COVID-19 has profoundly affected the health care landscape, raising anew concerns about the high cost of hospitalizations while simultaneously placing new burdens on those facilities and curtailing non-emergency services. Providers, unable to see patients for routine care, lost revenue and many free-standing physician practices are now at risk, and now face increasing pressure to merge with large health systems to survive.
These consolidations have historically led to significant price increases without improving quality of care – but they have provided support for physician practices to ensuring continued access for many communities. Hospitals themselves readily adapted and responded to the COVID-19 crisis, building surge capacity and strengthening infection controls – which now raise questions about whether that surge capacity should be retained. The federal government recently infused billions of dollars to help offset hospitals’ increased costs and the losses they experienced from delaying non-essential services. With regulatory rollbacks, telehealth has become a more dominant platform to deliver health care access and the pandemic’s stunning and disproportionate impact on people of color raises questions about how and where services are provided.
COVID-19 brings new urgency to states to assure that residents have access to the services and facilities they need, when they need them, and at a price they can afford. This question invites a reconsideration of decades-old state health planning initiatives and certificate-of-need (CON) programs that require a hospital or health system to obtain approval from the state before expanding, discontinuing, or dramatically changing health care services by demonstrating a need for change. As hospitals and state policymakers work through what the health care system will look like post-COVID-19, and whether surge capacity should be retained, or other services terminated, it is instructive to revisit the history of CON and state health planning efforts.
First State CON Programs
New York instituted the first CON program, shifting an existing, voluntary state health planning body that oversaw hospital expansion into a mandatory regulatory mechanism, largely as a cost-containment measure to lower the rate of health care inflation. The program was based on an emerging premise that rising health care costs could be associated with over-capacity, which would drive utilization of health care services, and increase service and overhead costs, such as rent, equipment, and supplies. This premise was built on “Roemer’s law,” a theory published by Milton Roemer in 1959, which states most simply that a “hospital bed built, is a hospital bed filled.” In other words, allowing hospitals to expand could be expected to lead to greater utilization and greater costs. Roemer based the theory on a study showing a positive correlation between the number of short-term general hospital beds available and the number of hospital days used.
While it’s been debated since it was published, Roemer’s theory sparked the first wave of state CON programs. Rhode Island was the second state to adopt a CON program in 1969 and just five years later 22 states had programs in place. These early programs required facilities to receive approval for projects that exceeded certain capital expenditure thresholds and some also required a CON for an increase in bed supply or purchase of major medical equipment.
By January 1975, just before the national mandate for CON programs was passed by Congress through the National Health Planning Resource and Development Act (NHPRDA), 46 states already had established CON programs either through statutes enacted by state legislatures or through capital expenditure review programs under Section 1122 of the Social Security Act. Adopted in 1972, Section 1122, allowed states, which opted to participate, to review plans for a hospital’s expansion or modernization and provide a recommendation as to whether community need justified the capital expenditure. A negative state recommendation generally led to the federal government withholding payment under Medicare and Medicaid for capital costs associated with the projects. To enforce this provision, if the plans were not sufficiently justified then the hospital would be deemed ineligible for participation in Medicare, Medicaid, or other maternal and child health programs. Although initially thought to be a cost-containment tool, states began adopting CON programs to balance competing goals – lowering costs while maintaining or improving quality and increasing access to care.
Reviews of these early CON programs found that they were frequently underfunded and potentially ineffective. Many state programs had high CON application approval rates, calling into question whether the programs were thoroughly reviewing applications or simply approving all applications they received. Massachusetts and New York that had lower rates of CON application approvals, but still saw high health care cost inflation. Some believed costs were shifting towards expenditures that wouldn’t trigger CON review, such as employee salaries. Early programs struggled with inconsistent reviews that were often politicized and influenced by industry interests. Program staff were under-resourced and had high turnover rates and insufficient knowledge to issue legally sound, robust findings on applications. In 1975, a federal mandate for states to implement CON programs, helped resolve some of these challenges.
Federal CON Mandate: National Health Planning Resource and Development Act
Prior to 1975, CON was a regulatory tool without a broader, consistent framework against which to pass judgment on the need for new facilities and services. This lack of structure persisted until President Gerald Ford signed the National Health Planning Resource and Development Act (NHPRDA) into law in 1975. Among other things, the NHPRDA provided funding and guidance for state, regional, and national health planning and a requirement for states to establish state certificate-of-need programs in order to be eligible for the health planning funding. National health planning was meant to improve efficiency, but also ensure equitable access to care at more reasonable costs. Ensuring equitable access included addressing maldistribution of health care resources so states would not have regions with scarce health care resources and regions with excess capacity.
The NHPRDA sought to standardize diverse, voluntary state health planning efforts and build on previous federal efforts including Hill-Burton in 1946, which focused on building new health care facilities to fill unmet community need, as well as the Comprehensive Health Planning (CHP) Program in 1966, which added a focus on unmet health care workforce and service needs in addition to access to facilities. The CHP program also introduced an emphasis on eliminating duplicative equipment and facilities. Despite previous federal legislation, Congress highlighted specific, ongoing concerns about the health care market for the NHPRDA to address, including a lack of effective health care delivery, maldistribution of existing resources, and increasing health care costs.
The NHPRDA was designed to be “ground up,” engaging local communities and tasking governors with establishing roughly 200 “Health Service Areas” based on geographic and population data for regional planning. It also created statewide health coordinating councils to lead state health planning and dedicated federal grants to support these efforts. It authorized $25 million in 1975, $30 million in 1976, and $35 million in 1977 to be distributed to states. In addition to the statewide health coordinating council, governors had to select a “state health planning and development agency.” Among other responsibilities, the selected agency had to create a preliminary state health plan to submit to the coordinating council and administer CON. In order to receive any funding under the Public Health Services Act, states had to comply with the NHPRDA, and implement a CON program, by 1979. By 1982, every state except Louisiana had a CON program in place that complied with the NHPRDA.
Impact of NHPRDA on State Health Planning and CON
Through the NHPRDA, the link between CON and health planning solidified. CON was administered by the state health planning and development agency, which was also tasked with developing the state health plan. States began considering the state health plan when reviewing applications for new or expanded facilities and applicants were asked to explain or justify how a proposal aligned with state and regional health planning goals.
Guidance and funding from the NHPRDA also helped address some of the problems with early state CON programs. It provided consistent, reliable funding – increasing the professionalism and competency of CON state staff. The NHPRDA required CON programs to issue written findings after reviewing proposals and to evaluate applications against set criteria, including, at a minimum, community need, financial feasibility, the availability of less-costly alternatives, quality of care, and accessibility of services for underserved communities. These guidelines helped bolster CON against potential legal challenges and created the underpinnings for the CON processes that still exist today in many states.
In 1979, Massachusetts published an evaluation that found the costs of the federally directed CON program outweighed the benefits. Massachusetts evaluated the costs, measured as application preparation, fees, costs to state government, and costs to the health system, against the benefits, measured as the capital costs of denied projects. Officials in Rhode Island built on this evaluation, by including more data points to measure its “benefits.” Rhode Island officials added the savings accrued from withdrawn project applications, operating cost avoidance, and interest from cost savings. By adding these additional measurements, Rhode Island found that in the first eight years of operation, the benefits outweighed costs by nearly $250 million. Similar to more current evaluations of CON, it was challenging for states or third-party reviewers to pinpoint the exact impact of CON programs and separate them out from other regulatory tools or market conditions that might raise or lower health care costs.
Repeal of Federal CON Mandate
In the 1980s, the Reagan Administration favored market incentives rather than government regulation to address health system costs. Subsequently, due to this market orientation and without clear evidence on CON programs’ effectiveness, state health planning and CON lost support in the White House and in Congress. With support from the Reagan Administration, Congress began rolling back federal funding for state health planning in 1983 and in 1986 Congress repealed the federal mandate for CON and the entire NHPRDA in the State Comprehensive Mental Health Services Plan Act. States began repealing CON laws, citing the administrative burden of programs, an interest in allowing the market to dictate hospital growth rather than regulation, and evidence that other states repealed CON without resulting dramatic cost increases. During the wave of program repeals, hospital associations were frequently the biggest supporters of keeping CON in place – causing many to question the true impact of CON on rising health care costs and whether it simply protected extant hospital markets.
Many states did keep CON programs in place, although they often diverged from federal CON guidelines on the types of facilities covered to accommodate more specific or narrow interests and reduce administrative burden. The NHPRDA required CON programs to review proposals for hospitals, psychiatric hospitals, skilled nursing facilities, intermediate care facilities, dialysis centers, and ambulatory surgical facilities. As states reduced CON program size, they often exempted or removed the requirement for certain facility types – some reduced programs down to focusing exclusively on skilled nursing facilities.
By the time the federal mandate was repealed, states were using CON review for goals beyond cost containment and many states felt that CON was one of very few tools that they had to address health system costs. Some of these goals were similar to those outlined in the NHPRDA, such as justifying community need before approving an expenditure, others included:
- Ensuring public participation in the development of new health care facilities;
- Preserving or improving the quality of care;
- Limiting public spending via Medicaid on new facilities or expanded services; and
- Addressing the maldistribution of resources in a state.
To offset the loss of federal funding, many states that kept CON laws in place took steps to reduce the administrative burden of programs by reducing the number of applications the state would review. States exempted certain projects, raised capital expenditure thresholds, added pathways for expedited reviews, and specified service areas they would review, instead of looking at the entire health system. These changes created the diverse state CON laws that exist today.
CON Today
Thirty-five state CON programs remain in place today and many states still rely on entities such as statewide health planning councils or state health plans first initiated under the NHPRDA. At least nine states’ CON programs reside in a planning- and development-focused agency similar to the requirements first laid out under the NHPRDA. For example, Hawaii’s CON program sits in the State Health Planning and Development Agency and applications are reviewed by three different bodies – a CON review panel, local councils, and a statewide coordinating council. Much of the early criticism of CON persists. Critics argue that “regulatory capture” has led the industry to steer the CON review process – meaning that CON agencies may reflect the interests of large health systems that are able to use the process to keep out potentially more affordable options. Early evaluations of CON were focused almost exclusively on whether they slowed health care cost inflation. In a shift of perspective, policymakers have now begun to think of CON as a broader tool to also address the distribution of services and the impact of consolidation, which is well documented to increase costs. Recent evidence suggests that the effectiveness of CON programs to limit consolidation and contain rising health care costs largely depends on how a state program is designed and implemented.
As a part of the NHPRDA implementation, the federal government sought to create national health planning goals and resource standards to help guide regional and state efforts. However, the Department of Health, Education, and Welfare (HEW) (known today as the Department of Health and Human Services), struggled to get consensus on broad national objectives. HEW also had challenges identifying appropriate metrics and data sources to measure health planning goals against. The practice of using data and establishing specific, quantitative standards for measuring efficacy or progress against health system goals was in the early stages when the NHPRDA was being implemented. If states revisited comprehensive health planning today, these issues may be less relevant with the rise of state all-payer claims databases and growing interest in hospital financial transparency.
Another critique of early CON programs was that they were only reactive and couldn’t initiate projects in underserved areas to meaningfully re-distribute health care resources. Policymakers are already thinking more critically and creatively about this issue today. Massachusetts Gov. Charlie Baker’s VALUE proposal would require health care entities, including providers, to increase expenditures on primary care and behavioral health by 30 percent over three years. While the Massachusetts Health Policy Commission’s oversight will be the primary enforcement mechanism to ensure providers comply with required investments, the bill also specifies that providers’ failure to meet the spending target will be noticed by the Department of Public Health and may be considered in the review of a determination-of-need application, Massachusetts’s CON process. This innovation could be a model for state CON programs to play a more active role in distributing health care resources.
While state policymakers have been working to lower health care costs for some time, current challenges with COVID-19 and the economic downturn have illuminated the need to redouble these efforts. They have also complicated the considerations before policymakers.
Questions about what constitutes an adequate bed supply have come into stark focus, and what needs to be done to ensure surge capacity is balanced against cost must now be debated. What types of providers are needed where? Can telehealth meet needs that until now have been met with facility-based services? How can access be assured, particularly access to safety net providers, whose financial situations make them vulnerable to closure? Can states reimagine the CON process to provide appropriate constraints and oversight to market consolidation? Can the criticisms of regulatory capture in CON – and in health planning, generally – be overcome? And at the very core – what kind of health care system does a state need and what can it afford?
The current public health crisis and stunning economic downturn have reignited the questions posed in the NHPRDA, but with new urgency. Understanding the history of state health planning and CON programs is an important first step in reinventing them to rise to meet these new challenges.
Resources:
Brown, L. D. (1992). Political Evolution of Federal Health Care Regulation. Health Affairs.
Blumstein, J. F., & Sloan, F. A. (1978). Health planning and regulation through certificate of need: An overview. Utah Law Review, 1978(1), 3-38.
Etheredge, L. (1983, January 1). Reagan, Congress, and Health Spending. Health Affairs, 2(1).
Goulet, G. R. Certificate of Need Over Hospitals in Rhode Island: A Forty-Year Retrospective. Roger Williams University Law Review, 15(1).
Health Planning and Resource Development Act of 1974. (1975, November). Journal of the National Medical Association, 67(6), 489-494.
Nichols, L. M., Ginsburg, P. B., Berenson, R. A., Christianson, J., & Hurley, R. E. Are Market Forces Strong Enough to Deliver Efficient Health Care Systems? Confidence is Waning. Health Affairs. doi:10.1377/hlthaff.23.2.8.
Schonbrun, M. K. (1979, August 1). Making Certificate of Need Work. North Carolina Law Review, 57(6), 11259-11315.
Simpson, J. B. (1986). Full circle: The return of certificate of need regulation of health facilities to state control. Indiana Law Review, 19(4), 1025-1128.
Simpson, J. B. (1985, October). State Certificate-of-Need Programs: The Current Status. American Journal of Public Health, 75(10), 11225-11229.
