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Improving Value

Certificate of Need

Introduction

Certificate of Need (CON) and Determination of Need (DON) (two terms for the same strategy) are approaches that have a long history as a potential cost control solution. CON and DON require healthcare providers – primarily hospitals - to demonstrate to a public body the clinical need for the capital expense (e.g. new building or equipment) prior to making these investments.  DON and CON began as state driven solutions that led to eventual federal adoption. This federal policy was allowed to expire in the mid 1980’s and today just 36 of the 50 states have CON and DON policies in action.

Evidence of the effects of CON and DON on the allocation of hospital capital resources are mixed.  One approach that seems to lead to better outcomes is the use review boards that include a variety of stakeholders, including the consumer voice. On the other hand, the evidence suggests that there may be even more beneficial mechanisms to address the policy problems targeted by CON and DON.

What is CON/DON?

These policies aim to control healthcare providers’ capital expenditures by limiting facility construction and acquisition of major medical equipment. CON and DON requires healthcare providers to demonstrate the clinical need for the capital expense (e.g. new building or equipment), along with the qualifications the hospital has for the operation and use of the capital equipment.

What Value Problem Does the Strategy Address?

The primary goals of CON and DON are to address the rising costs and oversupply problems in the healthcare system. At the time of the introduction of CON and DON (1970’s) healthcare expenditures per capita had tripled due to three main factors: implementation of Medicare, adoption of the traditional fee-for-service (FFS) model, and the diffusion of new medical technologies. CON and DON were introduced to combat the medical “arms race” that was occurring with the introduction of new technology.

This medical arms race led to popular, sophisticated, and expensive medical technologies being present in nearly every hospital. According to “Roemer’s Law,” new hospital beds and equipment will tend to be used – perhaps over and above what the population needs. Studies confirm this “law,” proving a relationship between available beds and increasing inpatient hospitalization rates.1,2

In an effort to halt this rapid expansion of technology, federal and state governments chose to create a panel to judge the services that were needed and not needed within a community. Many "CON" laws initially were put into effect across the nation as part of the federal "Health Planning Resources Development Act" of 1974.

These efforts to curtail the expansion of health technology tried to balance concerns about patient needs against and against a desire to provide services without unnecessarily duplicating services already provided in the community, in other words -  the efficiency of care delivery.

What Does the Evidence Say?

There are many studies that shows CON and DON has the ability increase efficiency. These studies find that CON and DON regulations had a positive impact on efficiency compared to a more free market system. While CON and DON do not always lower costs, these studies show CON and DON policies can effectively reduce the cost of delivering healthcare if they are effectively structured.3,4 The base of an effective CON and DON policy is that it keeps the communal reduction of costs the focus, rather than focusing on costs on a hospital by hospital basis.5

On the other hand, other studies that show that CON and DON policies may not be the most effective method of curtailing the medical arms race. This is because it is difficult to disentangle the impact of CON and DON laws on important areas of healthcare provision, including cost, price, access, and quality. One study finds that CON and DON policies possibly facilitate efficient production of healthcare; but there are other policy ideas that can be considered more superior.6

One such example of the inefficiencies of CON and DON programs is that a majority of states use an approval process that is often politically influenced by a variety of factors, including the provider’s clout, size, and overall resources. To counter this, the state of Michigan utilizes a diverse commission to establish standards to evaluate applications for CON’s and DON’s. This commission includes voices in the employer, consumer, and provider sectors, along with other interested parties appointed by the governor of the state.

Consumer Considerations

The available evidence gives CON and DON efficiency mixed review. The evidence suggests that there may be policies either in existence, such as Health Maintenance Organizations (HMOs), bundled payment options, global budgeting, and additional payment reforms, which may better address the problems CON and DON aim to address, that have yet to be fully realized. Additionally it will be important to continue to watch the CON and DON program in Michigan, as the inclusion of a consumer voice on the board that decides requirements to be awarded a CON or DON is unique development that may greatly benefit consumers giving advocates who choose to move forward with CON and DON a springboard for effective reform.

Conclusion

The evidence available on the effect that CON and DON has on the allocation of hospital resources is incredibly mixed. Studies show that it is possible for CON and DON policies to improve efficiency in delivery of care across a community, leading to a reduction in the cost of delivering healthcare. However, there are additional studies which show that there may be other policy ideas that would be more effective at controlling costs in the way CON and DON aim to control costs. Due to these mixed results the effectiveness of CON and DON moving forward is unclear.

Notes

1. Meesa, Indu R., Robert A. Meeker, Suresh K. Mukherji, “Certificate of Need,” Neuroimaging
Clinics of North America
, Vol. 22, No. 3 (August 2012).

2. Delamater PL, Messina JP, Grady SC, WinklerPrins V, Shortridge AM. Do more hospital hospitalization rates? A spatial examination of Roemer's Law. PLoS One 2013;8(2):e54900. Epub 2013 Feb 13. 

3. Ferrier, Gary D., Hervé Leleu, Vivian G. Valdmanis, “The Impact of CON regulation on Hospital Efficiency,” Healthcare Management Science, Vol. 13, No. 1 (May 2009).

4. Rosko, Michael D., and Ryan L. Mutter, “The Association of Hospital Cost-Inefficiency With Certificate-of-Need Regulation,” Medical Care Research and Review, Vol. 71, No. 3 (2014).

5. Ferrier (May 2009)

6. Conover, Christopher J., and Frank A. Sloan, “Does Removing Certificate-of-Need Regulations Lead to a Surge in Healthcare Spending?,” Journal of Health Politics, Policy and Law, Vol. 23, No. 3 (1998).