North Carolina has no need for the CON game

Public radio listeners in the Triangle recently learned about a significant competition in the health care arena.

This advocate of free markets usually welcomes competition. In this case, not so much.

Yes, competition generally means good news for consumers. The fight for the customer’s dollar leads producers to offer more goods and services, with better quality, at the lowest price. A particular business can secure a temporary advantage, but other producers strive to deliver even better deals.

That’s not the type of competition Jason deBruyn documented for WUNC radio on Aug.18.

Instead of competing for consumers’ business, major health care providers in one of the state’s major population centers are fighting for government approval.

“The Triangle’s three main health systems are once again in a heated battle, this time over which hospital can expand core services,” deBruyn reported. “North Carolina tightly regulates health services and caps the number of licensed acute care beds in a county or service area.”

The state Department of Health and Human Services operates an entire division devoted to Health Service Regulation. Those regulators have decreed that Wake County’s cap on licensed acute care beds can increase by 44 to 1,553, deBruyn explained.

The state will award a permission slip, officially known as a certificate of need, to health care providers who win some or all of the 44 new beds.

Expect intense competition. “[T]hese acute care beds are among the most highly coveted because they serve as the backbone of any hospital,” deBruyn reported. “These beds are effectively the capacity of any hospital, so if a hospital wants more inpatients, it needs more licensed beds.”

UNC Health, Duke Health, and WakeMed Health all seek the government CON. Each provider wants to secure most, if not all, of the new beds for its own operations, leaving the competition with little to nothing at the end of the fight.

“Regulators will consider which applications best serve Wake County’s needs and then allocate the beds,” according to WUNC. “Hospitals could see their applications partially approved, but regulators will approve no more than a total of 44 beds.”

Once government regulators make their choice, the competition will enter a new phase. “Regardless of the initial award, it is nearly certain that the hospitals that lose their bid will file an appeal,” deBruyn warned. “That process is handled by the Office of Administrative Hearings, and can take months to be resolved.”

That’s an optimistic assessment. Once OAH offers its decision, there’s a good chance that the losing party will take its case to court. It’s entirely possible that a legal dispute over 44 new hospital beds could linger for years.

DeBruyn’s report should raise serious questions.

First, why have government regulators decided that Wake County needs exactly 44 more acute care beds? Why not 43 or 45? Why not 50 or 100? Why should a government agency choose any number and force health care providers to engage in a “heated battle” for a government CON?

Left to make their own decisions, it’s likely that the three major providers would respond to market demand. If each sees a real need for 44 new beds, perhaps Wake County would see 132 new acute care beds.

It’s more likely that all three providers are seeking every possible bed now because they don’t know when government overlords will offer another opportunity for expansion. Plus they don’t want to fall behind by seeing a competitor win government-sanctioned growth.

Without tight government control, it’s likely that the competing providers already would have added beds as needed. The total supply of beds could be higher today than the 1,553 prescribed by the government.

The number of beds would continue to grow as needed. Providers would compete for patients. Wake County residents would see benefits from real competition.

Here’s a second major question: How does CON lock Wake County into its current selection of health care providers? Duke, UNC, and WakeMed are all large operations. They have resources to wade through CON’s complicated regulatory and legal process. While they fight each other, they are unlikely to worry about scrappy new entrants in the health care arena. Little guys can’t wage the costly CON war.

When health care has strong barriers to entry, like CON, there’s less opportunity for innovation. Less innovation typically means bad news for consumers.

State legislators have taken steps this year to roll back North Carolina’s certificate-of-need program. They ought to do more. The CON process produces the wrong kind of competition — for government favors instead of customers’ business. It’s a game North Carolina cannot win.

Mitch Kokai is senior political analyst for the John Locke Foundation.