The Journal of Healthcare Contracting

Here Today, CON Tomorrow?
States may delay approval for specialty hospital construction.

The development of physician-owned, limited service hospitals, or specialty hospitals, has become a hot-topic among not-for-profit healthcare providers, for-profit investors and physician groups, and government agencies.

Fueling the debate over specialty hospitals have been numerous government and private studies which found that specialty hospitals draw profitable patients away from non-profit community hospitals. One report in particular, released by the American Hospital Association in 2005, found that specialty hospitals tend to treat healthier patients more than non-profits and offer only profitable services. The report also found the average operating margin of a specialty hospital was 44 percent, compared to 3.3 percent for a community hospital.

In an effort to better understand specialty hospitals and their impact on local healthcare markets, the Centers for Medicare and Medicaid Services enacted an 18-month moratorium on physician referrals to specialty hospitals in which they have an ownership or investment interest. The moratorium, effective Dec. 8, 2003 through June 7, 2005, was developed as part of the Medicare Modernization Act of 2003. After the moratorium expired, CMS then undertook a six-month review of its procedures for enrolling specialty hospitals in the Medicare program and froze approvals until January 2006 by not allowing its regional offices to issue such hospitals provider agreements or authorize an initial survey by the state agency for new specialty hospitals. CMS took these steps to "promote true and fair competition in hospital services," according to a fact sheet released by CMS.

In August 2006, CMS released its final report with new recommendations. Hospitals are now required to disclose information concerning physician investment and compensation arrangements. Hospitals must also inform patients when physicians have an investment interest in the hospital. CMS concluded that doctors are not earning disproportionate returns on their investments; however, any specialty hospital that fails to report is financial structure will be fined $10,000 per day.

Despite the end of the moratorium and CMS’ findings, the debate still rages. The American Medical Association predicted that the battle would move from the federal level to the state-wide arena, and the current debate in Idaho validates this prediction.

The Idaho Hospital Association introduced an initiative to place a temporary moratorium on the licensing of all new medical facilities, not just specialty hospitals, until the legislature can review the association’s proposal to enact a Certificate of Need, or CON law. Association president Steven Millard says, "Certificate of Need is an important part of good community health planning. The Idaho Hospital Association and its allies are aggressively seeking to implement this check and balance system for healthcare providers in Idaho during the (2007) legislative session."

Boise, Idaho-based St. Luke’s Health System and other hospitals in the Boise area fear that a proposal by local doctors for a specialty hospital in the city could draw away insured patients, leaving community hospitals to treat many uninsured. While St. Luke’s CEO Ed Dahlberg has not seen the full proposal, "we have enough information from other areas that clearly demonstrates for-profit specialty hospitals have a negative impact on the communities where they are located."

Dahlberg supports the CON measure in Idaho which, he points out, "would be applied to all facilities looking to grow, expand or add services in our state." While he’s not certain if the lack of a CON process makes it easier for investors to develop specialty hospitals, he says "we’ve seen that states without CON are definitely more attractive to investors and are in fact targeted for the development of these facilities."

CON Laws: No easy answers

Healthcare providers planning the construction of new facilities face a number of challenges, but none may be as widely debated as the Certificate of Need.

The Certificate of Need, or CON, is a governmental approval to construct, modify, or close a healthcare facility, acquire major new medical equipment, offer a new service, or discontinue an old one. By 1978, almost every state had enacted CON laws due to the fact that certain federal healthcare funds were contingent on the existence of such laws. Yet, four years later, Congress repealed its CON mandate because the law failed to live up to its original intention - to reduce the nation’s healthcare costs.

Today, all but 14 states have some form of CON law in effect. While CON requirements widely vary from state to state; all CON laws serve a general purpose - to limit expansion by preventing excessive or duplicative development of healthcare facilities and services.

States that do not have CON laws believe that their cost of healthcare is not greater than ones that do. These states contend that by restricting new construction, CON programs may inhibit price competition between facilities and could keep prices high. However, states that have repealed their CON laws still regulate cost and duplication of services.

There are arguments both for and against CON laws, and there are no easy answers. "I’m on both sides (of the debate)," says Larry Bowe of Providence Newberg in Oregon, a state with a CON program. While Bowe agrees with the need not to replicate resources, he says that the CON process is "cumbersome, bureaucratic, and political. Theoretically it makes sense, but sometimes the practice doesn’t work as well as it should."