Health Systems

Is Certificate of Need the Answer to North Texas Healthcare Prices?

What if Texas began to limit the number of hospitals? Would it improve healthcare spending, or just reduce competition and hurt patients?

This spring, Children’s Health and Cook Children’s Hospital both announced the construction of new hospitals in Prosper. After decades of serving the growth in Dallas and Fort Worth respectively, the two pediatric health systems both felt the need to build hospitals just a few miles from each other. It felt like a change in the era of children’s healthcare in North Texas, and crossing the line of demarcation.

The northern suburbs are no stranger to new hospitals, with numerous facilities being built over the last few years in Frisco, and others are on the way. One can’t drive up Dallas North Tollway and see new and gleaming Texas Health, Baylor, Medical City, and Texas Scottish Rite hospitals without wondering how all these facilities are being paid for.

Employers and patients are experiencing ever-increasing healthcare spending, with many companies seeing upwards of five percent healthcare costs each year without improvements in overall quality. Dallas is especially expensive, about five percent above the national average. Individual choices, social determinants of health, pharmaceutical prices, and other factors contribute to increased spending, but putting a hospital in every affluent suburb surely factors in.

“The economics are driving this, not health care public policy,” Britt Berrett, a former hospital administrator and current teacher of health care management at the University of Texas at Dallas, told the Dallas Morning News in regard to the additional pediatric hospitals.

Can healthcare costs be controlled by limiting the number of hospitals built in an area? In 1972, it became a federal mandate that states require health systems obtain a certificate of need from the state, thereby controlling the number of hospitals or nursing homes in a certain area. Unlike other industries, demand often follows supply in healthcare according to Alan Baumgarten, the author of the Texas Health Review.  When new hospitals, imaging centers, or nursing homes are built, volume and demand will follow, much like how new lanes on a freeway will often have little impact on overall traffic. More people realize it is an option, and soon there are more cars on the road and traffic is not impacted.

One line of thinking is that adding new capacity, equipment, and facilities have a cost, and it is in the interest of the government, which pays for a great deal of healthcare, to restrain the supply and reduce capital expanses. A new CAT scan machine or MRI machine needs to be paid for, and building a new one might encourage providers to run more scans. Baumgarten says there are more MRI machines in the Twin Cities than in all of Canada, for instance. It is hard to justify that level of demand based on population and demand alone.

In the 1980s, Minnesota ended its certificate of need policy, but instead put a moratorium of building new hospitals, nursing homes, or group homes. Even though there are multiple rings of suburbs in the Twin Cities like Dallas, there are not hospitals in each of them. Yet there aren’t reports of Minnesotans waiting in unending lines for their care.

Nationwide, 36 states have some level of certificate of need still in place, with Florida agreeing to getting rid of their strict policy earlier this year. The rules can apply to hospitals, nursing homes, and other facilities, but each state has their own set of regulations. Because the federal government pays for such a large portion of healthcare, and up to 80 or 90 percent in nursing homes, the government attempts to reduce spending by limiting capacity. Policies require health entities to go before state departments of health to demonstrate the need for a new hospital before they are granted the right to build a new facility.

But certificates of need are blunt instruments for controlling hospital growth and spending, and place controls on the market that in theory should allow the best hospitals to succeed, rather than just the facility who has the blessing of the state government.

In states with CoN, the hospital system with the most resources is often able to lobby the government to prevent competition in their area and obtain all of the certificates. This lack of competition means residents are stuck with the systems in control, and they have little incentive to improve quality, lower cost, or compete in any way.

DFW Hospital Council Steve Love has worked all over the country, in places with CoN and places without. When working in Greensboro, North Carolina, he remembers one powerful health system with the best lawyers and most money system buying up all the other hospitals that held certificates, creating a monopoly in the region with even fewer reasons to improve for patients.

Texas ranks 27 in the country in hospitals per capita, with about one hospital for every 55,000 people. But many of the states with higher rates hospitals per capita such as the Dakotas, Kansas, and Wyoming do not have certificate of need rules, though they are rural states where residents would have to travel large distances if the number of facilities were further limited.

“If you are trying to stop duplication of service, I don’t see where certificate of need has achieved that,” Love says. “It’s better to let the market float free.”

Love says that in a place as sprawled as DFW, limiting the numbers of facilities could mean people are driving long distances to receive care, as they do not always live near their employer or hospital. One should be careful when seeing a new facility and assuming it is duplicating services of nearby hospitals. Sometimes the facilities are specialty hospitals or clinics, surgery centers, or other ambulatory services that complement what is already nearby.

Healthcare has also changed a great deal since 1972. Outpatient facilities can do so much more than they could 47 years ago, that limiting the hospitals wouldn’t have the impact it once did. Besides, hospitals will do a feasibility study to see if the facility will be successful and have all the risk if the market is too saturated. But as mentioned before, demand and supply don’t work like Econ 101 says they will in healthcare.

With Cook and Children’s Health both posting revenue gains above 13 percent annually, dwarfing UTSW at 3.5 percent, and with both hospitals at less than 71 percent occupancy, questions arise about need versus profit as hospitals continue to be built so close together. At the same time, Dallas suburbs are often the quickest growing cities in the country, and asking a parent to drive an hour or more to get to the hospital is not desirable either. Meanwhile, Texas ranks 49th in the country for children’s overall health.

In the end, a CoN law is laughable in a state as fiercely independent and pro-free market as Texas, but as healthcare payers search for ways to reduce spending, they are leaving no stone unturned. Unless political upheaval leads to a federal takeover of the healthcare system, changes are more likely to come from market-based reforms like increased pricing transparency, bundling payments, value-based care, and other changes.

“If you are going to have a free market, let the strong survive and the weak play out,” Love says.


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