Pros and CON
The ins and outs of the Certificate of Need program
By Isaac Stone Simonelli

ertain essential services arguably exist outside of the sphere of free market forces. One such set of services is provided by hospitals, which are required to provide care, often at a loss, in some cases under the Emergency Medical Treatment and Labor Act (EMTALA), for example, a federal law that requires anyone who seeks help at an emergency department be stabilized and treated, regardless of insurance status or ability to pay. It is the (often necessary for underserved patients) overuse of expensive emergency room services combined with defunding of certain programs that have contributed to the adoption of the Certificate of Need (CON) Program in Alaska.

The CON Program is a review process designed to promote responsive healthcare facility and service development, rational health planning, healthcare quality, access to healthcare, and healthcare cost containment.

With the Last Frontier’s coffers tapped for Medicaid, Alaska is incentivized to find ways to meet the need for public services; promote transparency; and avoid excessive, unnecessary, or duplicative development of facilities or services, explains Becky Hultberg of the Alaska State Hospital and Nursing Home Association (ASHNHA).

Nonetheless, even advocates for the program believe the CON program—in its current state—has some shortcomings.

“Nearly two years ago, Alaska Regional went through the Certificate of Need application process. The program definitely has some issues that should be addressed,” Alaska Regional Hospital CEO Julie Taylor says. “ASHNHA provided feedback to DHSS regarding opportunities to improve the program. The CON Program plays a key role in containing costs, especially for the Medicaid program.”

The CON program requires hospitals, nursing homes, and other facilities to prove the need for an expansion of services and infrastructure costing above $1.5 million.

“The expenditure threshold for CON was $1 million for many years; however, beginning on July 1, 2005, the expenditure threshold increased to $1,050,000 and increased by $50,000 annually on July 1 through 2013. It is now capped at $1.5 million,” explains CON Program Coordinator Alexandria Hicks.

Healthcare facilities subject to the CON process include “a private, municipal, state, or federal hospital, psychiatric hospital, independent diagnostic testing facility, residential treatment center, tuberculosis hospital, skilled nursing facility, kidney disease treatment center (including freestanding hemodialysis units), intermediate care facility, and ambulatory surgical facility.”

“The CON Program plays a key role in containing costs, especially for the Medicaid program.”
—Julie Taylor
CEO, Alaska Regional Hospital
Unprofitable (but Vital) Services
ASHNHA Senior VP Jeannie Monk argued in her April testimony against a senate bill to repeal the program that such a move would threaten the sustainability of community hospitals, which must continue to provide 24-hour emergency services to all in the community regardless of a person’s ability to pay.

“Hospitals prepare for and respond to emergencies that impact the public’s health such as flu epidemics, earthquakes, and other natural disasters. Because of the community responsibility to provide 24-hour emergency medical services and other essential services, hospitals have significant fixed and operating costs that must be covered,” Monk says.

“Not all services in a facility are profitable. In fact, many operate at a loss and the facility relies on profitable services to maintain operations. Without reasonable CON standards, healthcare providers with purely economic motives can cherry-pick profitable service lines which will threaten a hospital’s ability to provide the full range of care to a community.”

Hospitals—unlike concierge, single-specialty, and niche providers—provide stabilizing treatment to anyone who comes to the door and maintain critical emergency preparedness infrastructure, she explains.

Emergency services, trauma care, and perinatal services are all services that lose money for hospitals because of the resources required to support them. However, such services are vital to all Alaskans.

Monk argues that at the very least, Alaska should conduct a study to understand potential impacts before considering a bill that would repeal the program.

Her thoughts are echoed by Taylor: “Changes to or elimination of the CON program should be carefully analyzed to make certain the desired outcome is achieved and unintended consequences avoided while ensuring Alaskans have access to quality healthcare.”

Unlike oil or seafood, because of federal laws and regulations such as EMTALA, as well as the significant proportion of public payment for healthcare, the healthcare market must be thought of differently.

“CON repeal is based upon a flawed assumption that the healthcare market functions as a normal free market and that [repeals of] CON will reduce costs,” Taylor says.

The absence of the CON program would lead to an increased cost of Medicaid, explains Hultberg.

“Some services, like skilled nursing facilities, are more than 75 percent Medicaid-funded. Without CON, unchecked growth of these services would directly result in increased state Medicaid costs. In addition, competition in healthcare does not always bring down prices.”

“Without reasonable CON standards, healthcare providers with purely economic motives can cherry-pick profitable service lines which will threaten a hospital’s ability to provide the full range of care to a community.”
—Jeannie Monk, Senior VP, ASHNHA
CON and Competition
Hultberg points out that Anchorage has a significant number of outpatient surgery centers that either received a CON or did not fall under the program guidelines.

“If competition in healthcare always reduced prices, surgery prices would have decreased significantly in the Anchorage market. They haven’t,” she says.

Studies conducted by Blue Cross Blue Shield and the federal General Accounting Office have shown that, in healthcare markets, “supply creates demand.”

A large part of this is thought to be the way insurance impacts client decisions, as there is significantly less “shopping around” for the best deal when it comes to many medical procedures.

According to Mark Mack, manager of the Government Finance Officers Association’s Research and Consulting Center, there are seven primary reasons for rising healthcare costs. They include a fee-for-service system, which rewards volume of procedures, incentivizing overtreatment; prescription drugs; new medical technology and use of new medical technology; an aging population; unhealthy lifestyles; high administrative costs; and service provider consolidation, which is one factor that does not play a significant role in Alaska.

Proponents of the CON Program argue that excess capacity in the form of overbuilding results in healthcare price inflation.

“Supply tends to create its own demand. Assets must be paid for and the only way they can be paid for is through increased rates or utilization,” Hicks explains. For example, a new MRI means statistically more MRIs are ordered, even for the same size population. Similarly, more service providers don’t lead to more competition.

“Providers have no direct incentives to lower charges or utilization,” Hicks says. “In an area where the population is stable and no new services are offered, new providers simply take services away from existing providers or, at worse, increase use by performing unneeded tests and treatments. Mid-size and larger hospitals are likely to have to raise rates to maintain financial stability if profitable cost centers are reduced or eliminated by unbridled development of freestanding facilities.”

Despite the CON Program there is still a certain level of free-market competition for some services, as there are exceptions for certain healthcare service providers. If a service is offered from the private office of physicians or dentists, they do not need to be assessed via the CON Program. However, the business and all business assets must be 100 percent owned by one or more physicians or dentists; the office cannot otherwise be a healthcare facility; the business must provide assessment, diagnosis, and treatment to patients on an ongoing basis; and the business must hold a valid business license.

CON Program Standards
If a facility does not qualify for exception, it is required to go through the CON Program and will be assessed on six primary standards.

The company must show a need for the project by the population served or to be served. This can include the needs of “rural populations in areas having distinct or unique geographic, socioeconomic, cultural, transportation, and other barriers to care.”

The applicant needs to provide a long-range development plan that is integrated with community and health planning at all regulatory levels.

“A demonstration under this standard should show that the applicant has checked with the department regarding any relevant state plan, with appropriate federal agencies for relevant federal plans, and with appropriate communities regarding community or regional plans,” according to the Department of Health and Social Services.

The applicant must demonstrate evidence of stakeholder participation in planning for the project and in the design and execution of services; that they have assessed alternative methods of providing the proposed services; and that the proposed services are the most suitable approach.

The organization seeking a CON is also required to describe the anticipated impact on existing healthcare systems within the project’s service area that serve the target population and the anticipated impact on the statewide healthcare system.

Finally, applicants must demonstrate “that the project’s location is accessible to patients and clients, their immediate and extended families and community members, and to ancillary services. This includes the relocation of existing services or facilities.”

Additionally, the program requires healthcare organizations to describe their services not only with regard to the general population but underserved groups and those without the ability to pay for services.

In states that do not have CON Programs—Alaska is one of thirty-five states that does—some healthcare providers reduce services to rural, high/special needs areas. Instead, they tend to locate services in more affluent, profitable areas. The impacts of such a migration (if it were to occur in the Last Frontier) on the state’s many rural communities could be devastating and costly.

Doctors in Hallway
CON Applications
CON Applications
Because of the complex nature of construction, financing, and the services offered in a hospital, CON applications are lengthy documents, explains Hicks.

“Much of the information that is included is standard for anyone developing a plan of action to make a prudent business decision,” Hicks says. “The application must be submitted to the CON Program for review, and it has twenty days to review the document for completeness.”

After the application is declared complete, the review process takes no more than ninety days unless extended under certain criteria, which could increase the time to about six months if no hearing is requested.

“For those agencies who plan appropriately, completing the CON process imposes no significant financial burden or time delay. The process is similar to planning and zoning and fire marshall reviews of plans,” Hicks says.

Hicks points out that one of the many advantages of the program is that it is an open and transparent process for applicants and the public at-large, ensuring the necessary public accountability to implement and maintain it.

“CON promotes access to care for all Alaskans by promoting effective stewardship of healthcare resources. By imposing market entry regulation, which is grounded in community-based planning, CON ensures appropriate allocation of healthcare resources, assures access to care, maintains quality, and assists in controlling healthcare capital spending,” Hicks says.

Improving the CON
Despite a multitude of advantages of the CON Program in Alaska, Hicks says regulatory change is necessary to make the CON Program current.

“In Alaska, the regulations governing the CON Program have not been updated since 2009. Another update is necessary and is currently underway,” Hicks says. “A series of public meetings were held to obtain comment from CON providers and other members of the public affected by [the] CON. As a result of the public meetings or ‘listening sessions,’ a regulation change package was completed and will soon be presented back to the public for additional comment or feedback before it is finalized.”

As part of the updates to the CON Program, Hicks says there will be a re-evaluation of the Service Specific Methodologies used to determine need. The changes will be designed to “more accurately capture existing provision of services and utilization, forecast need, and include service specific factors per service specific methodology or calculation.”

The revisions will also include the public in the process, says Hicks.

Though the federal requirement for a CON was eliminated in 1987, its mission continues to resonate with many healthcare providers. Nonetheless, nearly all agree that improvements are necessary to allow it to better serve Alaskans

“We agree that problems exist within the current CON program and we encourage the Department of Health and Social Services to move forward with a regulatory review of the program to ensure that it is accomplishing its intent and meeting the needs of Alaskans,” Monk says.