Saturday, February 13, 2016

Do certificates of need raise health care prices?

A team of high-powered university researchers claimed in a recently published study that health care prices rise for consumers as the number of hospitals serving an area shrink.* The study argues that monopoly hospitals charge prices that are 15.3% higher than areas that have at least four hospitals. Some highlights of the study are:

Measures of hospital market structure are strongly correlated with higher hospital prices. Being for-profit, having more medical technologies, being located in an area with high labor costs, being a bigger hospital, being located in an area with lower income, and having a low share of Medicare patients are all associated with higher prices. However, even after controlling for these factors and including HRR fixed effects, we estimate that monopoly hospitals have 15.3 percent higher prices than markets with four or more hospitals. Similarly, hospitals in duopoly markets have prices that are 6.4 percent higher and hospitals in triopoly markets have prices that are 4.8 percent higher than hospitals located in markets with four or more hospitals. While we cannot make strong causal statements, these estimates do suggest that hospital market structure is strongly related to hospital prices (p.3)....
There is a large literature on hospital competition (see Gaynor, Ho, and Town 2015), which has generally found that hospital prices are substantially higher in more concentrated markets. The majority of this literature, however, uses estimates of transaction prices (usually based on charges) rather than actual data on transaction prices and mostly employs data from just one state - California.

We extend the literature by using a new, comprehensive database that covers a larger population in more detail than anything previously examined. Previous work has relied on data covering particular states, small groups of cities, or groups of companies. We capture claims for individuals with employer-sponsored insurance from three of the five largest insurers in the US. Moreover, rather than using charges or estimated prices, we have the actual transaction prices that capture the true payments made for care (p.8)....

In addition, Wu (2010) finds that hospitals with greater market power were able to make larger private price increases in response to cuts in public reimbursement rates. (p.24, footnote)...

For-profit hospitals (the omitted base ownership form) have higher prices than government hospitals, but there is not a significant difference between the prices of for-profit and not-for-profit hospitals. (p.30)...

The main data we use in this analysis are insurance claims between 2007 and 2011 from three of the five largest US insurers: Aetna, Humana, and UnitedHealthcare (the Health Care Cost Institute dataset). The data include more than eighty-eight million unique individuals and account for approximately 5 percent of total health spending and 1 percent of GDP annually. (p.1)

The results of the study shouldn't surprise anyone who has a basic understanding of economics.  However, reporter Eric Roehm  used the results to question whether the certificate of need process used in many states such as Mississippi deny access to health care by limiting the supply of hospitals.  Mr. Roehm argued in a Wall Street Journal essay that CON's limit healthcare options and raise prices.  Think of Jackson taxicabs. Mr. Roehm wrote:

When the 124-bed StoneSprings Hospital Center opened in December, it became the first new hospital in Loudoun County, Va., in more than a century. That’s more remarkable than it might at first seem: In the past two decades, Loudoun County, which abuts the Potomac River and includes growing Washington suburbs, has tripled in population. Yet not a single new hospital had opened. Why? One big reason is that StoneSprings had to fight through years of regulatory reviews and court challenges before laying the first brick.

County officials and the Hospital Corporati on of America, or HCA, began talking about building a new hospital in 2001. But Virginia is one of the 36 states with a “certificate of need” law, which requires health-care providers to obtain a state license before opening a new facility. Getting a license is supposed to take about nine months, according to the state Health Department. HCA first submitted an application in July 2002 but didn’t win approval for a new facility until early 2004.

Then the plan faced a series of legal challenges from the Inova Health System, an entrenched, multibillion-dollar competitor. Over decades Inova has become the dominant player in the Virginia suburbs. In 2008 the Federal Trade Commission blocked its attempt to acquire another independent hospital, saying that Inova already controlled roughly 75% of the market in Northern Virginia, and that further consolidation would be anticompetitive. That said, by all accounts the not-for-profit Inova’s 16,000 employees and five hospitals provide state-of-the-art health care, and it is regularly ranked as one of the nation’s top medical systems.

When it took up arms against HCA, Inova alleged that the certificate of need hadn’t been properly granted. Years of legal wrangling followed, and Inova tried to appeal all the way to the Virginia Supreme Court, which declined to hear the case in 2008.

Inova ultimately lost in court, but it was simultaneously backing public campaigns to try to pressure local officials to stop StoneSprings with zoning rules. Mailings and newspaper advertisements portrayed HCA as a carpetbagging mega-corporation. “What’s the deal?” asked an ad in the Loudoun Times-Mirror that highlighted a stake in HCA owned by Merrill-Lynch, which it assailed as “one of the first Wall Street companies that needed financial rescue as it suffered under the weight of its bad decisions.”.... Rest of essay.

It’s not hard to understand why Inova might fight so hard to keep out challengers: There’s a direct correlation between prices and competition. In a paper released in December, economists with Yale, Carnegie Mellon and the London School of Economics evaluated claims data from Aetna, Humana and UnitedHealth. They found that rates were 15.3% higher, on average, in areas with one hospital, compared with those serviced by four or more. In markets with a two-hospital duopoly, prices were 6.4% higher. Where only three hospitals compete they were 4.8% higher.

Research by Chris Koopman of the free-market Mercatus Center suggests that Virginia could have 10,000 more hospital beds and 40 more hospitals offering MRIs if the certificate of need restrictions did not exist. “In many instances, they create a quasi-monopoly,” he says. “In essence, it’s a government guarantee that no one will compete with you, until you get notice and an opportunity to challenge that person’s entry into that market.”
Mississippi has suffered under the certificate of need rules for quite some time.  It is the one subject besides SLRP that causes a bipartisan code of silence to take place in the Mississippi legislature.  The Republicans in Mississippi claim to be conservative.  They shriek that Obamacare is ruining the country and taking away our freedom.  However, they say absolutely nothing about this form of regulatory crony capitalism that favors privileged hospitals and denies Mississippians access to health care through higher prices and fewer hospitals.   The Democrats are silent as well as they were literally on the take for the Mississippi Hospital Association for many years and did their bidding while the hospitals funded some of their own causes (Redistricting fights, anyone?). 

If the legislature does address the CON process, the Mississippi Hospital Association will show up with fancy charts about health-care jobs and dollars given to a community by member hospitals will be erased if certificates of need are abolished.  There is also the matter of high-powered lobbyists and contributions (See Sam Mims' campaign finance reports, for example.). Don't forget the social media and letter-writing campaigns that would take place if some foolhardy legislative committee chairman took up the matter.   No small affair to ignore for politicians.  But there is the Tea Party, right? Wrong.   Facebook fights seem to take the place of real fights as the Tea Party ignores this problem  as well.

Governor Phil Bryant issues executive orders and goes to court against Blue Cross as he loudly proclaims his worries about Mississippians having "'access to health care".  Remember that fight several years ago? The Governor somehow forgets about "access to healthcare" when it comes to discussing the certificate of need process.

The certificate of need process is never mentioned in Mississippi politics.  The same politicians who regularly complain about how Mississippi is a poor state that suffers from a lack of healthcare or that too much money is spent on Medicaid have no interest in doing something that will lower prices and provide more healthcare to Mississippians at no cost to the taxpayers.  It will however, impact the bottom line of their hospital masters.

So economics, free markets, lower health care costs, and more health care for all be damned.  Studies will continue to roll out that state what everyone already knows but nothing will be done.  Mississippi will continue to remain in last place and that my friends, is the bottom line .

*The team is  Stuart Craig (University of Pennsylvania), Martin Gaynor (Carnegie Mellon University, University of Bristol, and NBER), John Van Reenen (Centre for Economic Performance, LSE, and NBER)


Anonymous said...

Two sides to this discussion. If you eliminate the CON, you need also to readjust how Medicaid payments to providers are calculated. The original reason for the CON was to keep from letting hospitals buy all kinds of expensive equipment so that they could claim to have the 'best available in the world' and all the time be paying for the equipment through their Medicaid reimbursement.

I agree with the free market side of the CON elimination. But adjustment in the Medicaid must be included so that the hospitals don't become big spenders on our taxpayer dollars.

I Hate Needles said...

Why would we assume hospitals are any different from automobile dealerships. If there are five places selling Chevrolets, they will compete for business and that'll be reflected in prices.

If there's only two hospitals, or worse yet, one, the prices will reflect that monopoly.

What gets me is the insanity that keeps Baptist and St. D from putting a hospital in Madison, for example. The 'medicaid conundrum' should not drive THAT! I am NOT going to go to a hospital in Canton and I HATE to go to a hospital in Jackson.

What the CON does not consider is the available labor pool, the neighborhood and the age of buildings.

Anonymous said...

I keep getting a popup from Merit Health Systems bragging about their commitment to "seniors". Yet, none of their clinics around Jackson take Medicare. Strange!

Kingfish said...

Hospitals also enjoy an advantage on Medicaid compared to private practices.

Anonymous said...

The CON keeps nursing home beds scarce and makes families have to drive too far to visit.

Anonymous said...

Mississip health care system and state policies are as disgusting as those who guard it!!!

Anonymous said...

6:32, you're wrong. There is a ban on new NH beds because Medicaid doesn't want to pay for them.

Anonymous said...

When Medicaid was first implemented (with a budget less than 5% of what it is today) the legislature established the cap on nursing home beds in order to keep Medicaid budget from ruining the state budget. LASTED FOR A WHILE, BUT.....

The CON on NH beds is there for that very reason. People throughout the state are abusing the Medicaid program - claiming mama and daddy don't have any assets so that the state will pay for their nursing home cost, when in fact mama and daddy's assets have been transferred to the kids so that the rest of us will take care of them.

If there were more beds and they were more convenient then there would be more abuse. If there were a demand for private sector beds, they would be built.

I'm in no way saying that everybody in a nursing home and having it paid for by Medicaid are ripping off the system. But -- there are plenty of people who are, and if the CON on homes were removed, the Medicaid budget would increase dramatically.

Anonymous said...

Bishop and Catholic hierarchy want to expand Medicaid so poor people can see a doctor. St. D's MEA clinics don't take Medicaid. Maybe they should revisit their on position.

Anonymous said...

The notion that a hospital or government or any of the other professions is no different from an automobile dealership business is the problem.
Our health is not merchandise to be packaged and sold. Justice is not something that can be packaged and sold. They are elements that are key to the survival of nation.
Capitalism is an economic system, not a system of government.
In forgetting that, we are learning why the phrase " money is the root of all evil" was coined.

Anonymous said...

Yes of course they cause higher prices. And it still ticks me off that Baptist and St. D blocked the small hospital up near county line road a while back citing "lack of need" yet now they themselves want to build to the north.

The CON process is simply about politics, connections and money. As is everything else when you pre-empt the free market from working (like monopoly cab operators)

Beds and Such said...

I don't understand 7:09's objection to the comparison offered. Hospitals are exactly like automobile dealerships and, for that matter, bait shops. If there's only one game in town, worms would be six bucks a box. And if the town ordinance prohibits another from opening, worms will go to $8.50.

Keeping only a few hospitals in the area keeps the prices high. That's got zilch to do with government or the root of evil. It's got everything to do with capitalism and the free market being restricted, strangled.

And if 8:54 thinks the Medicaid process won't discover (and penalize) every nickle in transferred assets, he's dumb as a stump. It's roughly true that the Medicaid system will penalize the applicant one month for every $4800 in transferred assets.

Therefore, if a house valued at $300,000 is transferred within five years of the application, looking back, there will be roughly a 63 month penalty during which medicaid will NOT pay for a nursing home.

Medicaid wasn't designed simply to prop up indigent, unemployed females with six snot-nosed kids under twelve. Sorry you think so.

Anonymous said...

9:50 - correct with assets passed 'within' five years of application. That's why so many almost seniors are passing the assets younger. Good planning, but still ripping off the system as it was designed to be. Just because the gubment offers a program doesn't mean that it is there for the taking to those that can figure out a way to get around the rules. Medicaid was designed to prop up the poor; it was not designed to support those that can support themselves and that have no philosophical problems with abusing the system.

That's what's wrong with our country today - people that want to 'cut all that wasteful spending' but ..... by no means cut what we feel like is ours as an entitlement.

Those folks that you want to let suck up my tax dollars (Medicaid) that are living comfortably should use that $300,000 house to pay for their retirement years. Long term disability policies are available for them. Medicaid wasn't designed to let their snotty nosed kids live off the proceeds from that house that they are transferred six years prior to their entry into the scarce Medicaid available beds.

Does The Govt Exist Only For The Poor? said...

12:36...Thanks for your opinion. And that's just what it is. Like the tax laws (which you no doubt pay somebody to massage to your benefit), medicaid rules are what they are and that's all what they are. Your liberal interpretation and smarmy little admonition is not necessary.

If the medicaid program did not intend for the five year period to be there (for our use), they would have imposed a fifty year time period.

You might also be overlooking the fact that 'some' people in nursing homes, even if previously wealthy, paid taxes of all sorts for upwards of sixty years. The pissants you think medicaid exists for have, arguably, NEVER paid taxes.

Anonymous said...

2;32. Read the history. I don't think 12:36's interpretation can in any way be determined to be liberal. But to each his own, I guess. Yes, the laws were written - in the 60's - by the LBJ Great Society programs when nobody thought that folks would flock to this new program designed for the poor. Now that the moderate, and the rich, want to live off of it is, while legal, was never conceived. And just as 12:36 said, the so called conservatives commenting here want to cut out all the programs for the poor but not the parts that they can suck off of as well. Therefore, as another part of the third rail of politics, Medicaid doesn't get revised to keep us from paying for costs that it was not designed to benefit, we all keep on paying our taxes so that yo'mama along with Kennufs mama can live off our largess.

No - Government does not exist only for the poor. But there are programs that were designed for the poor and now that you and your family wants to suck at the tit too, keep your piehole shut when you want to bitch about anything else that the truly poor are getting from us taxpayers.

And no. I'm about as far from being a bleeding heart as you can find. And I do pay taxes. And yes, I do take advantage of all the legal deductions that are in the system, but I also believe that we should get rid of most of them. But as I approach my 70's, I have not divested myself of my assets so that I can live off other's tax dollars, and don't intend to. For what its worth, my kids agree with this because that is how they were raised as well.

Anonymous said...

@ 12:36

Your inference is that medicaid should only be for the uneducated and ignorant - those unable to exercise "good planning".

You want others who've spent their entire lives funding the medicaid program to pay 'additionally' for long term disability for their own final years and not use the system they've already paid for.

You must be a liberal insurance agent.

Anonymous said...

If you are looking for the money, simply look in the doctors' pockets. Many are invested in CON health facilities. And send patients to the facilities. Can you say conflict of interest? Wonder why board of health does not investigate?

who the hell can afford a nursing home? said...

So, Medicaid should not be available to people who have paid for it through the nose for decades? You liberal assholes who think that program is only intended to benefit young black women who crank out two babies every 24 months are full of crap.

A nursing home can easily cost upwards of $7200+ per month for people who are not on the public dole. That's at least ninety thousand dollars a year. I have no problem with them getting government assistance after three to six years of that system draining their relatives finances down to zero.

Anonymous said...

Medicaid is not for 'those who have paid for it' because other than taxes, nobody has 'paid for it'. Under the concept of 8:28 and 3:33, everybody should be able to benefit from SNAP (food stamps), TANIF, Social Security Disability, Unemployment, etc. because 'they paid for it'.

No. As a working, taxpaying citizen I have paid for MEDICARE. Not MEDICAID - other than just regular income taxes. Because I have paid into Medicare, just like Social Security, I am entitled to participate in it.

But because I have paid my taxes, I am not entitled to benefit from Medicaid. Just like I purchase private insurance to cover my arse in case I get sick, I purchase my insurance to cover my arse when I get old. (And no, I damn sure ain't an insurance salesman.)

8:28 -your calculation is exactly opposite of what is being done. In order to get Medicaid the discussion here is for those that did not drain their or their relatives' finances down to zero. If that were the discussion, I would not disagree. In fact, it ought not drain their relatives' finances at all. But Medicaid is designed to come into play after the reciepents finances are drained - not after they have been given away in order to qualify for the rest of us to pay for their old age costs.

Anonymous said...

11:03 and his many other time stamps finally shut the hell up with all that "...and no" crap.

Here's a news flash for ya: Transferring a 175 thousand dollar, three bedroom house and a twenty thousand dollar credit union savings account is done for one reason. And that reason is to keep those things out of the hands of medicaid, the government.

Under the medicaid rules, a person is allowed to own a house and a car. But, the house has to be sold in order to pay the exorbitant nursing home bills. The car has to be used for the 'benefit of' the nursing home resident - back and forth to appointments, shopping, occasional rides, etc. But, both the house and the car have to be sold to pay the monthly bills.

That house and that car are sold for enough money to pay for less than two years in a nursing home. Then what? I'll tell you. Then the resident goes on Medicaid, if the family is lucky. And YOU think the resident and family are ripping off the system? You won't be satisfied until everybody related to that resident spends every dime they can get their hands on, including what they can borrow, mortgage, sell and find under the mattress.

Transferring assets, and the proper management of those assets to pay the bills is the right thing to do.

Anonymous said...


When you stated "...Social Security, I am entitled..." you revealed yourself.

It is wise for you to purchase insurance to 'cover your arse when old', but many folks don't have the funds you have throughout their working lives and are therefor faced with more difficult decisions.

This world is not made up of only rich and poor folks... the biggest segment are those in the middle.

Magic Money said...

"No. As a working, taxpaying citizen I have paid for MEDICARE. Not MEDICAID."

So, then, Senator Sanders, please tell me who HAS paid for medicaid. Or did those monies just get plucked off the proverbial money-tree?

Anonymous said...

CON is just something the larger hospitals use to keep the competition out. Much like the cab companies.

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