The Problem
How many hospitals does the Land of Lincoln need, and who gets to decide? In Illinois, the process is far more complicated than you might think—and, unfortunately, it also restricts access to health care for citizens across the state.

In 1974, a federal law gave states incentives to create Certificate of Need (CON) programs, which regulate the creation of new hospitals and healthcare facilities. In response to the incentives, Illinois, along with many other states, created CON programs.

Today, the Illinois Health Facilities and Services Review Board (formerly the Illinois Health Facilities Planning Board) issues certificates of need “for construction or modification projects proposed by or on behalf of healthcare facilities, and for approving transactions for the acquisition of major medical equipment.” Among other requirements, entities seeking a certificate of need “must justify that a proposed project is needed.”

According to the Illinois Department of Public Health, the Certificate of Need program is meant “to restrain rising health care costs by preventing unnecessary construction or modification of health care facilities.” But this way of thinking is outdated. The federal law has since been repealed, and in 2008, the U.S. Justice Department and Federal Trade Commission supported the repeal of state CON laws, stating the programs “undercut consumer choice, stifle innovation, and weaken markets’ ability to contain healthcare costs.”

The Department of Justice and the Federal Trade Commission warn that with CON laws, “market incumbents can too easily use CON procedures to forestall competitors from entering an incumbent’s market.” Northwestern University health economist David Dranove illustrates how unfair this process can be, pointing out that it is like allowing American automakers to “block entry by Japanese and Korean competitors, claiming that they had more than enough capacity to meet our automotive needs.”

Although these CON programs are meant to reduce health care costs, due to their anti-competitive nature, they have the opposite effect. Wharton School economist Mark Pauly found that “the consequence of restricted supply was higher prices” in states with CON laws as compared to those without them. The American Medical Association “has long opposed certificate-of-need restrictions, and the Illinois State Medical Society has advocated repealing the state law,” since “little evidence exists to suggest CON regulations effectively rein in health care costs or promote access to care.”

The bureaucratic processes in the CON program are often time-consuming and expensive, and in states that got rid of their hospital planning boards, per capita health care costs are lower on average than in states like Illinois, which still have planning boards. For example, 2002 data from the American Hospital Association shows that the average cost of hospital services per capita in Texas, which has not had a hospital planning board for more than twenty years, was 16 percent less than in Illinois. From fiscal year 2000 through fiscal year 2010, entities applying for certificates of need paid $23.6 million in fees to the Illinois Health Facilities Planning Fund. Instead of paying for fees, this money could have been invested by the applicants in their facility expansions.

Because existing hospitals have great incentive to lobby against new competition, there is also an opportunity for corruption and “pay-to-play” politics. The Illinois Health Facilities and Services Review Board (previously known as the Illinois Health Facilities Planning Board) came under fire in 2004 “when it came to light that a member had orchestrated kickbacks for himself and friends in exchange for votes.” The scandal began when a hospital CEO with a project that needed approval by the Illinois Health Facilities Planning Board was warned that approval of her project rested on hiring a specific contractor and finance company with political ties. The hospital CEO wore a wiretap for months for the FBI, resulting in federal convictions of Illinois Health Facilities Planning Board member Stuart Levine and others.

The Solution
The General Assembly should repeal the current Certificate of Need program and allow health facility construction to be driven by consumer demand rather than a state agency. Instead of creating barriers to entry and encouraging anti-competitive behavior in the health care market, the state should let health care providers have greater flexibility to respond to the needs of the community.

Why This Works
As costs of healthcare rise, Illinois needs to re-evaluate the state’s healthcare system to ensure the system best serves citizens’ needs. High regulatory barriers to entry create an anti-competitive environment and long travel times to hospitals—issues that can literally be a matter of life and death. In addition, rather than keeping healthcare costs down, Certificate of Need programs can actually have the opposite effect, creating scarcity and ramping up prices for people who need health care. Removing this bureaucratic process for approving health facilities will also remove opportunities for political corruption in the health care realm—and, most importantly, increase health care access throughout the state.

Download the full report here.