Will Virginia COPN Study Group Ask the Critical Questions?

Data source: Virginia Department of Health
Data source: Virginia Department of Health

by James A. Bacon

State Certificate of Public Need (COPN) programs come in many shapes and sizes across the United States. Fourteen states have abolished the health-care regulatory program entirely, while states that continue to regulate capital investments in health care facilities and high-end equipment vary widely in what they regulate.

Among states with COPN, Virginia regulates about 19 of 30 categories of medical services, placing it in the middle of the pack for regulatory intensity, according to a state-by-state comparison presented to Virginia’s COPN work group earlier this month. Virginia’s application fees are relatively modest, but the review process, at 190 days, is the longest in the country.

The work group is studying Virginia’s COPN law to determine if it needs reform, in light of the enactment of the Affordable Care Act and other changes in the medical marketplace. The justification for COPN when it was instituted nationally in Virginia in 1973 was that normal competitive processes did not work in health care. When hospitals and other providers added hospital beds and purchased high-tech equipment, they supposedly made sure that patients utilized them, which added to the run-up in health care costs.

However, critics of COPN argue that the cost-plus system for reimbursing providers, which created financial incentives for providers to over-diagnose and over-treat patients, is no longer prevalent. The primary justification cited now for COPN is that by restricting competition, it shores up hospital profits and guarantees as a condition of receiving a certificate that hospitals will provide charity care for thousands of Virginians lacking insurance.

Virginia Secretary of Health and Human Resources Bill Hazel explained the logic of the national survey this way: “Do we know anything about … what actually happens in states where there has been deregulation?” (See the Richmond Times-Dispatch coverage here.)

Those are worthwhile questions to start with, but the study group needs to delve a lot deeper. One question I would ask is this: Does Virginia’s COPN really accomplish anything? The chart above, based upon Virginia Department of Health data, shows the dollar value of COPN applications approved and denied. Virginia approves the overwhelming majority of applications, a trend that has become especially evident since 2009. If the COPN reviews are just rubber-stamping applications, what’s the point in reviewing them at all? Alternatively, does the COPN process discourage entrepreneurs from even submitting proposals to a process they deemed to be rigged in favor of established players?

The chart raises another question: What accounts for the dramatic fall-off in health care-related capital spending in Virginia since 2009? We can’t blame it on the 2007-2009 recession, a period during which hospital spending actually peaked. Arguably, spending tanked as a reaction to uncertainty created by the enactment in 2010 of the Affordable Care Act (Obamacare). But even that explanation begs another question: Why has capital spending remained so low in subsequent years when regulations have been written, the law applied and uncertainty is less prevalent? Have Obamacare or changes in the commercial health insurance market created incentives to restrain capital spending? And, if so, why would we still need COPN?

I would add an even more fundamental set of questions: What impact has COPN had on health care productivity in Virginia? The health care sector is notorious for its low level of productivity growth, an underlying cause of escalating health care costs. There are two schools of thought. The first is that maximizing utilization of a restricted supply of beds and equipment, which COPN is designed to do, will lift productivity. The countervailing theory is that the path to greater productivity lies in embracing new processes, which often entail redesigning the physical layout of hospital floors or even building specialized, dedicated facilities. COPN would slow such changes. Which school of thought is right? Without more evidence, we don’t know.

The debate over U.S. health care focuses overwhelmingly on who pays. It’s a zero-sum game of slicing up a fixed pie so that some get bigger pieces and others get smaller pieces. The only way out of this morass, to borrow a hoary cliche, is to grow the pie — to make more health care available at more affordable prices for all. One way to do that is to overhaul the way health care is delivered: to evolve from a system dominated by general-purpose hospitals that provide a wide range of services to one that includes focused factories specializing at performing a narrow range of procedures exceptionally well and exceptionally efficiently.

That’s not happening. Rather than encouraging entrepreneurial specialization and experimentation, the health care industry is consolidating. Both the insurance and hospital sectors are becoming cartels, and they’re absorbing independent physician practices. The causes are bigger than COPN alone. But COPN may contribute to the trend. The big-picture question Virginia policy makers need to ask is this: Do we want cartels or entrepreneurs to dominate state health care? I don’t hear anyone asking that question.

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  1. Reed Fawell 3rd Avatar
    Reed Fawell 3rd

    This is an extremely important and timely topic.

    This is the kind of topic whose complexity and “dry nature” frequently shield it from open, informed, and transparent discussion. And this neglect can too often continue in the face of gross dysfunction that all too often lays out in the open while competent people fail to step forward, ask questions, and demand straight forward answers to alarm bells ringing in front of them. Often this occurs because too many stakeholders are in on an illicit game.

    One here is reminded of the VA dysfunction which went on for so long without challenge and even now proves highly resistant to cure.

    With regard to substance here, I do not know the merits of the broad issues you raise, but they certainly carry the whiff of smoke raising the possibility of fire.

  2. Cville Resident Avatar
    Cville Resident

    I think this is also a by-product of my idea of “2 Virginias” (apologies to John Edwards…ha ha).

    COPN does seem a little out-of-date to the urban crescent.

    But I imagine it’s a different story in most of rural VA. The customer and economic base is so small in a lot of places in the rural horseshoe, that an unregulated health care market could create serious issues.

    If health care entities want to fight it out for the Richmond or NoVa market…so be it….those areas are large and wealthy enough that it’s not like they’re going to lose services if a the market proves destructive to some firms.

    A place like South Boston or Danville or Martinsville? Let an entity make a miscalculation on a market and watch both entities in the market go out of business. And the demand/economic base is probably not strong enough to entice someone else to enter.

    1. Reed Fawell 3rd Avatar
      Reed Fawell 3rd

      Excellent point.

      Hope to see your proposed book review soon. Perhaps Jim missed it.

      1. Cville Resident Avatar
        Cville Resident

        I appreciate the compliment.

        If you have the time, there’s an interesting battle going on in Danville between Lifepoint (which owns the Danville Hospital) and Centra (Lynchburg’s Hospital). Centra’s trying to move in on the Danville market. They’ve been fighting over COPNs the past few years. It is my understanding that Centra wants to open something akin to a “mini-hospital” (urgent care and other services, but not quite a hospital) in Danville. Lifepoint is fighting this effort. Wish I had more details, but if you’re interested in the issue, it’s probably worth some time to explore.

        1. Reed Fawell 3rd Avatar
          Reed Fawell 3rd

          There you go!!! How typical.

          The fight too often becomes over money and who controls the biggest possible share of the market and to hell with the patients who soon become pawns fought over in the “regulatory process” where those players with the most power tilt the table to control the game.

          Obviously, I do not have the facts of that particular case you mention but its very broad outline as you describe it would seem to fit into a familiar pattern. (see my earlier comment below). Time permitting, I’ll take a look at that controversy.

    2. TooManyTaxes Avatar

      Agree strongly that rural markets are generally quite different from urban-suburban and even exurban ones. More capacity in the latter can often put downward pressure on prices. But in the former, just the opposite will often occur.

      1. Maybe the solution is to retain COPN for rural markets and abolish it for large urban markets. That might work in the Richmond region where you have three major players — VCU, Bon Secours and HCA. Not sure it would work in Northern Virginia, which has one dominant player (Inova) or Hampton Roads (Sentara).

  3. JohnHop Avatar

    The fact that most applications in Virginia are approved is not proof of rubber-stamping. It seems to me that merely having regulatory review would discourage speculative investment in high-cost, redundant facilities.

    1. Reed Fawell 3rd Avatar
      Reed Fawell 3rd

      I should think that the reverse would be true as these regulatory structures too easily morph into anti competitive cartel mechanisms.

      Free markets are by nature risk adverse, both as to entry and survival, as well as culled maintenance.

      Meanwhile, regulatory control does the reverse. It removes risk. Thus it encourages duplication and inefficiency that in turn drive unnecessary procedures, high costs and choice reduction.

      Whether this happens sooner or later, it always happens.

      Witness, for example, today’s price of education versus its product for most consumers. Here the winners are administrators, not students. The same will too easily become the case with highly regulated and centrally controlled medicine.

  4. LarrytheG Avatar

    well.. I think you have to follow the money. where is the money coming from to build these capital facilities and who gets hurt financially if they go belly up?

    We have a new 100 bed HCA hospital that was fought tooth and nail with COPN by the existing 400+ bed hospital. They lost, the new hospital was built and Mary Washington went into the red financially in the follow on years.

    In point of fact – Mary Washington actually opened up a New stand-alone ER and imaging facility less than a mile from the new competitor – apparently without any restraint from the state.

    You know for all the hell and fury over this guy named Gruber and his opinion about the knowledge of the general public with regard to health care – … well.. he was far more right than wrong…

  5. Reed Fawell 3rd Avatar
    Reed Fawell 3rd

    My personal and rather intense but limited experience with these trends in DC market in nutshell is:

    1. There has been a quantum leap forward in services and staff of most hospital care, subject to following caveats –

    a. Dangerously long wait times getting appointment and follow up care are already becoming far too common.

    b. Generally the specialists physicians are excellent but too often (but not always) their focus is extremely narrow, so beware of issues falling between the cracks, including the need to alternative care and/or follow up care, particularly the broad holistic and imaginative kind.

    c/ Also beware of the occasional bad apple physician (typically arrogant, narrow, uncaring) who too often now can be quite difficult to avoid, challenge or confront.

    d/ There is great and increasing need for excellent General Practitioners to manage each patient’s over all health. God held those patients without one.

    e/ Also I fear for the future as lack of competition and attendant lack of focus sets in. God Help those Patients who then are not pro-active, affluent, aggressive, demanding and unafraid. Otherwise a lot of folks will suffer.

  6. 1medexpert Avatar

    COPN is not necessary. It seems everyone has a desire to pose straw man arguments of one type or another. If one understands capitalism and CAPEX, then one realizes COPN does not help rural markets any more than large markets. Step out of the box for a second. How many McDonald’s are located in a small rural community? Why? How many McDonald’s are located in a medium to large market? Over capacity never wins and that’s a basic fact of business. Do we really need to pretend that somehow, some way, investors will propose CAPEX in non-viable markets? We need a major interruption in healthcare to optimize access and affordability and abolishing COPN is a great start. Not doing so will allow mediocre healthcare to dominate. Consumers are and will continue to influence health care preferences and services. Entities will have to become responsive or face poor financial health. Consumers do not care about legacy legislation. At the prices they pay for insurance, they want a Smartphone not a flip phone. COPN is quite flip.

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