Crony chronicles: Certificates of need

Austin Berg

Director of Content Strategy

Austin Berg
May 14, 2015

Crony chronicles: Certificates of need

How an Illinois state board known mainly for corruption operates a Soviet-style system proven to fail.

Want to open a health-care facility? Expand on one you’ve already built? Offer a new medical service? In Illinois, be prepared to convince an outdated state board with a history of corruption of your project’s “necessity.”

In many cases, this means fighting your competition not on prices or services, but for the government approval necessary to exist at all. The real loser? Illinois patients in need of quality care.

St. Elizabeth’s Hospital knows this. Beginning in August 2014, St. Elizabeth’s fought tooth-and-nail to convince state planners to let them move seven miles from Belleville, Illinois, to a brand-new, $253 million facility in O’Fallon.

But after heavy lobbying from rival Memorial Hospital, which had plans to build a new facility in nearby Shiloh, St. Elizabeth’s was stonewalled by state planners in January.

But on April 21, the Illinois Health Facilities and Services Review Board, or HFSRB, changed its tune, and granted approval to St. Elizabeth’s. More than eight months after applying for authorization, it is now free to build.

This case is just one in a long list of Kafka-esque sagas surrounding certificates of need, or CON, and the state board that chooses who gets them in Illinois. For decades, this scheme has led to outright corruption and costly inefficiency in the state’s health-care market.

But where did it all start?

In 1974, the federal government passed a law mandating that all 50 states establish a review process for major capital projects at health-care facilities. The reasoning was simple enough: since government had positioned itself as a vested financial interest in the health-care industry via Medicaid and Medicare, government control seemed necessary to prevent public funds from flowing to frivolous spending. But regardless of the law’s intention, these state boards were failing on a grand scale.

Herein lies the problem with heavy government involvement in the first place: Instead of keeping costs low and preventing duplicative services, appointed bureaucrats were handing out favors to the most connected players; preventing honest competition to deliver the best care at the lowest price.

The federal mandate was repealed in 1987. But 36 states and Washington, D.C., still have CON laws on the books. Illinois is one of them, despite being the poster child for CON abuse.

The Illinois Health Facilities Planning Act created a 13-member Illinois Health Facilities Planning Board (now the nine-member HFSRB) in 1974 to administer the CON process. Virtually every major health-care investment in the state falls under its purview.

The following licensed and state-operated entities are subject to CON laws in Illinois (facilities operated by the federal government are exempt):

  • Hospitals
  • Long-term care facilities
  • Dialysis centers
  • Ambulatory surgery centers
  • Alternative health-care delivery models
  • Free-standing emergency centers
  • Birthing centers

Activities requiring the certificate include:

  • Capital expenditure or major medical-equipment purchases exceeding $12,495,668 for hospitals, $7,062,768 for long-term care facilities and $3,259,740 for all other applicants
  • Substantial increase in a facility’s bed capacity
  • Substantial change in the scope or functional operation of a facility
  • Establishment or discontinuation of a facility or category of service

The broad scope and absolute nature of the board’s power begs for its perversion via regulatory capture. A 2011 report from the National Institute for Health Care Reform confirmed this after interviewing stakeholders in the CON process in Illinois, Connecticut, Georgia, Michigan, South Carolina and Washington, stating: “In five of the six states studied – all except Michigan – the CON approval process can be highly subjective and tends to be influenced heavily by political relationships rather than policy objectives.”

Further, “Certificate-of-need programs tend to be influenced [by] a provider’s clout, organizational size, or overall wealth and resources … according to many respondents.”

Sadly, these findings confirmed a warped regulatory regime more than a decade after the board was racked by corruption scandals. In 2004, now-disgraced Illinois Gov. Rod Blagojevich promised a “fresh start” after it was revealed that board members were using their power to deny CON applications as leverage to shake down Illinois hospitals. In fact, the same federal investigation that brought down the board’s former vice chairman, Stuart Levine, ultimately led to Blagojevich’s corruption conviction.

The reality that cronyism is still ingrained in the CON system today is a clear impetus for reform. But even if the system had no history of outright abuse, CON laws would still be a raw deal for Illinoisans.

When Illinois held a formal review of its CON laws in 2008, it was met with a joint statement from the Federal Trade Commission and the Department of Justice rebuking CON laws, stating that they undercut consumer choice, stifle innovation and fail to keep health-care costs down. The American Medical Association voiced their opposition to CON restrictions, as did the Illinois State Medical Society.

CON regulations hike costs and undermine care in a number of ways. First, they favor incumbents by preventing new providers from competing with established hospitals.

“There are all kinds of benefits of allowing newcomers to enter the market and ignoring the voices of incumbents who will use entry regulations to protect the status quo,” Northwestern University health economist David Dranove told Crain’s Chicago Business. Indeed, CON favoritism has been found to reduce the availability of medical equipment and hospital beds.

Furthermore, the reimbursement formulas used by commercial and government insurance companies in the 1970s that encouraged hospitals and providers to overinvest – remember, this was the reason for the federal CON mandate – are long gone, according to Dranove.

The barriers to entry raised by this antiquated system have spurred a few of Illinois’ neighbors into action.

Indiana repealed its CON program in 1999. Wisconsin followed suit in 2011. Kentucky is conducting a major overhaul of its CON laws, but the verdict is still out on whether that will result in real improvements.

Could the Land of Lincoln be next?

Illinois State Sen. Bill Brady, R-Bloomington, introduced a bill this year to repeal the Health Facilities Planning Act, abolish the HFSRB and transfer its functions to the Department of Public Health.

He’s on to something. Illinoisans don’t need hospitals’ scarce resources spent on convincing bureaucrats to let them better serve patients.

State lawmakers should move to sunset certificates of need – and the board that doles them out – for the sake of patients and providers across the state.

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