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Debating Certificates of Need

By Josh Shepherd

For decades, Kentucky has required entities wanting to expand or introduce certain healthcare services into a geographic location to obtain a state-issued Certificate of Need (CON), which means there is an official finding that an unmet public need for the service proposed exists in that region.
For decades, Kentucky has required entities wanting to expand or introduce certain healthcare services into a geographic location to obtain a state-issued Certificate of Need (CON), which means there is an official finding that an unmet public need for the service proposed exists in that region.

There is an ongoing debate about the proper way to go about managing Kentucky’s healthcare industry. Should it be subject to the same economic forces as any other competitive enterprise or does the industry serve such a vital need that it requires high regulation to ensure pub­lic access to services without regard to its potential for profit? And likely the most contentious question of all: Which approach accomplishes the triple aims of controlling healthcare costs, preserving quality and raising the overall health of the population?

For decades, Kentucky has required entities wanting to expand or introduce certain healthcare services into a geographic location to obtain a state-issued Certificate of Need (CON), which means there is an official finding that an unmet public need for the ser­vice proposed exists in that region.

Kentucky’s Certificate of Need review standards are managed by the Office of Health Policy within the Kentucky Cabinet for Health and Family Services (CHFS). Thirty-seven states maintain some kind of CON policy, but the extent of control is variable. Thirteen states have either deregulated their CON policies or never adopted them in the first place, leaving healthcare and other services to the whims of the open market.

A year before the adoption of the 2015-2017 State Health Plan, CON Policy Advisor Diona Mullins, under the direction of Office of Health Policy Executive Director Emily Parento and CHFS Cabinet Secretary Audrey Tayse Haynes, issued a memorandum to all stakeholders in Kentucky’s system requesting input about modernizing CON policies.

Stakeholders responses expressed concerns or hope, depending on their point of view, that “modernization” might be a veiled allusion to CON deregulation or a significant loosening of review standards.

Responding to those concerns, the Kentucky Hospital Association commissioned Sullivan Consulting Group (Dan Sullivan) to prepare a white paper analyzing the effect of CONs on Kentucky’s healthcare industry titled “Certificate of Need: Stabilizing Force for Health Care Transformation.” (Find further comments from stakeholders concerning CON modernization at the Kentucky Office for Health Policy website.)

The conversation about the CON program’s future was left open-ended with the transition from the Beshear administration to that of Gov. Matt Bevin and new CHFS Secretary Vickie Yates Brown Glisson.

When CHFS was approached in early April to offer comments concerning CON, the cabinet declined interview requests, saying it was too early for the new leadership to take a definitive posi­tion, having been in office for only a few months and the 2016 legislative session commanding a higher priority for their limited time.

Elizabeth Cobb, vice president for health policy with the Kentucky Hospital Association, and Chris Thorn, CEO of Graves Gilbert Clinic, the largest multispecialty physicians’ clinic in Bowling Green, were willing to present arguments on behalf of their respective organizations regarding Kentucky’s CON policy, against and in favor of, respectively, loosening the state’s regulation.

The arguments were conveyed in separate phone interviews but are presented here in a pro and con debate form.

The KHA “Stabilizing Force’ white paper succinctly states the heart of the CON debate: “The fundamental issue is whether regulatory models offer a better means of distributing healthcare services [in Kentucky] than a competi­tive free-market model.”

Introducing stability or protecting territory?

One of the KHA’s chief arguments for stricter oversights is that there are just too many sweeping changes happening in healthcare to introduce yet another major industry shift. Since 2010, providers have been figuring out how to transition to outcome- and value-based reimbursement models and implement other Patient Protection and Affordable Care Act (ACA) mandates. They also are struggling to adapt to new state and federal requirements on implementing integrated technology such as electronic medical records.

With the administration change in Frankfort and another coming in eight months in Washington, D.C., there are questions regarding the future of healthcare reform. There’s too much uncertainty within the industry, Cobb said. The system needs an island of stability.

The stability argument goes further, however. During the past decade, Kentucky’s health systems have been partnering to create provider networks that will efficiently create medical outcomes to financially sync with value-based reimbursement. These models are designed to reduce hospital re-admissions, aid communication and improve the overall health of not just individuals but entire populations.

These still-developing networks – consisting of primary care providers and specialists, clinics, safety-net and rural hospitals, and regional medical centers on up to the state’s tertiary care and teaching hospitals – are fragile and need the support of a stable functioning CON policy, Cobb argued. Deregulating CON has the potential to undermine the work that has gone into establishing these mutually beneficial, cooperative healthcare delivery systems.

“There was a national trend toward dismantling CON regulations some time ago, but many states have backed away from the idea of total deregulation,” Cobb said, “because healthcare is different from other industries. It performs a crucial public service that requires some level of government regulation.”

Thorn, on the other hand, dismisses the notion that healthcare is undergoing too much change.

“It has never been stable,” he said. “There is always something going on – federal and state regulations, hospital acquisitions, merging healthcare net­works, insurance companies forming and dissolving, or new advances in technology – it never ends. We’re always adapting to change.”

The stability that providers talk about with CON is an attempt to maintain an environment that is anti-competitive, Thorn said. They are designed to protect the territory of existing providers against encroachment by potential rivals who might offer patients a preferred alternative.

Regarding CON, Thorn emphasized he could only speak to Graves Gilbert’s position perspective and experience, particularly when it was trying to estab­lish an ambulatory surgery center (ASC) in its home community of Bowl­ing Green.

CON reviews for almost two decades consistently thwarted Graves Gilbert’s efforts to establish an ambulatory surgery center in Bowling Green, said Thorn, who inherited the project in 2007 when he accepted an offer to be the company’s CEO. Persistence finally paid off in 2015, though, when the state’s health policy office amended CON policy on ASCs. The change enabled the physicians’ group to partner with HCA-owned Greenview Hospital, one of two medical centers in Bowling Green serving the south-central Kentucky region, to establish a free-standing center.

“The partnership is a victory for our service area. Working with Greenview opens up opportunities that we probably could not have offered alone,” Thorn said. However, this devel­opment came about only after years of the multi­specialty practice being prevented from competing in its own market, despite being willing to take on the financial risks.

“We’re not talking about protecting borders. CONs inhibit Kentucky providers from delivering services and competing. Philosophically, there is something wrong with that,” Thorn said.

Instead of maintaining stability for Kentucky healthcare, he said, CONs introduce market protections to existing providers, usually hospitals, so that there is less or no incentive to be efficient or raise the quality of care. Competition drives innovation, he argued. Left on its own, healthcare responds to the free market in much the same way as any other industry. It forces providers and hospitals to deliver higher-quality services at competitive prices, Thorn said.

“If they don’t, someone will step in who will.”

In some cases, like the relationship between Greenview and Graves Gilbert, it encourages collaboration through shared risk, he said. “Exempting the healthcare industry from consumer-driven market forces is not only a disservice to the people of Kentucky, it results in higher costs.”

Proliferation of services in concentrated areas raises costs

In contrast to Graves Gilbert’s arguments, the KHA asserts that “health services do not fit neatly into a competitive market model.” That is one of the key conclusions the KHA’s white paper argues. In fact, the KHA questions the notion that expanded competition naturally leads to lower healthcare costs.

“Entrepreneurs want to establish themselves in Kentucky, which is a good thing,” Cobb said.

However, financial incentives lead commercial investors, when possible, to target healthcare sectors with the highest profits, in KHA’s view. Investors strive also to provide in high-population areas of the commonwealth with greater pockets of affluence, lower unemployment and a substantial population covered by commercial health insurance.

Pursuit of financial return can lead to heightened levels of competitiveness in desirable areas, making it less likely one or two companies will wind up dominating a market to an extent that they can recoup their investment in a short timespan. It’s far more likely, Cobb said, that the markets considered most desirable by entrepreneurs will get saturated with duplications of services beyond what they are capable of sustaining.

To recoup their investments, commercially driven providers usually first will try to charge commercial insurance payers more for services. Whatever charges insurers refuse to approve then get billed on to the customer, months removed from the time of service, Cobb said.

The same thing happens even in states with CONs, she added, and it is this tendency that led to the establishment of CON regulations to begin with, she said. The very preamble to the Certificate of Need page on the Kentucky.gov website asserts that belief, in language approved by the state’s legislature: “The Kentucky certificate of need process prevents the proliferation of healthcare facilities, health services and major medical equipment that increase the cost of quality healthcare in the Commonwealth.”

Controlling the proliferation of services into narrow markets of opportunity is a central goal of CON policies, Cobb said. Anyone associated with the healthcare industry knows how expensive it is to purchase and maintain state-of-the-art equipment and technology, not to mention the salaries of a professional clinical and administrative staff. The costs of staying ahead of technological obsolescence, and recruiting and maintaining board-certified specialists and knowledgeable staffs are in addition to the initial investments.

Hospitals use profit centers to underwrite necessary but unprofitable services

There are many benefits from offering services on the free market, but a draw­back in the model is its primary focus on profitable services delivered to those with the most efficient and reli­able reimbursement. Proponents of the free-market model give much less consideration to providing medical ser­vices that are not profitable but do serve critical public needs. Nor does the model cover the needs of rural and underserved areas of the common­wealth that lack the income base to attract the interest of commercial investors, Cobb said.

Clinics that provide only specialty-care services are not obligated to pro­vide a full range of fundamental medical services to anyone who needs them, she said. Small and regional hospitals throughout the state fund pri­mary-care clinics, obstetrical and gyne­cological services, critical access, urgent care and emergency services. These are not generally very profitable, Cobb said, but they are necessary and people need access to them.

And considering that many hospitals and care providers depend a great deal on Medicare and Medicaid reimbursement, they are still only receiving a percentage of the total costs. The unreimbursed rest must be written off, she said.

Hospitals have an obligation to provide a full range of medical services regardless of whether they can turn a profit or not, Cobb continued. Rural hospitals of any size often depend on the narrow range of profitable services to underwrite those that meet a critical need. Without CONs to regulate how the broad menu of services meet the needs of the population, competitors can come in and cripple a hospital’s ability to provide needed services.

“Hospitals treat all patients. They can’t cherry pick from a menu of services or target a specific market population,” Cobb said. “They need CON regulations to allow them a firm financial foundation to deliver quality healthcare.”

But, Thorn responds, the argument that hospitals use profitable services to underwrite unprofitable ones “is an old and one-sided argument.”

When it comes to overall reimbursement for services, there are many ways hospitals are improving their earning potential, he said. And the field is not level for all providers. In general, Thorn asserts, hospitals tend to get paid better for providing the same services than a physician-owned clinic. When two imaging services sit across the street from one another, one hospital-owned and the other physician owned, Thorn said, “the hospital one gets paid a lot more for performing the very same service.”

Hospitals enjoy other advantages over physician-owned practices, he continued, listing disproportionate share payments, tax exemptions on property and profits, and low-cost loans to expand services. Additionally, there is the recent Medicaid expansion in Kentucky providing coverage to people who once lacked any, thanks to the ACA, he said.

Thorn suggests that Kentucky look to the two examples sitting right across the state’s border.

Neither Ohio nor Indiana state has a CON process. They have regulatory programs to ensure all providers and facilities meet or exceed the same high standards of healthcare quality. Both, he said, have a thriving healthcare system with as much a blend of collaboration and cooperation between providers and hospitals as Kentucky, but also a rich competitive environment that better serves the needs of patients and each state’s population.

The future for CON

Regarding the position of the new leadership in the CHFS and its Office of Health Policy, KHA is encouraged that the administration is open to conversation. In fact, according to Cobb, they seem to be more than willing to work with hospitals and providers across the board.

However, though the state is not yet willing to declare where it stands on the issue of Certificates of Need, it may not have the luxury of time on its side. According to an April news report from the Cincinnati Enquirer, The Christ Hospital Health Network based in Cincinnati purchased the former Drawbridge Inn site across the river in Fort Mitchell, Ky., for the purpose of providing “emergency department, pri­mary and specialty care, and women’s health services.”

Northern Kentucky’s healthcare ser­vices are largely provided by the Saint Elizabeth Health system, which merged with its rival health system, St. Luke’s, about five years ago.

The only hurdle in Christ Hospital’s way is approval of its Certificate of Need application, which falls to state officials in Frankfort.