilities 	would expand
excessively or purchase unnecessary equipment. 	The 	proponents 	of
CON 	regulation 	argued 	that 	market 	forces 	did 	not 	sufficiently
constrain 	this 	tendency 	because most 	health care 	consumers 	were
insured by policies 	that 	required 	little 	or 	no 	out-of-pocke;
paYment, 	and were 	therefore 	generally 	insensitive 	to 	price.
Moreover, 	third-party 	payers 	often 	reimbursed 	health 	facilities
on 	the 	basis 	of 	the 	costs 	actually 	incurred by 	the 	facility 	for
the 	treatment 	of 	each 	patient. 	This 	further 	reduced 	the
incentives 	the 	facilities 	might 	have 	had 	to 	contain costs.
Health 	care 	facilities 	allegedly had 	incentives 	to 	compete
on quality 	rather 	than price, 	to 	provide wider 	ranges 	of
5
review. LB 	429 	would 	also 	change 	the 	procedures 	for 	CON
6 	LB 	429 	would 	not 	affect 	the 	ability 	of 	some 	small,
rural 	hospitals 	to 	use 	some 	beds 	for 	both 	acute 	care 	and 	skilled
nursing 	care.
7 	~ Health 	Planning 	and 	Resources 	Development 	Amendments
of 	1979, 	Pub. 	L. 	No. 	96-99, 	S 	103(b), 	93 	Stat. 	592 	(1979),
repealed, 	Pub. 	L. 	No. 	99-660, 	S 	701(a), 	100 	Stat. 	3799 	(1986).

The Honorable Bernice T.abedz 	Page 	4
8
diagnostic 	and 	therapeutic 	ftervices 	and equipment, 	and more
comfortable 	accommodations. 	Health 	planners 	expressed 	concern
that 	the 	cost 	of 	these 	underutilized, 	albeit 	improved, 	facilities
would be 	passed along 	to 	consumers, 	thereby 	increasing the 	cost
of 	health care. 	Thus, 	the 	principal 	purpose 	of 	CON 	regulation
was 	to 	control 	the 	perceived t~ndency to 	provide 	facilities 	or
services 	that 	were 	not 	needed.
Substantial 	changes 	in health 	care markets 	have 	invalidated
many of 	the 	assumptions 	underlying 	the 	arguments 	in 	favor 	of 	CON
regulation. 	Third-party 	payers 	and consumers 	have 	shown
increasing 	sensitivity 	to 	the 	prices 	of 	hospital 	services.
Health maintenance 	organizations 	and preferred provider organi-
zations 	now 	channel 	subscribers 	to 	physicians 	and 	hospitals 	that
offer 	quality care 	at 	economical 	rates. 	Conventional 	health
benefit 	programs 	provide 	financial 	incentives 	(such 	as 	co-payment
requirements) 	that 	lead 	their 	subscribers 	t~ seek economical
providers, 	including nonhospital 	providers. 	0 	The 	increasing
sensitivity of 	health care purchasers 	to 	the 	prices 	of 	hospital
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, 	been 	a 	trend
toward 	increased pri~e competition among 	hospitals. ll
Programs 	such 	as 	Medicare's 	"~rospective reimbursement"
system will 	reinforce 	this 	trend. l 	Medicare 	now 	r~imburses
hospital 	operating costs 	at 	prospective 	rates 	that 	are 	based
principally 	(and 	soon exclusively) 	on 	flat 	rates 	for 	specific
diagnosis 	related 	groups 	(DRGs), 	rather 	than on 	actual 	costs
See 	Hospital 	Corp. 	of 	America 	[Chattanooga 	acqu1s1-
tions], 	106 	F.T.C. 	at 	478-79; 	M. 	Noether, 	note 	3 	above, 	at 	81.
9 	See 	Joskow, 	Controlling I Hospital 	Costs: 	The 	Role 	of
Government 	Regulation, 	at 	78-79 	(1981).
10 	See 	Insurance 	Coverage 	Drives 	Consumer 	Prices,
Hospitals, 	Nov. 	1, 	1985, 	at 	91; 	see 	also W. 	Manning, 	et 	al.,
Health 	Insurance 	and 	the 	Demand 	for 	Medical 	Care: 	Evidence 	from
a 	Randomized 	Experiment, 	77 	American Econ. 	Review 	251 	(1987).
11 	~,~, 	Hospital 	Corp. 	of 	America 	[Chattanooga
acquisitions], 	106 	F.T.C. 	at 	480-82; 	Hospital 	Industry 	Price Wars
Heat 	Up, 	Hospitals, 	Oct. 	I, 	1985, 	at 	69.
12 	~ 	J. 	Robinson, 	et 	al., 	Hospital 	Competition and
Surgical 	Length of 	Stay, 	239 	J. 	Am. 	Med. 	A. 	696, 	700 	(Feb. 	5,
1988) 	(prospective 	payment 	systems 	reduce 	the 	tendency of
hospitals 	to 	compete 	for 	surgeons 	by 	allowing 	the 	surgeons 	to
hospitalize 	patients 	for 	longer 	periods).

-rile Honorable Bernice Labedz 	Page 	5
13
16
incurred. 13 	As 	such 	systems 	are 	implemented, 	hospitals 	rather
than 	third-party payers 	will 	bear the 	costs 	of 	any 	inefficien-
cies. 	Hospitals 	will 	thus 	have 	increased 	incentives 	for 	cost-
effective 	operations. 	Indeed, 	the 	prospect 	of 	future 	reim-
bursement 	r~forms is 	already encouraging 	hospitals 	to 	be more
efficient. 1
Similar 	improvements 	are occurring 	in other Nebraska 	health
care markets 	currently subject 	to 	CON regulation. 	For 	example,
Nebraska's 	Medicaid program, 	the 	principal 	third-party 	payer 	for
nursing 	home 	services, 	provides 	significant 	incentives 	for 	nur-
sing 	home 	cost 	containment. 	Most·notably, 	Medicaid's 	prospective
payment 	system 	for 	nursing 	homes 	refuses 	to 	reimburse 	capital 	and
operating costs 	as~ociated with amounts 	of 	unused 	capacity
greater than 	15%.1 	Medicaid 	also 	disallows 	costs 	that 	are 	out
of 	line with 	the 	average costs 	of 	other 	nursing 	homes 	in
Nebraska, 	ang gives 	incentive 	payments 	to 	the most 	efficient
facilities. 1 	Thus 	prospective 	entrants 	into 	nursing 	home
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 	Fed. 	Reg. 	18840 	(1987) 	(proposed 	regulation
to 	phase 	in 	flat 	prospective 	rates 	for 	capital 	costs 	over 	three
y~ars for 	movable 	equipment, 	and 	over 	ten years 	for 	other 	capital
costs). 	But 	see Omnibus 	Budget 	Reconciliation Act 	of 	1987,' Pub.
L. 	No. 	100-203, 	S 4006(b)(1), 	101 	Stat. 	1330-52 	(1987) 	(delaying
implementation of 	prospective 	reimbursement 	for 	capital-related
costs 	until 	1991). 	See 	also Modern Healthcare, 	Aug. 	I, 	1986, 	at
20; 	Health Care 	Competition Week, 	Jan. 	12, 	1987, 	at 	4. 	.
14 	~,~, 	Raske, 	Association Seeks 	Sound 	Capital 	Pay
policy, 	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 	inpatient 	services).
15 	See Neb. 	Admin. 	R. 	12-011.06B, 	.06C 	("allowable 	costs"
per 	nursing 	home 	patient 	day computed on 	basis 	of 	the 	greater 	of
actual 	occupancy or 	85 	percent 	occupancy, 	unless 	nursing 	home 	is
less 	than 	a 	year 	old). 	It 	appears 	that 	as 	a 	result 	of 	this
requirement, 	and Medicaid 	regulations 	governing 	specific
reimbursement 	elements, 	Medicaid 	pays 	only costs 	allocated 	to
nursing 	home 	beds 	actually 	used 	by 	its 	beneficiaries, 	and 	some 	of
the 	costs 	of 	unused 	beds 	up 	to 	15 	percent 	of 	a 	facility'S 	total
beds, 	but 	none 	of 	the 	costs 	of 	higher 	levels 	of 	unused beds.
See 	Neb. 	Admin. 	R. 	12-011.0701, 	.0704 	(ceiling 	on
operating 	cost 	component 	of 	reimbursement 	set 	at 	110 	percent 	of
average 	operating 	costs 	of 	all 	nursing 	home 	facilities 	of 	same
care 	classification; 	nursing 	homes 	with 	non-nursing 	operating
(continued ... )

'!'he Honorable Bernice Labedz 	Page 	6
markets 	have 	no 	substantial 	incentive 	from Medicaid 	to 	build more
capacity than they can reasonably expect 	to 	use. 	Existing 	firms
also 	have 	strong 	incentives 	to 	serve 	patients 	more 	effectively to
keep 	their capacity 	fully 	utilized. 	Moreover, 	price competition
for 	nursing 	home 	patients 	who 	pay 	for 	their own care deters
nursing 	homes 	from 	imposing excessive 	costs 	upon 	those
patients. 17 	Similarly, 	price competition and well-structured
governmental 	and 	private 	reimbursement 	programs 	limit 	incentives
for 	over-investment 	and 	other wasteful 	eXPenditures 	for 	other
health 	services 	and 	facilities 	that 	are 	currently subject 	to 	CON
regulation, 	such 	as 	home 	health care 	Bervices, 	ambulatory 	surgery
centers, 	and 	renal 	dialysie 	centers. 1
B. 	CON Regulation Has 	Been 	Ineffective
as 	a 	Cost-Containment Mechanism
It 	is 	not 	clear that 	CON 	regulation 	has 	promoted 	the
efficient 	delivery of 	health care 	services, 	as 	intended. 19 	A
number of 	empirical 	studies 	suggest 	that 	CON 	regulation 	has 	not
controlled 'general 	acute 	care 	hospital 	costs. 	Early 	studies
found 	that 	instead of 	constraining overall 	hospital 	costs, 	CON
regulation may 	have 	simply caused hospitals 	to 	reallocate 	their
resources, 	constraining some 	costs 	while 	other costs
16( •.. continued)
costs 	below 	statewide 	average 	granted up 	to 	$1 	additional
reimbursement 	per 	patient 	day).
17 	~ A. 	Lee, 	H. 	Birnbaum 	& C. 	Bishop, 	How 	Nursing 	Homes
Behave: 	A Multi-Equation Model 	of 	Nursing Home 	Behavior, 	17
Soc~al Science 	aQd Medicine 	1897, 	1905 	(1983) 	(private 	patient
demand 	for 	nursing 	home 	services 	is 	price 	sensitive).
I
18 	~,'~, 	K. 	Anderson 	& 	D. 	Kass, 	note 	3 above 	(home
health 	care); 	52 	Fed. 	Reg. 	20466 	(1987), 	52 	Fed. 	Reg. 	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 	half 	cost-based»; 	51 	Fed. 	Reg. 	29404 	(1986)
(Medicare 	reimburses 	outpatient 	renal 	dialysis 	care 	at 	flat
prospective 	rates).
19 	It 	is 	true, 	of 	course, 	that 	if 	the 	CON process 	signifi-
cantly 	reduces 	the 	level 	of 	capital 	investment 	below the 	level
that 	would otherwise 	exist, 	total 	health care costs 	will 	be 	less.
This 	is 	undesirable, 	however, 	to 	the 	extent 	that 	health care
services 	for 	which 	consumers 	would be 	willing 	to 	pay 	are 	not
supplied or 	the 	prices 	of 	services 	rise 	above 	competitive 	levels.

The Honorable Bernice Labedz 	Page 	7
increased. 20 	Later 	studies 	also concluded 	that 	CON 	regulation
did 	not 	reduce costs 	per unit 	of 	hospital 	output. 21 	Finally,
several 	studies, 	including two 	recent 	FTC 	staff 	reports,
conclu~~d that 	CON 	regulation 	is 	associated with 	higher 	hospital
costs. 	These 	studies 	suggest 	that 	S~N laws 	do 	not 	contain
costs, 	and 	in 	fact 	may 	increase 	them.
Supporters 	of 	CON regulation 	sometimes 	point 	to 	the 	dollar
amount 	of 	projects 	denied, 	withdrawn or modified 	as 	a 	result 	of
the 	CON 	process 	as 	an 	indication of 	the 	value 	of 	CON 	regulation.
These 	amounts, 	however, 	are 	not 	necessarily an 	accurate 	measure
of 	the 	"excessive" 	capital 	investment deterred, 	because CON
regulation may cause 	the 	filing 	of 	applications 	for 	more 	projects
than would actually be 	carried out 	in an open market.
CON 	regulation 	forces 	firms 	to compete 	for 	a 	limited 	number
of 	certificates 	of 	need. 	Because 	the 	certificates 	are 	granted 	on
a 	showing 	of 	"need," 	applicants 	may assume 	that 	any CON 	granted
20
D. 	Sherman, 	note 	3 above, 	at 	iv, 	78; 	M. 	Noether, 	note 3
above, 	at 	74, 	82. 	These 	studies 	used 	data 	from 	all 	50 	states
but 	from 	different 	time 	periods, 	each comparing 	states 	by 	type
of 	regulation. 	F. 	Sloan & B. 	Steinwald, 	Effects 	of 	Regulation
on 	Hospital 	Costs 	and 	Input 	Use, 	23 	J. 	L. 	& Econ. 	81 	(1980); 	C.
Coelen 	& D. 	Sullivan, 	An 	Analysis 	of 	the 	Effects 	of 	Prospective
Reimbursement 	on 	Hospital 	Expenditures, 	3 Health Care 	Financing
Review 	1 	(1981). 	These 	studies, 	in 	addition 	to 	comparing 	data
across 	states, 	also 	compared costs 	before 	and 	after 	the 	enactment
of 	CON 	regulation 	in various 	states. 	See 	also K. 	Anderson 	& D.
Kass, 	note 	3 above, 	at 	87-92 	(CON does 	not 	decrease, 	and may
increase, 	the 	cost 	of 	home 	health care).
Salkever 	& Bice, 	Hospital 	Certificate-of-Need 	Controls:
Impact 	on 	Investment, 	Cost," and 	Use 	(1979); 	Salkever 	& Bice, 	~
Impact 	of 	Certificate-of-Need Controls 	on Hospital 	Inyestment,
54 	Milbank Mem. 	Fund Q. "185 	(1976)".
21 	Policy Analysis, 	Inc.-Urban Systems 	Engineering, 	Inc.,
Evaluation of 	the 	Effects 	of 	Certificate of 	Need Programs 	(1980);
Steinwald 	& Sloan, 	Regulatory Approaches 	to 	Hospital 	Cost 	Con-
tainment: 	A Synthesis 	of 	the 	Empirical 	Eyidence, 	in American
Enterprise 	Inst., 	A New Approach 	to 	the 	Economics 	of 	Health 	Care
(1981).
22
23 	A 1986 	FTC 	staff 	report 	reached 	a 	similar 	conclusion
about 	the 	effect 	of 	CON 	regulation 	on home 	health care 	services.
K. 	Anderson 	& D. 	Kass, 	note 	3 above, 	at 	87-92 	(1986). 	In
addition, 	a 	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, 	note 	17 	above, 	at 	1906.

'.rile Honorable Bernice Labedz 	Page 8
reduces 	the 	likelihood that 	a 	similar CON will 	be 	granted 	to
another 	applicant. 	This 	generates 	pressure 	to 	file 	preemptively
or defensively 	(particularly under combined review, 	where
applications 	for 	similar projects 	are 	required 	to compete 	for 	a
limited number of 	approvals). 	When 	several 	applicants 	pursue 	one
available CON, 	that 	does 	not 	mean 	that 	in 	the 	absence of 	CON
regulation 	all 	proposed 	projects 	would 	have 	been carried 	out.
The 	applicants 	may 	realize 	that 	demand 	exists 	for 	only one
project. 	Therefore, 	the 	denial 	of 	all 	applications 	but 	one 	would
not 	represent 	actual 	savings 	in capital 	costs.
Moreover, 	some 	applicants 	may 	not 	be committed 	to 	carrying
out 	their 	proposed 	project even 	if 	selected. 	An applicant 	may
be 	protecting 	its 	perceived 	long-run 	interests 	or may 	simply 	be
filing 	to 	delay or 	frustrate 	other 	applications. 	Therefore, 	the
number of 	applications 	denied, 	withdrawn, 	or modified may 	sub-
stantially overstate 	actual 	deterrence.
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 	imposes 	substantial 	costs 	on 	applicants,
because 	of 	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 	these 	services
can be 	expected to 	~ 	higher 	than they would 	be 	in 	an
unregulated market. 	Curtailing services 	or 	facilities 	may
create 	shortages, 	forcing 	some 	consumers 	to 	resort 	to 	more
expensive 	or otherwise 	less 	desirable 	substitutes. 	For 	example,
a 	shortage 	of 	nursing 	home 	beds 	can delay 	the 	discharge 	of
24 	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 	services.
Severe 	shortages 	of 	capacity can protect 	firms 	that 	provide
substandard 	service 	from 	competitive 	pressures 	to 	upgrade
performance 	and 	from 	regulatory 	pressures 	to 	adhere 	to 	licensure
requirements. 	For example, 	a 	state agency may 	be 	reluctant 	to
close 	a 	nursing 	home 	for 	major violations 	of 	licensure
requirements 	if 	the 	patients 	cannot 	be 	placed elsewhere. 	See 	J.
Feder 	& W. 	Scanlon, 	Regulating 	the 	Bed 	Supply 	in 	Nursing Homes,
58 	Milbank Memorial 	Fund Q. 	54, 	76 	(1980).

I}'be Honorable Bernice Labedz 	Page 	9
patients 	from more 	expensive 	general 	acute 	care 	hospital 	beds 25
or 	force 	patients 	to 	use 	nursing 	homes 	far 	from 	home.
The CON regulatory process 	may 	lead 	to 	higher prices 	by
protecting 	firms 	from 	competition by 	innovators 	and 	new
entrants. 26 	The CON process 	reduces 	the 	possibility of 	entry by
firms 	that could 	provide 	services 	of 	higher quality 	or 	lower cost
than 	existing 	firms, 	and that 	perhaps 	could displace 	firms 	that
do 	not 	effectively meet 	consumer 	needs. 	Although 	the 	CON 	process
does 	not 	always 	prevent 	the 	entry or expansion 	of 	health
facilities 	or 	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 	firms
already 	in the market).27 	CON 	regulation may 	also 	create
opportunities 	for 	existing 	firms 	to 	abuse 	the 	regulatory 	process
to 	prevent or delay 	new competition. 28 	CON 	regulation,
therefore, 'makes 	entry and expansion 	less 	likely, 	or 	at 	least
less 	rapid. 	Firms 	in 	a 	market 	need 	not 	be 	as 	competitive 	in
price or .as 	sensitive 	to 	consumer demand 	for 	new 	services 	if 	they
know 	that 	it will 	be difficult 	and expensive 	for 	new'firms 	to
enter and 	offer .competitive prices 	or 	services.
Because CON 	regulation 	at 	least' increases 	the 	cost 	and 	time
required for 	new entry" and expansion, 	it 	increases 	the
likelihood 	that 	existing providers 	will 	exploit whatever market
25 	U.S. 	General 	Accounting Office, 	Constraining 	Health
Care 	Expenditures: 	Achieving Ouality Care 	at 	Affordable 	Cost, 	at
93-94 	(1985).
26 	Posner, 	Certificate Qf 	Need 	fQr 	Health Care 	Facilities:
A Dissenting View, 	in Regulating Health 	Facility ConstructiQn 	at
113 	(C. 	Havighurst, 	ed. 	1974); 	M. 	Noether, 	note 	3 above, 	at 	82
(CON 	restrictiQns 	on entry are 	associated with 	hospital 	price
increases 	of 	approximately 	4 	to 	5 percent 	and 	hospital 	cost
increases 	of 	approximately 	3 to 	4 	percent).
27 	~ Hospital 	Corp. 	of 	America 	[Chattanooga 	acquisi-
tions], 	106 	F.T.C. 	at 	490-92.
28 	T. 	Calvani 	& N. 	Averitt, 	The 	Federal 	Trade 	CQmmissiQn
and CompetitiQn 	in 	the 	Delivery of 	Health Care, 	17 	Cumberland L.
Rev. 	293, 	298-99 	(1987) 	(discussing 	potential 	for 	health
providers 	tQ 	use 	CON process 	fQr 	"nQn-price 	predation"); 	St.
Joseph's 	Hospital 	v. 	Hospital 	Corp. 	of America, 	795 	F.2d 	948,
959 	(11th Cir. 	1986) 	(defendants' 	misrepresentations 	to 	state
health planning body concerning plaintiff's 	CON 	application 	not
prQtected 	from 	antitrust 	scrutiny); 	Hospital 	Corp. 	Qf 	America
[Chattanooga 	acquisitions], 	106 	F.T.C. 	at 	492.

'.rhe Honorable Bernice T.abedz 	Page 	10
31
power they 	have, 	individually or collectively, 	to 	raise 	prices
above 	(or 	reduce 	quality below) 	the 	competitive 	level. 29 	That 	is
why the 	Federal 	Trade Commission, 	in 	its 	opinions 	in 	hospital
merger cases, 	has 	cited the 	entry 	barrier created by CON
regulation 	as 	a 	factor 	significantly contributing to 	the
potential 	for 	anticoapetitive 	effects 	from 	the mergers. 30
CON 	regulation may also 	interfere with competition by
delaying the 	introduction and acceptance of 	innovative 	alterna-
tives 	to 	costly treatment 	methods. 	Regulators 	may 	lack 	the
information to 	determine 	how many 	such 	facilities 	are 	needed, 	or
may 	not 	respond 	rapidly enough 	to 	changing market 	conditions.
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. 31 	Demand 	for 	ambulatory 	surgery can be 	difficult 	to
predict 	because 	the market 	is 	changing 	rapidly. 	Provider 	firms
have 	financial 	incentives 	that 	regulators 	lack 	to 	gather 	infor-
mation 	and 	to 	adjust 	rapidly 	to 	unexpected changes 	in costs 	or
demand. 	For 	these 	reasons, 	relia~ce on market 	forces 	is 	likely
to 	provide more 	rapid 	and 	desirable 	responses 	to 	changing con-
ditions 	than CON 	regulation would 	allow.
29 	This 	is 	most 	likely 	to 	occur where 	there 	are 	few
competing providers 	in a 	particular market, 	~ 	Hospital 	Corp. 	of
America 	[Chattanooga 	acquisitions], 	106 	F.T.C. 	at 	487-89, 	such 	as
in 	rural 	areas, 	or 	for 	certain hospital 	specialty 	services.
30 	American Medical 	Int'l, 	Inc., 	104 	F.T.C. 	at 	200-01
(1984); 	Hospital 	Corp. 	of America 	[Chattanooga 	acquisitions],
106 	F.T.C. 	at 	489-96, 	and 	807 	F.2d 	at 	1387.
Some 	shared 	service 	arrangements, 	consolidations, 	and 	other
joint 	provider 	activities 	could 	significantly threaten 	com-
petition unless 	the 	prospect 	of 	new entry would 	keep 	the 	market
competitive by making any 	significant 	price 	increases 	unsus-
tainable. 	CON 	regulation can thus 	conflict with 	health 	planning
objectives 	by 	limiting providers' 	freedom 	to 	pursue 	efficiencies
without 	also 	creating unacceptable 	risks 	of 	anticompetitive
effects.
Pennsylvania 	Legislature, 	Budget 	& Finance 	Committee,
Report 	on 	a 	Study of 	Pennsylvania's 	Certificate 	of 	Need 	Program
at 	14 	(Feb. 	1987). 	FASCs 	offer 	an 	innovative, 	less 	costly 	alter-
native 	to 	hospital 	surgical 	facilities. 	Evidence 	suggests 	that
the 	growth of 	FASCs 	generally has 	been 	hampered 	by 	the 	CON
process. 	Ermann 	& Gable, 	The 	Changing 	Face 	of 	American 	Health
Care, 	23 	Medical 	Care 	401, 	407 	(1985).

'l'he Honorable Bernice Labedz
IV. 	REPEAL OR SUBSTANTIAL LIBERALIZATION OF CON
REGULATION 	IN NEBRASKA WOULD HAVE A BENEFICIAL
EFFECT ON COMPETITION AND CONSUMERS
Page 	11
For the 	reasons 	discussed 	above, 	we 	believe 	the 	continuation
of CON 	regulation 	in Nebraska may 	adversely affect 	competition
in 	the 	state's 	health care markets, 	increasing 	the 	price 	and
decreasing 	the 	quality of 	health care services. 	We 	believe 	that
the 	total 	elimination of CON 	regulation, 	as 	proposed 	in LB 	745,
is 	the 	best 	alternative 	available 	to 	the Legislature.
If 	the 	Legislature 	does 	not-eliminate CON 	regulation
entirely, 	reductions 	in 	the 	coverage of CON 	restri~tions, 	such 	as
those 	set 	forth 	in 	the 	principal 	provisions 	of 	LB 	429 	and LB 	439,
would 	likely 	reduce 	the 	adverse 	effects 	of 	CON 	regulation.
Raising CON coverage 	thresholds, 	as 	LB 	429 	and 	(to 	a 	lesser
extent) 	LB 	439 	would do, 	should 	substantially 	reduce 	the 	burden
of 	CON 	regulation by eliminating 	review of 	relatively 	small
capital 	eXPendit~~es, equipment 	purchases, 	and other 	investments
in new 	services. 	A 1988 	report 	by 	the 	staff 	of 	the 	FTC's
Bureau 	of 	Economics 	suggests 	that 	hospit!~s in 	states 	with 	higher
CON 	thresholds 	have 	lower overall 	posts. 	Moreover, 	the
provisions 	of 	LB 	429 	and LB 	439 	that would eliminate 	CON 	regu-
lation 	of 	home 	health care 	services 	are 	especially 	li~ely to
benefit 	consumers, 	since 	the 	need 	for 	CON 	regulation of 	ho~e
health care 	is 	particularly questionable. 34 	.
While we 	believe 	the 	principal 	substantive 	reform 	provisions
of 	LB 	429 	and LB 	439 	would be 	likely 	to 	yield 	substantial 	bene-
32 	LB 	439, 	however, 	would 	limit 	the 	beneficial 	effect 	of
its 	threshold 	increases 	by requiring CON 	review 	of 	All projects
. to 	establish 	certain specified health 	services, 	including 	not
only costly 	services 	such 	as 	organ 	transplants, 	but 	also 	the
much 	less 	costly dialysis 	and ambulatory 	surgical 	center
services. 	We 	think 	flat-rate 	Medicare 	reimbursement 	policies 	put
more 	pressure on 	health care 	facilities 	to 	be 	efficient, 	and
reduce 	the 	need 	for 	CON 	regulation of 	dialysis 	and 	ambulatory
surgery. 	~ 	note 	18 	above: 	FTC 	Staff 	Comments 	to 	Maryland
Health Resources 	Planning Comm'n 	re: 	Draft 	Ambulatory 	Services
Section of Maryland 	State Health 	Plan 	(Aug. 	6, 	1987). 	(A 	copy 	of
the MHRPC 	comments 	is 	enclosed with 	this 	letter.)
33 	D. 	Sherman, 	note 	3 above, 	at vi, 	7, 	59-60, 	78.
34 	See 	K. 	Anderson 	& D. 	Kass, 	note 	3 above: 	see 	also 	H.R.
Rep. 	No. 	96-190, 	96th Cong., 	1st 	Sess. 	at 	53 	(1979) 	(House
committee 	considering amendments 	to 	federal 	health 	planning 	law
found 	CON 	regulation of 	home 	health 	care 	unwarranted 	because
market 	forces 	adequately 	constrain 	and 	allocate 	supply): 	Havig-
hurst, 	Deregulating the 	Health 	Care 	Industry 	at 	193-202 	(1982).

'.rile BoDorable Bernice T.abedz 	Page 	12
36
fits 	to consumers, 	we 	have 	reservations 	about 	some 	provisions 	in
those 	bills 	that would 	tighten CON regulation 	of 	particular 	types
of 	health care 	projects. 	For example, 	both LB 	429 	and LB 	439
would 	remove 	the 	partial 	exemption 	from 	CON 	review 	for 	HMO
facilities. 	This 	would extend CON 	regulation 	into 	an 	area 	where
it 	is 	unlikely 	to 	serve 	any 	useful purpose. 	HMOs 	have 	parti-
cularly strong 	incentives 	to 	avoid wasteful 	investments 	in
facilities 	and equipment, 	since 	they 	have 	no 	opportunity 	to 	shift
the 	costs 	of 	their mistakes 	to 	other third-party payers. 	Largely
because HMOs 	have 	such 	strong 	incentives 	to 	be 	efficient, 	in 	1979
Congress 	enacted 	an exemption to 	the 	National 	Health 	Planning 	and
Resources 	Development Act 	to 	allow 	state CON programs 	to 	leave
HMO 	facilities 	and 	services 	unregulated 	in most 	cases. 35
We 	are 	also 	concerned 	about 	the 	provision 	in LB 	429 	for
expanded CON 	review 	of 	transfers 	into 	long-term 	care 	of 	unused
bed capacity at 	institutions 	other 	than 	nursing 	homes, 	including
particularly the 	substantial 	unused capacity 	in 	the 	medium-to-
large 	or USgan hospitals 	ineligible 	for 	LB 	429's 	"swing bed"
exception. 	To 	the 	extent 	that 	such conversions 	are 	currently
possible without 	CON 	review but would 	be 	subjected 	to 	review 	by
LB 	429, 	such new 	regulation would 	likely 	interfere with 	a 	parti-
cularly 	inexpensive method of 	adding 	to 	long-term care 	capacity
to 	compete with existing nursing 	homes.
V. 	CONCLUSION
We 	believe 	that 	the 	continued existence 	of 	CON 	regulation
would be 	contrary 	to 	the 	interests 	of 	health care 	consumers 	in
Nebraska. 	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 	concerns 	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 	counterproductive, 	because 	it 	interferes 	with 	competitive
35 	Health 	Planning and 	Resources 	Development 	Amendments
of 	1979, 	Pub. 	L. 	No. 	96-99, 	S 117(a), 	93 	Stat. 	615-17 	(1979),
repealed, 	Pub. 	L. 	No. 	99-660, 	S 701(a), 	100 	Stat. 	3799 	(1986);
S. 	Rep. 	96-96, 	96th Cong., 	2d Sess. 	at 	79-80 	(1979); 	see 	also
Havighurst, 	note 	34 	above, 	at 	213-36.
~ American Hospital 	Ass'n, 	1988 	Hospital 	Statistics,
at 	94; 	American Hospital 	Ass'n, 	1988 AHA Guide 	at 	A201-A205; 	LB
429, 	sec. 	15 	(proposed new Neb. 	Rev. 	Stat. 	S 	71-5830(4». 	LB 	429
would 	not 	affect 	conversions 	of 	small 	amounts 	of 	bed capacity
(the 	lesser of 	10 	beds 	or 	10 	percent 	of 	a 	facility'S 	total 	beds).
However, 	it 	would 	affect 	larger conversions 	not 	currently 	subject
to 	review 	because 	they 	are 	accomplished without-capital 	expendi-
ture.

The BoDOrable Bernice Labedz 	Page 	13
market 	forces 	that would otherwise 	help contain costs. 	CON
regulation tends 	to 	foster 	higher prices, 	lower quality, 	and
reduced 	innovation 	in health care markets. 	The elimination of
such 	regulation, 	as 	proposed 	in LB 	745, 	or 	its 	substantial
liberalization, 	as 	proposed 	in LB 	429 	and 	to 	a 	lesser extent 	in
LB 	439, 	would 	be 	likely 	to 	benefit 	Nebraska 	health care
consumers.
We 	appreciate 	the 	opportunity to 	present 	these 	comments. 	We
would be happy 	to 	answer any 	questions 	you may 	have 	regarding
these comments 	and 	to 	provide 	any other assistance you may 	find
helpful.
Sincerely yours,
~?zBureau 	of 	Competition
Enclosures:
The 	Effect 	of 	State Certificate-of-Need Laws 	on
Hospital 	Costs: 	An Economic 	Policy Analysis 	(1988)
Competition Among Hospitals 	(1987)
Certificate of 	Need Regulation of 	Entry 	Into 	Home
Health Care 	(1986)
FTC 	Staff 	Comments 	to 	Maryland Health Resources 	Planning
Commission re: 	Draft 	Ambulatory Services 	Section of
Maryland 	State Health Plan 	(August 	1987)