By John Hood
RALEIGH — We live and work in a mostly free economy — but a spate of year-end stories demonstrated a prominent exception.
Triad Business Journal reported that Novant Health, based in Winston-Salem, sought permission to build a $249 million hospital in Asheville focused on cancer treatment. Its application was denied in favor of a rival proposal from a Florida-based chain, AdventHealth.
Meanwhile, sister publication Triangle Business Journal reported that North Carolina’s latest State Medical Facilities Plan authorizes the addition of precisely 237 acute-care beds in Wake County and 82 beds in a region encompassing Durham, Caswell, and Warren counties. Novant will vie with WakeMed, Duke Health, and UNC Health for those bed allocations.
Permission? Authorization? Central planning? Doesn’t sound much like free enterprise, but when it comes to providing health care in hospitals and other settings, North Carolina doesn’t follow the normal economic rules. Our state requires that most providers obtain a certificate of need (CON) before building new institutions, expanding existing ones, or adding major medical devices and services.
Other states rely on innovation and competition to sort these things out. Our neighbor South Carolina is in the process of phasing out its CON system. But step through the looking glass to North Carolina and you can still find the regulatory equivalent of jabberwocky — aesthetically pleasing to bureaucrats and protected firms, perhaps, but impossible for the rest of us to understand.
When Congress first compelled states to create CON systems in 1974 — after the North Carolina Supreme Court nixed a prior version as an unconstitutional monopoly — the idea was that normal rules couldn’t apply to hospitals. Because Medicare, Medicaid, private insurers, and other third parties were their main funders, neither hospitals nor their patients had the proper incentives to economize on health care.
Furthermore, advocates argued, any benefits of wide-open competition would accrue overwhelmingly to urban areas, since few providers would want to launch competing institutions in far-flung rural areas. So, we needed central planners to keep costs in line.
I’m not going to say these propositions were utterly absurd. Third-party payment does pose challenges for the efficient delivery of health care. But empowering government agencies to ration hospital beds and services turned out to be a bad idea. The Federal Trade Commission concluded that it “failed to control healthcare costs and was insensitive to community needs.” In 1986, Congress repealed its mandate. Since then, wise states have abandoned CON. Alas, in this area, North Carolina has proved stubbornly foolish.
The empirical case against CON laws keeps growing stronger. One of the latest studies examined the effects of regulation on ambulatory surgical centers, which offer low-cost alternatives to hospitals. Scholars from Utah State and George Mason universities examined the cases of six states abandoning CON laws between 1991 and 2019. Comparing their experience to that of other states, the researchers found that ambulatory surgical centers per capita went up by nearly half — but even more, 92% to 112%, in rural areas.
A recent edition of Southern Economic Journal published a CON study by Appalachian State University economist Shishir Shakya and West Virginia University economist Christine Bretschneider-Fries. They found that “counties in states with CON laws that border counties without such laws have nearly 10% less spatial accessibility to substance-use disorder treatment facilities.”
Lanhee Chen, a scholar at Stanford University’s Hoover Institution, wrote in the Journal of the American Medical Association Health Forum that while CON laws may be “well-intentioned and designed to control costs, they have, in practice, undermined competition and ironically led to higher prices in the long run” as well as “extended wait times for patients” due to artificial constraints on hospital construction.
As West Virginia University’s Matthew Mitchell put it in Southern Economic Journal, “the accumulated evidence is overwhelming that CON laws do not achieve their purpose. Instead, the balance of evidence suggests that these regulations increase spending, reduce access to care, undermine quality, and fail to ensure care for underserved populations.”
Competition works. Central planning doesn’t.
John Hood is a John Locke Foundation board member. His books Mountain Folk, Forest Folk, and Water Folk combine epic fantasy with American history (FolkloreCycle.com).
