FTC Staff Comment to the Hon. John. F. Pressman and Hon. Donald W. Snyder Concerning Pennsylvania H.B. 1328 to Repeal the Certificate of Need Process

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Tbe Mall Build1tla
11. St. Clair A"auo
Clevoland, Ohio 4411.-1257
(%16) 52)-4210
TcllMlOpLM: ,~. 7239
JOHN M. ·WBNDBNH~LL
AdUlI I\"'ooal Director
_______ .. 	I. ~~
UNITBD ST~TES OF AMER.ICA
FEDERAL TRADE COMMISSION
CLEVBLAHD R.EOION~L OFFICii
COMMISSION AUTHORIZED
March 30, 1988
The Honorable John F. Pressmann and
The Honorable Donald W. Snyder
Stale Representatives
House Post Office Box 114
Main Capitol Building
Harrisburg, Pennsylvania 	1712()'0028
Dear Representatives Pressmann and Snyder:
The staff of the Federal Trade Commission! is pleased to respond to your
invitation to comment on House Bill 1328, repealing the Certificate of Need
(CON) process in Pennsylvania, and on the effectiveness of CON laws generally
in promoting consumer welfare. 	Although we have not conducted empirical
studies that arc specific to Pennsylvania, for reasons discussed in greater detail
below we believe that continued CON regulation is unlikely to benefit health
care consumers in Pennsylvania. 	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 the
adverse effects of such regulation on competition in health care markets.
Consequently, continuing CON regulation is likely to harm consumers by
increasing the price and decreasing the quality of health services in
Pennsylvania.
We recognize that the legislature may, for a variety of reasons, choose to
retain the CON process. 	If it does. then certain changes, such as increasing
the thresholds on covered expenditures and removing certain types of facilities
from coverage, may decrease the negative effects of CON regulation. 	In
addition, a sunset provision would ensure that CON regulation will be
re-evaluated soon 1D light of new developments.
1 	These comments represent the views of the Federal Trade Commission's
Bureaus of Competition, Consumer Protection and Economics, and of the
Cleveland Regional Office, and not necessarily those of the Commission itself or
any individual Commissioner. 	The Commission has, however, voted to authorize
the starr to submit these comments to you.

The Honorable John F. Pressmann and
The Honorable Donald W. Snyder
L 	._. INTEREST AND EXPERIENCE OF TIlE FEDERAL TRADE COMMISSION.
Page 2.
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 antitrust law
enforcement and in advocacy of regulatory reforms. 	Those efforts are based on
the premise that competition in health care service markets, like other markets,
will benefit consumers by strengthening incentives for providers to satisfy
consumer demands. 	As a result of Commission antitrust law enforcement efforts
and economic analyses of the effects of CON regulation, the Commission's staff
has gained ex~rience with the economics of health care competition and the
ways in which CON regulation affects that com~tition.2 Indeed, a large part
of the Commission's antitrust law enforcement efforts in the health care field
focuses on competitive problems that would not exist, or would be less severe,
if there were no CON regulation.3
IL 	CON REGULATION IS INEFFECTIVE AND POSSIBLY COUNTER·
PRODUCTIVE IN PROMOTING EFFICIENCY IN HEALTH CARE MARKETS.
A. 	CON Regulation IJ Unnecessary to Remedy Deficiencies In Health
Care Reimbursement.
CON regUlation of health facilities was introduced principally on the
ground that unre~uJated competition would resull in the construction of
unnecessary facihties or unnecessary capital expenditures by existing health
faciHties. 	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-of-pocket payment, making
% 	See, ~.g., Hospital Corp. of America rChattanooga acq1.!isitionsl. 106 F.T.C.
361 (985), afld, PIJ7 F2d 1381 (7th Cir. 1986), ctrl. denied, 107 S. Ct. 1975
~
987); Hospital Corp. of America [Forum acquisitions1106 F.T.C. 298 (1985)
settfed by consent order); American Medical Int'l, Inc., 104 F.T.C.1 (1984 ,
. Sherman, 	f c 	rti kat 	- 	L w 	.
An Economic Polic)' Analysis (1988) (FTC staff report); M. Noether, Competition
Amonl Ho§pitals (1987) (FTC staff report); 	K. Anderson & D. Kass, Certificate
Qf Need Reiu1@tion of Entry Into Home Health Care (1986) (FTC staff report).
Copies of these three FTC staff reports are enclosed WIth this letter.
3 	See Section ItC. below.
. -~.. ;

The Honorable John F. Pressmann and
The Honorable Donald W. Snyder
consumers generally insensitive to the price of health care services."-
Moreover, third-party paycrs often reimbursed health facilities on a
retrospective cost basis, removing whatever incentive the facilities might have
had to contain costs.
These forces allegedly generated an incentive for health care facilities to
compcte on the quality rather than the price of their services, although limited
price competition existed. 	Health care facilities had incentives to eX'pend
resources to provide wider ranges of diagnostic and therapeutic servIces and
equip-ment, and more comfortable ~ccommodations.5 The conCern expressed by
health planners when CON regulatIOn was created was that the cost of these
improved, albeit under-utilized, 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 De 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. 6
In light of substantial changes in health care markets, many of the
assumptions underlying arguments in favor of CON regulation ap{>ear to have
lost their validity. 	Third·party payers and consumers have shown mcreasin~
sensitivity to the prices of hospital services. 	Health maintenance organiz8tlOns
and preferred provider organizations, throush selective contracting, channel
subscribers to physicians and hospitals offenng 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 these subscribers toward economical providers, including nonhospital
providers.? 	The increasing sensitivity of health care purchasers to the pnces
of hospital services limits the ability of hospitals to pass on to consumers the
costs of facilities and serviccs that are not useful in meeting consumer
.. 	See Health Planning and Resources Development Amendments of 1979, Pub.
L 	No. 96-99, I 	lO3(b), 93 Stat. 592 (1979), repealed. Pub. L. No. 99-960,
§ 701(a), 100 Stat 2m (1986).
, 	See Hospital Corp. of America [Chattanooga acquisitions1106 F.T.C. at
47S-79; M. Noether, supra notc 2, at 81
6 	See P. Joskow, ContrulJjD~ Hospital Costs: 	The Bolk of Government
Relulation at 7g..79 (1981).
1 	See Insurance CQveraie Driyes Consumer Prices. Hospitals, Nov. 1, 1985, at
91; su also W. Manning, ct al., Health Insurance and the Demand for Medical
8~} Eviden" from a Randomized Experiment, 77 American Econ. Review 251
Page 3.

The Honorable John F. Prcssmann and
The Honorable Donald W. Snyder
demands. 	There has, accordingly, been a trend toward increased price
competition among hospitals.&
.- 	Programs such as Medicare's "prospective reimbursement" system will
reinforce this trend. 9 	Medicare presently reimburses hospital operating costs
at prospective rates which are based principaJJy (and soon exclusively) on flat
rates for specific diagnosis related Kroups (DROs), rather than the actual costs
incurred 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 l'?ckets rather than those of third-party
payers and individual consumers, provIding hospitals the incentive for cost-
effective provision of service. 	Indeed, the prospect of future reimbursement
reforms is already encouraging greater efficiency on the part of hospitals.ll
ImJ'rovements similar to these are occurring in some Pennsylvania health
care markets currently subject to CON regulation. 	For example, reimbursement
of nursing homes in Pennsylvania by Medicaid, an important third-party payer
for nursing home services, now provides significant incentives for cost
containment. particularly with respect to the construction of new capacity.
Most notably, the Medicaid program refuses to bear capital and operatins costs
associated with more than a small amount of unused capacity. 	Tliis depnves
prospective entrants into nursing home markets of any Medicaid incentive to
build more capacity than they can reasonably expect to use. 	It also gives
existing firms strong incentives to serve patients more effectively so they can
I 	See. e.g., Hospital Corp. of America [Chattanooga acquisitions], 106 F.T.C.
at 480-82; Hospital Industry Price Wars Heat Up, Hospitals, Oct. 1, 1985, at @.
9 	See 1. Robinson, et al., Homital Competition SDq Surlical Leneth of Stay,
239 J. Ant. Med. A 696 at 7c.xr(Feb. 5,1988) (prospectIve payment systems
counteract the tendency of hospitals to compete for surgeons by allowing the
surgeons to hospitalize patients for longer periods).
to 	Medicare plans to begin reimbursing capital costs in a somewhat similar
manner. 	See 42 U.S.C.A~s139Sww(aX4), (d) {West Supp. 1987); 52 Fed. Reg.
18840 (1987) (proposed regulation to phase In flat prospective rates for capital
costs over diree years for movable equipment, and over ten years for otlier
capital costs~ see also Modern Healtheare, Aug. 1,1986, at 20; Health Care
Competition Week, Jan. 12, 1987, at 4. 	But see Omnibus BUd~et Reconciliation
Act of 1987, Pub. L 	No. 100-203, ~ 4006(bXl), 101 Stat. 	1987) (delays
implementation of prospective reimbursement for capita -related costs until
1991~
11 	See Raske. Association Seeks Sound Ca.pital Pay Policy, Modern Heo11~are,
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~ 	.
Page 4.

The Honorable John F. Pressmann and
The Honorable Donald W. Snyder
keep their capacity fully utilized.u 	Moreover, price competition for nu~sing
home patients who pay for their care from theu own funds deters nursmg
homes from imposing excessive costs upon those patients.tl 	Similarly, price
competition and/or well--struetured governmental and private reimbursement
programs limit incentives for over-investment and other wasteful expenditures
for at least some of the other types of health facilities subject to CON
regulation in Pennsylvania}·
B. 	CON Regulation Has Been Ineffective as a Cost-Containment
Mechanism.
Page 5.
It is not clear that CON regulation has had the intended effect of
containing health care costs. 	A number of empirical studies suggest that CON
regulation has not controlled general acute care hospital costs by preventing
expenditures for unnecessary beds, services, and equlpment.~ Early studies of
the effects of CON regulation found that instead of constraining overall hospital
J2 	55 Pa. Code I 1181.233 (1983). 	As we understand it, Pennsylvania Medicaid
computes capital and operating cost reimbursement per Medicaid patient day, in
most instances, by dividing a nursing home's allowable costs by the number of
patient days per year the nursing home would have had if it operated at a
90 percent occupancy rate (or, if greater, the actual number of patient days~
As a result, Medicaid pays only costs allocated to the capacity used by its
beneficiaries, except that it bears some of the costs of unused capacity not
exceeding 10 percent of total capacity. 	Other states pay for even a smaller
amount of unused capacity. 	(Pennsylvania Medicaid also imposes ceilings on
reimbu~sabJe opera~ing costs?f nursing homes, and.~wards i.ncentive payments
to nurSIng homes WIth operatmg costs below the celhngs.) 	,
13 	See A. Lee, H. Birnbaum &. C. Bishop, How Nyrsin~ Homes Behaye; 	A
Mu1ti-~atiQD Model of Nursinl Home Behayjor, 17 Social Sci~lIC~ and Medicine
1897, aii 	5 (1983) (private patient demand for individual nursing homes'
services is price elastic}
14 	See. e.g~ 52 Fed. Reg. 20466 (1987), 52 Fed. Reg. 20623 (1987) (Medicare
reimburses freestanding ambulatory surgery centers at flat pros~tive rates,
and will soon provide half the reimbursement for hospital outpatient surgery on
the same basis (with the other half cost.based».
15 	A 1986 FTC staff report reached a similar conclusion about the effect of
CON regulation on home health care services. 	K. Anderson & D. Kass. supra
note 2, at 87..92 (1986). 	A study of the economic behavior of nursing homes,
which did not focus on the effectiveness of CON regulation, noted that CON
regulation appeared to increase, rather than decrease, the average cost of
nursing home" services. 	A. Lee, H. Birnbaum & C. Bishop, supra nl4, at 1906
(1983).

The Honorable John F. Pressmann and
The Honorable Donald W. Snyder
costs, it may have simply caused hospitals to reallocate their resources. 	Thus,
while some types of hospital costs were constrained by CON regulation, other
~osts in~reas~d.16 Later studies reache~ similar ~onclusions, fin~ing that CON
"regulatIon dId not reduce costs ~r UnIt oC hospItal output.t' 	Fmally, several
studies, including two recent FTC staff reports, concluded that the presence of
CON regulation is associated with hi,her hospital costs)8 	These studies
suggest that as a means of cost contamment, CON laws may be, at bes~
ineffective and, at worst, costwincreasing.
A 1987 assessment of Pennsylvania's CON program, while noting that
health care costs in the Commonwealth have risen as fast as the national
average, found that the CON program in Pennsylvania has been effective in
16 	Salkever & Bice, HQspital Certificate-of-Need ContrQls: Impact on
Inyestment, Cost. and Us,: (1979); Salkever & Bice, The Impact Qf Certificate-
gf-Need ContrQls on Hospital Investment. 54 Milbank Memorial Fund Q. 185
(Spring 1976).
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 attributable to these
factors wilt be less. 	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 advances die regulation's proffered justification -
the curtailment of capital investments that are financially feasible only if costs
can be shifted to thira-party payers. 	If additional investment is curtailed, then
some health care services for which consumers would have been willing to pay
more than is necessary to cover all of the capital and other attendant costs of
providing them will nonetheless not be supplied. 	In addition, the prices of each
of the particular services whose supply is curtailed by the regulation will rise
above competitive levels.
17 	Policy Analysis, Inc.-Urban Systems Engineering, Inc., evaluation of the
Effects of Certificate of N~R.d PrQirams (1980); Steinwald & Sloan, Re~ulatory
Ap.proaches to Hospital Cost Containment: 	A Synthesis of the EmpirIcal
EVidence. in A New AJl..l1roach to tbe Economics of Health Ci[1i, American
Enterprise Institute (1981).
t8 	D. Sherman, supra note 2, at iv, 78; and M. Nocther, supra nQte 2, at 74,
82. 	These studies used data from all 50 states but from different time periods,
each comparing states by ty 	e of re ulation. 	F. Sloan & B. SteinwaJd, Effects
atio 	0 	't 1 	s 	23 J.L &: Econ. 81-109 (1980);
and 	Coelen & D. Sullivan, An Analysis of the Effect§ of Prospective
Reimbursement on Hospital :Expenditures, 3 Health Care Financing Review 140
(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 Anderson & Kass, supra note 2, at 87-92 (CON does nut
decrease, and may increase, the costs of home health care agencies).
Page 6.

The Honorable John F. Pressmann and
The Honorable Donald W. Snyder 	Page 7.
avo~din, certain costs because certificates of need have been denied, withdrawn
or modified as a result of the CON process.19 	The report also warned of "t.he
possib,ility of unbridled capital spendlOg". should CON be repealed based on ,the
expenence of other states - 	notably, Anzona and Utah. which repealed thctr
CON requirements.20
However, the dollar amount of projects denied, withdrawn or modified as a
result of the CON process does not necessarily rcpresent a savings in the
overall cost of health care, nor does it necessarily represent an accurate
measure of the amount of "excessive" capital investment detcrrcd, 	While CON
regulation may deter some of the capital spending which would occur in an
unregulated environment, the amount of this deterrence is difficult to measure
because CON regulation may cause the filing of project applications in excessive
numbers.
CON regulation forces firms to compete for 	a limited number of
certificates of need. 21 	Simply because scveral applicants pursue one available
CON does not mcan that In the absence of CON regulatIon all 	proposed projects
would be carried out, since demand for more than one such pro}Cct 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
protecting what it perceives as the institution's long-term interests or may
simply be filing an application to delay or frustrate the other. 	Thus, the dollar
amount of applications denied, modified or withdrawn may substantially
overstate actual deterrence. 	Furthermore, deterrence of somc capital spending
by CON regUlation may not yield an overall savinBs in health care costs since
costs may increase in other areas not covered by CON regUlation, as suggested
by some of the studies mentioned above. 22
19 	Legislative Bud~et & 	Finance Committee, Report on a Study of
v 	'a's' 	r 	Feb. 1987 (hereinafter "LBFC
Report", at 18--20, 22-23. 	Elsewhere, the report referred to these as
"demonstrated cost savings." 	ld. at 4. 	.
20 	Jd. at 3.
21 	This is particularly true where applications are subject to comparative
review. 	Even for applications not subject to comparattve review, since the
burden is on the applicant to demonstrate need, applicants may assume that any
CON granted reduces the likelihood that a similar CON will be granted to
another a,Pplieant. 	Such an assumption generates pressure to file pre-emptively
or defenSively.
22 	See sources cited supr~ notes 16 and 17, and Anderson & 	Kass, supra
note 2, at 87-92, 	See also C. Havighurst, Reeulation of Health Facilities and
Services by "Certificate of Need,1I59 Virginia L. R~, 1143, at 1218 (1973).

The Honorable John F. Pressmann and
The Honorable Donald W. Snyder
. 	The prediction that "an unbridled surge" in unnecessary capital spending
win occur if CON regulation is repealed is based on early reports of the
experi~nce of Arizona and Utah. with CON repcal. 23 	Howe.ver, a mo~e detailed
.analysls of the post.cON events 10 these states shows most Increases In
construction which did occur were likely to have been short-term and in areas
which were under-served. 24 	For example, Arizona's "surge" in nursing home
construction began even before CON expired - when its bed-to-over-65-
population ratio was the lowest in the nation and substantially below the
national average - and continued durin~l period when the State experienced
substantial in-migration of aged persons. 	Also, an initial study of the effects
of CON repeal in Arizona reported a strong surge in applications for hospital
projects, but a later study found, however, that much of the planned
construction did not materialize. 26 	The Johns Hopkins Report found that Utah
experienced an increase, but not a "surge" in nursmg home construction, while
new hospital construction was limited to freestandin~ psychiatric hospitals.27
The Report concluded that the change to a prospectIve J?ayment system by
Medicare had diminished the incentives toward new capital investment by
hospitals.28
23 	LBFC Report at 21 	While we argue in this paragraph thatlredictions of
increased hospital and nursing home construction are overstate, it should not
be inferred diat we consider such construction to be undesirable. 	As we have
discussed in previous sections, CON regulation restricts supply, so it is expected
that construction will occur where supply has not kept pace with demand 	On
the other hand, if there is an over-supply in a particular area (e.g., acute care
hospital beds) new construction is unlikely to occur.
24 	M. Lerner, er aJ., Investiiation of Certain Issues in Connection With the
Yiriinia Certificate of Need Law at VI, 9-17, 2740; VII, 5-7 (final report,
Aug. 10,1987) (hereinafter "Johns Hopkms Report'1. 	"
1S 	rd. at VII, l2, 27.
26 	Results of both studies are summarized, id. at VII, 5. 	Arizona did
experience substantial growth in the number of open-heart surgery units, but
otlier states that repealed CON did not. 	[d. at VII, 10.
"7 	rd. at VI, 12-13, 16.
21 	rd. at VI, 14-16. 	The experience of Arizona, Utah, Kansas and Texas is
summarized at VII, 5-6. 	The Report concludes that "indications from these four
states are that substantial growth in hospital beds is unlikely on CON sunset."
rd. at VII, 6.
Page 8.
Just as Medicare is influencing capital investment decisions by hospitals,
state Medicaid reimbursement policies are aD important influence on the growth
of nursing homes. 	[d. at VI, 13-14 and YIl, 14-15 (states with very high 	.
occupancy ratios can expect nn increase in construction or conversion of beds

______'-'... 	I • .,Lt:J
The Honorable John F. Prcssmann and
The Honorable Donald W. Snyder 	Page 9.
-
C. 	CON Regulation Interferes with Competition and Innovation in
Health Care Markets.
< 	CON regulation, on balance, is probably not merely ineffective but actually
-counterproductive in its contribution to the control of health care costs. 	As
discusseo below, the CON regulatory process itself imposes substantial costs on
applicants, in terms of both the effort required to obtain regulatory approval
ana the delays occasioned by the regulatory process. 	To the extent that CON
regulation reduces the supply of particular health services below competitive
levels, their prices can be expected to be higher than they would be in an
unregulated market.19 Curtailment of available services or facilities may
create shortages which force some consumers to resort to more expensive or
otherwise less desirable substitutes, thus increasing costs for third-party payers
andbr patients. 	For example, a shortage of nursinF home beds can delay the
discharge of patients from more expensive genera 	acute carc hospital beds30 or
force patients to use nursing homes far from home.
Even if CON regulation docs not yield acute shortages of services, it can
substantially interfere with competition in health care markets. 	First, the CON
regulatory process may increase prices to consumers by protecting firms in the
market from competition by innovators and new entrants. 31 	Although the CON
upon CON repeal, but the level of Medicaid reimbursement is an important
influence on the amount of growth, along with other factors, such as the
existing bed-to-population ratio and the geographic distribution of existing
beds). 	Because Pennsylvania already has in place Medicaid reimbursement
~licies that should deter unnecessary nursing home construction in the event
of CON repeal, an "unbridled surge" In such construction seems unlikely to
occur. 	S~~ pp. 4-5, supra. 	.c.
29 	Where prices arc 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, not only from competitive pressures to upgrade performance, but also
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, R¢:ufatinr the Bed Sunn'Y in Nurs;"r Homes, 58 Milbank
Memorial Fund Q. 54, at 76 (1980).
30 	U.s. General Accounting Office, EQCstrajnjD~HealthCare Exnendjtures;
Achieyini Quality Care at AffordableCost, at 9 	94 (1985~
'1 	Posner, Certificate of Need for Health Care Facilities: 	A Dissenting View,
in Reiulatine Health Facilit§ Construction at 113 (C. Havighurst, ed. 1974~
M. Noether, supra note 2, at 	2 (CON restrictions on entry arc associated with

The Honorable John F. Pressmann and
The Honorable Donald W. Snyder 	Page 10.
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. 	This reduces the possibility of entry by more efficient
firms which would provide hiBher quality andlor lower cost services and,
possibly, replace the less efficient firms. 	In addition, the process of preparing
and defendm~ a CON application is often costly and time-consuming
(particularly 1f the apphcation is opposed by firms already in the market~32
CON regulation may also create opportunities for existing firms to abuse the
regulatory process so as further to prevent or delay new competition.3~ CON
regulation, therefore, makes entry and expansion less likely, or at least Jess
rapid. 	Firms in any given 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 the market and offer competitive
prices or services. 	.
second, by reducing the likelihood of (or at least increasing the cost and
time required for) entry and expansion, CON regulation can make it more likely
that providers wifl exploit whatever market power they have, individually or
collectively, to raise prices above (or reduce quality below) the competitive
level.34 	That is why, in both oC the hospital merger decisions issued by the
Federal Trade Commission in litigated cases, the Commission cited the entry
hospital price increases of approximately 4 to 5 percent, as well as increases in
hospital costs of approximately 3 to 4 percent~
31 	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 J?rotracted 	Michigan
Statewide Health Coordinating Council, An EyaluatIon of the Certificate of Need
PrQ~ram (March 19,1987) at 29-34. 	See also Hospital Corp. of America
(Chattanooga acquisitions1106 F.T.C. 8t 490-92.
33 	T. Calvani & N. Averitt. The Federal Trade Commission and Competition in
the Deliyery of Health Care, 17 Cumberland L Rev. 293, at 298--99 (1987)
(diSCUSSin~potential 	for health yroviders to usc CON process for "non·price
predation 	51. J~~ph's Hospita 	v. Hospital Corp. of America, 795 F2d 948,
at 959 (lit 	Cir. 1986) (defendants' misrepresentatIons to state health planning
body concerning plaintiffs CON application not protected from antitrust
scrutiny); Hospital Corp. of America [Chattanooga acquisitions1106 F.T.C. at
492.
34 	This is most likely to occur where there are few competing providers in a
particular market, see Hosp~tal Corp. of America (Ch8:UanOO$8 acquisitions],
106 r.T.C. at 487-89, such as In rural areas, or for certam hospital specialty
services.

The Honorable lohn F. Pressmannand
The Honorable Donald W. Snyder 	Page 11.
barder created by CON re~ulation as a factor significantly contributin~ to the
~tential for antl-competitlve effects from the mergers.3~ CON regulation can
thus render anti-competitive otherwise lawful conduct, and aggravate the
anti-competitive effects of antitrust violations.36
Third, CON regulation may delar the introduction and acceptance of
innovative alternatives to present cost y treatment methods because re$ulators
may lack the information necessary to determine how many such facihties are
needed 	For example, action on all CON applications for freestanding
ambulatory surgical centers (PASes) in Pennsylvania was delaved by six months
while a CON task force reviewed the need for these facilities.3"7 	It is difficult
to predict demand for ambulatory surgery because it is rapidly becoming more
accessible to patients due to improvements in technolo$y and greater acceptance
by physicians. 	While state health-planning agencies mIght provide information
or guidance on future trends, provider firms have incentives to gather their
own information (~.g., by paying for market research) and to adjust rapidly to
unexpected changes in trends. 	For these reasons, rehance on market forces is
likely to provide greater flexibility in adaptin~ to changing conditions while the
need to meet CON requirements will delay adjustments in rapidly growing and
changing markets.
3! 	AI;Ilerican Medical Int·l, ~~c:, 104 P.T.C. at 200-01 (1984); HospitaJ Corp,--~r
AmerIca rChattanooga acqulSltlons1106 P.T.C. at 489-96, af/d. PJ11 F.2d 1381,
at 1387 (7th Cir. 1~
36 	In particular. the entry barriers created by CON re$ulation can transform
into possible antitrust violations potentially efficient jomt activities by health
care providers that would otherwise be lawful. 	For example. in some cases
shared service arrangements and consolidations could significantly threaten
competition. unless the prospect of new entry would keep the market
competitive by making any significant, sustamed price increases unprofitable.
CON regulation can thus conflict with the achievement of health ~lanning
objectives by limiting the freedom of providers to pursue efficienCIes without
also creating unacceptable risks of antia.eompetitive effects.
37 	LBFC Report at 14. 	FASCs offer an innovative, less costly alternative to
hospital surgical facilities. 	Evidence suggests that the growth of FASCs
~enerally has been hampered by the CON process. 	Ermann & Gable, ~
Chaniini Face of American Health Care, Medical Care, 1985, at 407.

The Honorable John F. Pressmann and
The Honorable Donald W. Snyder 	Page 12.
D. 	CON Regulation Is Not a Good Method For Assuring A«eSS to
Care lor Indigent Patients.
, 	It has also been suggested that CON regulation must be retained in order
to protect access to care for indigent patients. 	According to this theory, CON
regulation prevents the construction of facilities that would siphon off paying
patients, leaving those facilities that treat indigent patients with no way to
make up their 10sses.38 	Under this view, CON reguration should be retained
precisely because it insulates providers from competition.
CON regulation, however, rna)' not be the best means of assuring that care
i5 available for indigent patients. 	CON regulation, in effect, imposes a ''hidden
tax" on consumers of health services in the form of higher prices. 	That "tax"
may be more costly to society than conventional forms of taxation because of
its mterference with health facility competition; moreover, the burden of that
"tax" falls dispro~rtionately on those in poor health.39 	The le~islature may
wish to consiCler alternative mechanisms for funding care for mdigent patients
that would not impair the efficient functioning of health care markets as CON
regulation does.40
Eo 	Other Justifications for Contlnuln& CON Regulation Are
wurrldent.
It has been suggested that CON regulation be retained for a limited period
of time so that the weight of increased use of HMOs and PPOs and improved
consumer information can be felt in the markctplace.41 	For example, the lack
of availability of consumer information has been cited as a reason for
continuing CON regulation until the Pennsylvania Health Care Cost Containment
Council is able to provide comprehensive information on health care quality and
cost. 	The Council projects that such information would be available no sooner
than two years from now.42 	However, while the Commonwealth eventually may
38 	LBFC Report at 4-5.
~ 	See R. Posner, Tjxation by Reiu]ation, 2 Bell J. of Econ. 22 (1971);
C. Havighurst, supra note 22, at 1188-94.
40 	For example, rural hospitals whose viability (and ability to serve the
indigent) is tlireatened by declining occupancy rates could be encouraged to
convert beds to long-term care. 	Johns Hopkins Report at VII, 13. 	The same
Report summarizes efforts by the states to find alternative methods for funding
indigent patient care. 	ld. at part VII, 23-24, citing FAHS Reyiew, ''Reyiew's
1986 State-by-State Survey: 	A Special Report:' SeptJOct. 1986 at 27-42.
41 	LBFC Report at 4,27.
42 	LBFC Report at 27.

The Honorable John F. Prcssmann and
The Honorable Donald W. Snyder
be.able to provide some consumer information, health care providers and other
groups have clear incentives to provide consumer information and can be
expected to provide more of it as the market becomes more competitive. 	These
incentives to provide information should increase in the absence of the CON
process which insulates providers from competition. 	Therefore, retention of
CON regulation may actually reduce the amount of available health care
information.
It also has been suggested that a sunset provision in a revised CON law
would allow for a fresh look at the state of toe health care market including
health care alternatives and consumer information, in a few years.4'3 	While we
agree that a sunset provision is apfropriate if the CON process is to be
retained, we emphasize that repea 	of CON regulation is a preferable means of
enhancing consumer welfare. 	.
Page 13.
IlL 	IF TIlE CON PROCESS IS RETAINED. IT SHOULD BE IMPROVED TO
MINIMIZE ITS NEGATIVE IMPACT ON COMPETITION AND CONSUMERS.
The LBFC Report also recommends that the legislature raise the thresholds
for CON review, reduce the list of new health services subject to CON review,
and expand review of purchases of major medical equipment. 	If repeal of CON
is not feasible at this time. raising coverage thresbolCJs and reducing the
number of new health services subject to CON review may alleviate in part
some of the negative effects of CON regulation. 	However, we question the
necessity of expanding coverage of purchases of major medical equipment to
providers currently not subject to CON.
Raising coverage thresholds as the LBFC Report recommends 44 will reduce
the burden of CON regulation by eliminating the need to review minor capital
expenditures and equipment purchases. 	It would facilitate the growth of
lower-cost alternatives to inpatient care.45 	A 1988 report by the FTC's
Bureau of Economics suggests that hospitals in states with higher CON
thresholds actually have lower overall costs.46
4) 	Id. at 15.
44 	The LBFC Re~rt (at 8-9) recommends increasing the current threshold of
$760,495 to between $1.5 million and $2 million.
..., 	Johns Hopkins Report at VH. 12.
46 	D. Sherman, supra note 2, at vi. 7, 59-60, 78.

The Honorable John F. Pressmann and
The Honorable Donald W. Snyder 	Page 14.
-"
. 	Limiting the number of new health services subject to review may also
have the effect of lowering costs since it removes restrictions on entry. 	The
LBFC Re~rt recommends covering new health services only if they exceed the
coverage threshold for capital expenditures or if they have been shown to
require a certain volume of use in order to maintain quality. 	We suggest that
the Legislature also consider whether some new health services should be
exempted from coverage even if they entail a capital expenditure in excess of
the threshold.47
The reason given for broadening CON coverage of major medical equipment
purchases is that) currently) substantial numbers of such purchases are made by
providers, such as physicians' offices, that are not subject to CON review.48
However, broadening CON coverage to include these providers may not be
warranted. 	Physicians' groups and other providers not reimbursed on a
retrospective-cost basis for capital expenditures would have much weaker
incentives than do hospitals to make excessive capital investments. 	Thus, CON
review of their pro~ed expenditures offers little prospect of public benefit
while imposin~ costs both on the providers (complying with the process) and the
public (admimstering it~
IV. 	CONCLUSION.
We believe that the continued existence of CON regulation would be
contrary to the interests of health care consumers in Pennsylvania. 	Ongoing
changes in the health care financing system) including prospective payment
mechanisms and increased consumer yrice sensitivity fostered by private
insurers, are eliminating the principa 	problem that prompted CON regulation.
Moreover, the CO~ regulatory process does not a.ppear to serve its intended
purpose of controlhng health care costs. 	Indeed, It may defeat that purpose by
Interfering with competitive market forces that. would otherwise help contain
costs. 	However, should the legislature decide to retain CON regulation, we
believe that decreases in the scope of coverage and increases in the threshold
for covered services would reduce the negative effects of the CON system.
~7 	For example, freestanding ambulatory sur~ical centers are a fast.growing,
innovative form of treatment whose introductIon has been retarded oy CON
regulation (see Section II.C., supr(l~
48 	LBFC Report at 11

The Honorable John F. Pressmann and
The Honorable Donald W. Snyder 	Page 15.
" _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, 	.",'
,,.'" 	.... ,t;, 	/' 	,///
., ",;l;?~/Y(~~I'~"-(/L ...
/ ' John M. -Mendenhall
Actirig Director
Cleveland Regional Office
Enclosed FTC Staff Reports:
The Effect of State Certificate-of-Need Laws on
Hospital Costs: 	An Economic Policy Analysis (1988);
Competition Among Hospitals (1987); and
Certificate of Need Regulation of Entry Into Home
Health Care (1986).
TnTN 	D 4C