CON Laws Pose Threat to Health Care Markets, DOJ Antitrust Division Official Tells Georgia Legislative Committee

by Heather Good

On February 23, 2007, a U.S. Department of Justice (DOJ) Antitrust Division official told the Georgia state legislature in no uncertain terms: “Certificate of Need [CON] laws pose a substantial threat to the proper performance of healthcare markets.” Mark Botti, Chief of the Litigation I Section of the DOJ’s Antitrust Division, spoke before Georgia’s State House of Representatives CON Special Committee. Mr. Botti explained that “by their very nature, CON laws create barriers to entry and expansion and thus are anathema to free markets.”

Mr. Botti explained that CON laws create regulatory barriers to healthy competition with little or no justification. He offered several reasons to support his conclusion: (1) the original rationale for CON laws no longer exists; (2) protecting revenues of incumbents is an insufficient justification; (3) CON laws impose costs and facilitate anticompetitive behavior; and (4) CON laws lead to lessened competition and higher prices.

Mr. Botti contended that the original rationale for CON laws was based on the government’s cost-plus reimbursement program for Medicare, which no longer exists. The cost-plus reimbursement program incentivized over-investment, and the goal of the CON laws was to decrease healthcare costs by decreasing excessive capital investment. Governments wanted to prevent providers from unnecessarily expanding their services, thereby increasing costs. Most studies show that CON laws were unsuccessful in containing healthcare costs, he said. More importantly, the government no longer reimburses on a cost-plus basis, making this rationale for CON laws moot, according to Botti.

Some supporters of CON laws have argued that hospitals should be protected against additional competition so that they can use their profits to cross-subsidize care for uninsured or under-insured patients, he noted. Mr. Botti’s response to this argument is that, to the extent legislatures decide to cover health care costs for the indigent, there are more efficient ways to accomplish that goal without creating regulatory barriers to entry into the health care markets.

Mr. Botti further discussed how CON laws create an opportunity for existing competitors to exploit regulatory procedures and thwart or delay new competition. This happens when a competitor uses the hearing and appeals process to create delays for the entry of new competitors. Much of what is done under the cover of CON laws would otherwise implicate antitrust concerns. For instance, threats of objections to a CON application process have been used to discourage such applications. Likewise, close competitors have used the CON process to allocate healthcare services between themselves—an ostensible violation of antitrust laws. In another example, territorial market allocations by cartels, preventing competitive entry into markets, have been allowed under CON regulatory programs.

Contrary to claims made by CON law proponents, studies show that removal of CON laws does not result in higher prices, Botti claimed. In fact, the opposite is true, he said, because the presence of CON laws results in higher healthcare costs. Mr. Botti cited a Georgia State University study revealing that rigorous CON regulation is associated with less competitive markets and higher prices for private inpatient care.

Mr. Botti encouraged the Committee to use a balancing test to determine whether the benefit of maintaining Georgia’s CON laws might be outweighed by the costs. He explained that CON laws should be evaluated with the following in mind: (1) whether there is a clearly articulated and significant justification; (2) whether the law harms consumers; and (3) whether there are alternative ways to structure CON laws to diminish anticompetitive barriers to entry. Finally, Mr. Botti noted that he is aware of no evidence supporting the claim that elimination of CON laws results in any harm to citizens. In fact, he said, all the evidence he has seen supports the opposite conclusion.