FTC Staff Comment Before the Virginia Commission on Medical Facilities Concerning Reform of Certificate of Need Regulation

·1
:
UNITED STATES OF AMERICA
FEDERAL TRADE COMMISSION
WASHINGTON. D.C. 2OS80
liMMfSSJPN 	AUTHURiiffl
VriOO/'-/-
Maston T. 	Jacks, 	Esq.
Chairman
Commission 	on 	Medical 	Facilities
Certificate 	of 	Public 	Need
Commonwealth 	of 	Virginia
Richmond, 	Virginia
Dear Mr. 	Jacks:
August 	6, 	1997
The 	staff 	of 	the 	Federal 	Trade 	Commission 11 	is 	pleased 	to
respond 	to 	your 	invitation 	to 	assist 	the 	Commission 	on Medical
Care 	Facilities 	Certificate 	of 	Public 	Need 	("COPN 	Commission") 	in
preparing 	its 	recommendations 	to 	Governor 	Gerald 	L. 	Baliles 	for
reforms 	of 	certificate 	of 	public 	need 	regulation 	of 	health
facilities: ("CON 	regulation"). 	For 	reasbns 	discussed 	in 	greater
detail 	below, 	we 	believe 	that 	CON 	regulation 	is 	unlikely 	to
benefit 	health 	care 	consumers 	in 	Virginia, 	and 	we 	support 	the
complete 	elimination 	of 	CON 	regulation. 	Ongoing 	improvements 	in
health 	care 	financing 	are 	resolving 	the 	principal 	problems 	that
prompted 	CON 	regulation, 	and 	it 	is 	unlikely 	that 	CON 	regulation
can 	help 	to 	address 	any 	remaining 	problems. 	Moreover, 	any
potential 	benefits 	of 	CON 	regulation 	are 	likely 	to 	be 	outweighed
by 	the 	adverse 	effects 	of 	such 	regulation 	on 	competition 	in 	health
care 	markets. 	Consequently, 	CON 	regulation 	is 	likely 	to 	harm
consumers 	on 	balance 	by 	increasing 	the 	price, 	and 	decreasing 	the
quality, 	of 	health 	services 	in 	virginia. 	We 	also 	believe 	that
specific 	concerns 	relating 	to 	the 	nursing 	home 	industry, 	and
access 	to 	health 	care 	facilities 	in 	some 	rural 	and 	inner-city
areas 	of 	Virginia, 	do 	not 	warrant 	retaining 	CON 	regulation.
I. 	Interest 	and 	Experience 	of 	the 	Federal 	Trade 	Commission
For more 	than 	a 	decade, 	the 	Federal 	Trade 	Commission 	has
engaged 	in 	extensive 	efforts 	to 	preserve 	and 	promote 	competition
in 	health 	care 	markets. 	The 	Commission 	and 	its 	staff 	have 	been
active 	both 	in 	antitrust 	law 	enforcement 	and 	in 	advocacy 	of 	regu-
latory 	reforms. 	Those 	efforts 	are 	based 	on 	the 	premise 	that 	com-
petition 	in 	health 	care 	service 	markets, 	like 	other markets, 	will
benefit 	consumers 	by 	strengthening 	incentives 	for 	providers 	to
satisfy 	consumer 	demands. 	As 	a 	result 	of 	Commission 	antitrust 	law
enforcement 	efforts 	and 	economic 	analyses 	of 	the 	effects 	of 	CON
11 	These 	comments 	represent 	the 	views 	of 	the 	Federal 	Trade
Commission's 	Bureaus 	of 	competition, 	Consumer 	Protection, 	and
Economics, 	and 	not 	necessarily 	those 	of 	the 	Commission 	itself.
The 	Commission 	has, 	however, 	voted 	to 	authorize 	the 	staff 	to
submit 	these 	comments 	to 	you .
•

Maston T. 	Jacks, 	Esq. 	Page 	2
regulation, 	the 	Commission's 	staff 	has 	gained 	considerable 	experi-
ence 	with 	the 	economics 	of 	health 	care 	competition, 	and 	with 	how
CON 	regulation 	affects 	that 	competition. 	£I 	Indeed, 	a 	large 	part
of 	the 	Commission's 	antitrust 	law 	enforcement 	efforts 	in 	the
health 	care 	field 	focuses 	on 	competitive 	problems 	that 	would 	not
exist, 	or 	would 	be 	less 	severe, 	if 	there 	were 	no 	CON 	regulation. 	2/
II. 	CON 	Regulation 	is 	Ineffective, 	and 	Possibly 	Counter-
Productive, 	in 	Promoting 	Efficiency 	in 	Health 	Care 	Markets
Market 	forces 	generally 	allocate 	society's 	resources 	far
better 	than 	decisions 	of 	government 	planners, 	and 	should 	be
allowed 	to 	operate 	absent 	a 	strong 	showing 	that 	significant 	market
failures 	make 	it 	possible 	for 	planners 	to 	outperform the 	market.
We 	believe 	that 	such 	a 	showing 	can 	no 	longer 	be 	made 	for 	CON
regulation 	in 	Virginia.
A. 	CON 	Regulation 	Is 	Unnecessary 	to 	Remedy
Deficiencies 	in 	Health 	Care 	Reimbursement
CON 	regulation 	of 	health 	facilities 	has 	been 	justified prin-
cipally 	on 	the 	theory 	that 	unregulated 	competition 	would 	result 	in
the 	construction 	of 	unnecessary 	facilities, 	unnecessary 	expansion
of 	existing 	facilities, 	or 	unnecessary 	capital 	expenditures 	by
health 	facilities. 	The 	assumption 	underlying 	this 	theory 	was 	that
health 	facilities 	had 	an 	inherent 	tendency 	to 	expand 	or 	purchase
unnecessary 	equipment. 	It 	was 	thought 	that 	this 	tendency 	was 	not
sUfficiently 	constrained 	by 	market 	forces 	because 	most 	consumers
of 	health 	care 	were 	insured 	by 	policies 	that 	required 	little 	or 	no
out-of-pocket 	payment, 	making 	consumers 	generally 	insensitive 	to
the 	price 	of 	health 	care 	services. 	Moreover, 	health 	facilities
were 	often 	reimbursed 	by 	third-party 	payors 	on 	a 	retrospective
cost 	basis, 	removing 	whatever 	incentive 	they 	might 	have 	had 	to
contain 	costs.
As 	a 	result 	of 	these 	forces, 	competition 	among 	health 	care
facilities 	was 	typically 	based 	on 	the 	quality 	rather 	than 	the
£J 	See,~, 	Hospital 	Corp. 	of 	America 	[Chattanooga 	acqu1s1-
tio~s], 	106 	F.T.C. 	361 	(1985), 	aff'd, 	807 	F.2d 	1381 	(7th 	Cir.
1986), 	cert. 	denied, 	107 	S.Ct. 	1975 	(1987): 	Hospital 	Corp. 	of
America 	[Forum 	acquisitions], 	106 	F.T.C. 	298 	(1985) 	(settled 	by
consent 	order): 	American 	Medical 	Int'l, 	Inc., 	104 	F.T.C. 	1 	(1984);
M. 	Noether, 	Competition Among 	Hospitals 	(1987) 	(FTC 	staff 	report):
K. 	Anderson 	& D. 	Kass, 	Certificate 	of 	Need 	Regulation 	of 	Entry
Into 	Home 	Health 	Care 	(1986) 	(FTC 	staff 	report). 	copies 	of 	these
two 	FTC 	staff 	reports 	are 	enclosed 	with 	this 	letter.
1I 	See 	section 	II.C. 	below.

Kaston T. 	Jacks, 	Esq. 	Page 	3
price 	of 	their 	services, 	although 	limited 	price 	competition
existed. 	Health 	facilities 	had 	incentives 	to 	expend 	resources 	to
provide 	wider 	ranges 	of 	diagnostic 	and 	therapeutic 	services 	and
equipment, 	and 	more 	comfortable 	facilities. 	!I 	The 	concern 	ex-
pressed 	by 	health 	planners 	when 	CON 	regulation 	was 	created 	was
that 	the 	cost 	of 	these 	improved, 	albeit 	underutilized, 	facilities
would 	be 	passed 	along 	to 	consumers, 	thereby 	increasing 	the 	cost 	of
health 	care. 	The 	principal 	purpose 	of 	CON 	regulation 	was 	not 	to
assure 	that 	needed 	facilities 	were 	built when 	they 	otherwise 	would
not 	be; 	rather, 	it 	was 	to 	control 	the 	perceived 	tend~ncy to
provide 	facilities 	or 	services 	that 	were 	not 	needed. 	21
Many 	of 	these 	assumptions 	supporting 	CON 	regulation 	are 	no
longer valid, 	in 	light 	of 	substantial 	changes 	in 	health 	care
markets. 	This 	is 	particularly 	true 	for 	general 	acute 	care
hospital 	markets, 	although 	similar 	trends 	are 	also 	affecting 	other
health 	facility 	markets 	SUbject 	to 	CON 	regulation 	in Virginia.
Third-party 	payors 	and 	consumers 	have 	shown 	increasing 	sen-
sitivity 	to 	the 	prices 	of 	hospital 	services. 	There 	has, 	accord-
ingly, 	been 	a 	trend 	toward 	increased price 	competition 	among 	hos-
pitals. 	§J 	For 	example, 	price 	competition 	can 	be 	stimulated 	by
health 	maintenance 	organizations 	and 	preferred 	provider 	organi-
zations, 	which 	are 	well-posit~oned to 	channel 	subscribers 	to 	hos-
pitals 	offering 	quality 	care 	at 	economical 	rates 	through 	selective
contracting. 	These 	organizations 	are 	common 	in 	Virginia's 	major
metropolitan 	areas. 	Improvements 	in 	conventional 	health 	benefit
programs 	also 	provide 	their 	subscribers 	with 	financial 	incentives
(such 	as 	co-payment 	requirements) 	that 	channel 	them 	toward
economical 	providers, 	including 	non-hospital 	providers. 	1/ 	The
increasing 	sensitivity 	of 	health 	care 	purchasers 	to 	the 	prices 	of
hospital 	services 	limits 	the 	ability 	of 	hospitals 	to 	pass 	on 	to
consumers 	the 	costs 	of 	facilities 	and 	services 	that 	are 	not 	useful
in 	meeting 	consumer 	demands.
~ 	See 	Hospital 	Corp. 	of 	America 	[Chattanooga 	acquisitions),
106 	F.T.C. 	at 	478-79; 	M. 	Noether, 	supra 	note 	2, 	at 	81.
21 	See 	P. 	Joskow, 	Controlling Hospital 	Costs: 	The 	Role 	of
Government 	Regulation 	78-79 	(1981).
§J 	See,~, Hospital 	Corp. 	of 	America 	[Chattanooga
acquisitions), 	106 	F.T.C. 	at 	480-82; 	Hospital 	Industry 	Price 	Wars
Heat 	Up, 	Hospitals, 	Oct. 	1, 	1985, 	at 	69.
1/ 	See 	Insurance 	Coveracre 	Drives 	Consumer 	Prices, 	Hospitals,
Nov. 	1, 	1985, 	at 	91; 	see 	also 	W. 	Manning, 	et 	al., 	Health 	Insurance
and 	the 	Demand 	for 	Medical 	Care: 	Evidence 	from 	a 	Randomized
Experiment, 	77 	American 	Econ. 	Review 	251 	(1987) .
•

Maston T. 	Jacks, 	Esq. 	Page 	4
This 	effect 	will 	be 	reinforced 	by 	the 	implementation 	of
hospital 	reimbursement 	at 	rates 	not 	linked 	to 	individual 	hos-
pitals' 	costs 	or 	charges, 	such 	as 	Medicare's 	"prospective 	reim-
bursement" 	system. 	Medicare 	presently 	reimburses 	hospital 	oper-
ating 	costs 	at 	prospective 	rates 	which 	are 	based 	principally 	(and
soon 	exclusively) 	on 	flat 	rates 	for 	specific 	diagnosis 	related
groups 	("DRGs 1 '), 	rather 	than 	the 	actual 	costs 	incurred 	by 	a 	parti-
cular 	hospital 	for 	its 	Medicare 	patients. 	Medicare 	plans 	to 	begin
reimbursing 	capital 	costs 	in 	a 	somewhat 	similar mann~r. ~ 	As
that 	system, 	and 	others 	like 	it, 	are 	implemented, 	the 	costs 	of
hospitals' 	inefficiencies 	will 	increasingly 	come 	out 	of 	the 	hos-
pitals' 	own 	pockets 	rather 	than 	those 	of 	third 	party 	payors 	and
individual 	consumers.
Moreover, 	the 	prospects 	of 	further 	reforms 	in 	hospital 	reim-
bursement 	(including 	the 	full 	implementation 	of 	improvements 	al-
ready 	in 	progress, 	such 	as 	Medicare 	prospective 	payment), 	and 	of
increasingly 	intense 	price 	competition, 	reinforces 	the 	effect 	of
cost-containment 	incentives 	already 	in 	place. 	Hospitals 	should 	be
deterred 	from 	making 	major 	capital 	improvements 	with 	long 	useful
lives 	(such 	as 	new 	buildings), 	if 	the 	feasibility 	of 	those 	pro-
jects 	depends 	on 	the 	hospitals' 	ability 	to 	pass 	the 	depreciation
costs 	on 	to 	third-party 	payors 	even 	if 	the 	improvements 	prove 	not
to 	have 	been 	worthwhile. 	21
These 	improvements 	in 	hospital 	markets 	have 	been 	accompanied
by 	similar 	improvements 	in 	other markets 	currently 	subject 	to 	CON
regulation 	in 	Virginia. 	For 	example, 	reimbursement 	of 	nursing
homes 	in 	virginia 	by 	Medicaid, 	the 	dominant 	third-party 	payor 	for
~ 	See 	42 	U.S.C.A. 	§ 	1395ww(a) (4), 	(d) 	(West 	Supp. 	1987); 	52
Fed. 	Reg. 	18840 	(1987) 	(proposed 	regulation 	to 	phase 	in 	flat 	pro-
spective 	rates 	for 	capital 	costs 	over 	three 	years 	for 	movable
equipment, 	and 	over 	ten 	years 	for 	other 	capital 	costs); 	see 	also
Modern 	Healthcare, 	Aug. 	1, 	1986, 	at 	20; 	Health 	Care 	Competition
Week, 	Jan. 	12, 	1987, 	at 	4. 	But 	see 	Modern 	Healthcare, 	July 	17,
1987, 	at 	10 	(House 	subcommittee 	approved 	plan 	to 	delay 	for 	four
years 	implementation 	of 	prospective 	rates 	for 	capital 	costs).
21 	See 	Raske, 	Association 	Seeks 	Sound 	Capital 	Pay 	Policy,
Modern 	Healthcare, 	Nov. 	7, 	1986, 	at 	120 	(uncertainty 	about 	future
of 	reimbursement 	for 	capital 	expenses 	is 	encouraging 	hospitals 	to
make 	more 	conservative 	capital 	investment 	decisions 	for 	inpatient
services) .

Kaston 	T. 	Jacks, 	Esq. 	Page 	5 	'"
nursing 	home 	services 	lQ/, 	now 	provides 	significant 	incentives 	for
cost 	containment, 	particularly 	with 	respect 	to 	the 	construction 	of
new 	capacity. 	Most 	notably, 	the 	Medicaid 	program 	flatly 	refuses
to 	bear 	capital 	and 	operating 	costs 	associated 	with more 	than 	a
small 	amount 	of 	unused 	capacity. 	This 	deprives 	prospective
entrants 	into 	nursing 	home 	markets 	of 	any 	Medicaid 	incentive 	to
build 	more 	capacity 	than 	they 	can 	reasonably 	expect 	to 	use. 	It
also 	gives 	existing 	firms 	strong 	incentives 	to 	serve 	patients 	more
effectively 	so 	they 	can 	keep 	their 	capacity 	fully 	utilized. 	1lJ
Moreover, 	price 	competition 	for 	nursing 	horne 	patien~s who 	pay 	for
their 	care 	from 	their 	own 	funds 	121 	makes 	it 	difficult 	for 	nursing
homes 	to 	impose 	excessive 	costs 	upon 	those 	patients. 	Similarly,
price 	competition 	and/or 	well-structured 	governmental 	and 	private
reimbursement 	programs 	limit 	incentives 	for 	overinvestment 	and
other wasteful 	expenditures 	for 	at 	least 	some 	of 	the 	other 	types
of 	health 	facilities 	subject 	to 	CON 	regulation 	in 	Virginia. 	1]/
lQ/ 	See 	minutes 	of 	April 	13, 	1987 	COPN 	Commission meeting
(presentation 	of 	P. 	Clendenin, 	director, 	Virginia 	Health 	Care
Ass'n) 	(about 	66% 	of 	patients 	in 	Virginia 	nursing 	homes 	are
covered 	by Medicaid) .
1lJ 	Virginia 	Dep't 	of 	Medical 	~ssistance services, 	Nursing
Horne 	Payment 	System, 	VR 	460-03-4.194 	§§ 	2.1-2.9 	(1986). 	A~ 	we
understand 	it, 	Virginia 	Medicaid 	computes 	capital 	and 	operating
cost 	reimbursement 	per 	Medicaid 	patient 	day, 	in 	most 	instances, 	by
dividing 	a 	nursing 	horne's 	allowable 	costs 	by 	the 	number 	of 	patient
days 	per 	year 	the 	nursing 	horne 	would 	have 	had 	if 	it 	operated 	at 	a
95% 	occupancy 	rate 	(or, 	if 	greater, 	the 	actual 	number 	of 	patient
days). 	As 	a 	result, 	Medicaid 	pays 	only 	costs 	allocated 	to 	the
capacity 	used 	by 	its 	beneficiaries, 	except 	that 	it 	bears 	some 	of
the 	costs 	of 	unused 	capacity 	not 	exceeding 	5% 	of 	total 	capacity.
(Virginia 	Medicaid 	also 	imposes 	ceilings 	on 	reimbursable 	operating
costs 	of 	nursing 	homes, 	and 	awards 	incentive 	payments 	to 	nursing
homes 	with 	operating 	costs 	below 	the 	ceilings.)
1lJ 	See 	A. 	Lee, 	H. 	Birnbaum 	& C. 	Bishop, 	How 	Nursing 	Homes
Behave: 	AM~lti-Equation Model 	of 	Nursing 	Horne 	Behavior, 	17
Socia~ Science 	and 	Medicine 	1897, 	1905 	(1983) 	(private 	patient
demand 	for 	individual 	nursing 	homes' 	services 	is 	price 	elastic).
l]j 	See,~, 	52 	Fed. 	Reg. 	20466 	(1987), 	52 	Fed. 	Reg. 	20623
(1987) 	(Medicare 	reimburses 	freestanding 	ambulatory 	surgery 	cen-
ters 	at 	flat 	prospective 	rates, 	and 	will 	soon 	provide 	half 	the
reimbursement 	for 	hospital 	outpatient 	surgery 	on 	the 	same 	basis
(with 	the 	other 	half 	cost-based)) .
•

·	Kaston T. 	Jacks, 	Esq.
B. 	CON 	Regulation 	Is 	Ineffective
as 	a 	Cost-Containment 	Mechanism
Page 	6
It 	is 	far 	from 	clear 	that 	CON 	regulation 	effectively
restrains 	whatever 	tendencies 	may 	still 	exist 	for 	inefficient
capacity 	additions 	or 	other 	capital 	expenditures 	in 	Virginia
heal th 	care 	markets. 	A number 	o.f 	empirical 	studies 	suggest 	that
CON 	regulation 	has 	not 	had 	the 	intended 	effect 	of 	controlling
general 	acute 	care 	hospital 	costs 	through 	the 	prevention 	of
expenditures 	on 	unnecessary 	beds, 	services, 	and 	equipment. 	lA/
Early 	studies 	of 	the 	effects 	of 	CON 	regulation 	found 	that 	it 	had
no 	effect 	on 	constraining 	overall 	hospital 	costs; 	rather, 	it 	may
have 	simply 	caused 	hospitals 	to 	reallocate 	their 	resources 	so 	that
while 	some 	types 	of 	hospital 	costs 	were 	constrained 	by CON 	regu-
lation, 	other 	costs 	increased. 	121 	Later 	studies 	reached 	similar
conclusions, 	finding 	that 	CON 	regulation 	did 	not 	reduce 	costs 	per
unit 	of 	hospital 	output. 	1§j 	Among 	these 	studies 	are 	a 	recent 	FTC
staff 	report 	concluding 	that 	CON 	regulation 	was 	associated 	with
increases 	in 	hospital 	costs. 	11/ 	Also 	consistent 	with 	these
results 	are 	preliminary 	findings 	of 	a 	study 	sponsored 	by 	the 	COPN
Commission 	and 	conducted 	by 	analysts 	at 	Johns 	Hopkins 	University,
lA/ 	A 1986 	FTC 	staff 	report 	reached 	a 	similar 	conclusion
about 	the 	effect 	of 	CON 	regulation 	on 	horne 	health 	care 	services.
K. 	Anderson 	& D. 	Kass, 	supra 	note 	2, 	at 	87-92 	(1986). 	(Home
health 	care 	is 	not 	SUbject 	to 	CON 	regulation 	in 	Virginia.) 	We 	are
not 	aware 	of 	any 	published 	empirical 	analyses 	focusing 	on 	the
effectiveness 	of 	CON 	regulation 	with 	respect 	to 	health 	facilities
other 	than 	general 	hospitals 	and 	home 	health 	care 	agencies. 	How-
ever, 	one 	study 	of 	the 	economic 	behavior 	of 	nursing 	homes 	noted
that 	CON 	regulation 	appeared 	to 	increase, 	rather 	than 	decrease,
the 	average 	cost 	of 	nursing 	home 	services. 	A. 	Lee, 	H. 	Birnbaum 	&
C. 	Bishop, 	supra 	note 	12, 	at 	1906. 	In 	addition, 	preliminary
findings 	of 	a 	study 	sponsored 	by 	the 	COPN 	Commission 	address 	the
impact 	of 	CON 	regulation 	with 	respect 	to 	non-hospital 	facilities,
as 	discussed 	below.
l2/ 	Salkever 	and 	Bice, 	Hospital 	Certificate-of-Need 	Controls:
Impact 	on 	Investment, 	Cost, 	and 	Use 	(1979); 	Salkever 	and 	Bice, 	The
Impact 	of 	Cer~ificate-of-Need Controls 	on 	HosDital 	Invest~o~t, 54
Milbank 	Memorial 	Fund 	Q. 	185 	(Spring 	1976).
1&/ 	Policy Analysis, 	Inc.-Urban 	Systems 	Engineering, 	Inc.,
Evaluation 	of 	the 	Effects 	of 	Certificate 	of 	Need 	Programs 	(1980);
Steinwald 	and 	Sloan, 	Regulatory 	Approaches 	to 	Hospital 	Cost
Containment: 	A Synthesis 	of 	the 	Empirical 	Evidence, 	in 	A New
Approach 	to 	the 	Economics 	of 	Health 	Care 	(1981).
11/ 	M. 	Noether, 	supra 	note 	2, 	at 	74, 	82.

Maston T. 	Jacks, 	Esq. 	Page 	7
indicating 	"the 	absence 	of 	any 	clear 	regulatory 	effects" 	of 	CON
regulation 	on 	the 	costs 	of 	health 	facilities 	in 	general, 	including
non-hospital 	facilities. 	~
C. 	CON 	Regulation 	Interferes 	with
Competition 	in 	Health 	Care 	Markets
Moreover, 	it 	is 	likely 	that 	CON 	regulation 	is, 	on 	balance,
not 	merely 	ineffective 	but 	actually 	counterproductive 	in 	its
contribution 	to 	the 	control 	of 	health 	care 	costs. 	A3 	discussed
below, 	the 	CON 	regulatory 	process 	itself 	imposes 	substantial 	costs
on 	applicants, 	in 	terms 	of 	both 	the 	effort 	required 	to 	obtain
regulatory 	approval 	and 	the 	delays 	occasioned 	by 	the 	regulatory
process. 	To 	the 	extent 	that 	CON 	regulation 	reduces 	the 	supply 	of
particular health 	services 	below 	competitive 	levels, 	their 	prices
can 	be 	expected 	to 	be 	higher 	than 	they 	would 	be 	in 	an 	unregulated
market. 	~ 	Such 	artificial 	shortages 	of 	services 	may 	sometimes
also 	force 	consumers 	to 	resort 	to 	more 	expensive 	or 	otherwise 	less
desirable 	SUbstitutes, 	thus 	also 	increasing 	costs 	for 	third-party
payors 	and/or 	patients. 	For 	example, 	a 	shortage 	of 	nursing 	home
beds 	can 	delay 	the 	discharge 	of 	patients 	from 	more 	expensive
general 	acute 	care 	hospital 	beds 	£Q/, 	or 	can 	force 	patients 	either'
~ 	M. 	Lerner, 	et 	al., 	Investigation 	of 	Certain 	Issue,s 	in
Connection with 	the 	Virginia 	Certificate 	of 	Need 	Law, 	at 	11I-11
(preliminary 	report, 	July 	13, 	1987) 	(hereinafter 	"Johns 	Hopkins
Preliminary 	Report"].
l.V 	Where 	prices 	are 	regulated, 	the 	"price 	increase" 	may 	take
the 	form 	of 	reductions 	in 	service 	quality, 	so 	that 	consumers
receive 	services 	of 	lesser value 	for 	the 	same 	price, 	instead 	of
paying 	more 	money 	for 	the 	same 	services.
Severe 	shortages 	of 	capacity 	can 	protect 	firms 	providing
substandard 	service 	to 	consumers 	not 	only 	from 	competitive
pressures 	to 	upgrade 	performance, 	but 	also 	from 	regulatory
pressures 	to 	adhere 	to 	licensure 	requirements. 	For 	example, 	it
can be 	difficult 	to 	close 	a 	nursing 	home 	for 	major 	violations 	of
licensure 	requirements 	if 	there 	is 	no 	place 	to 	put 	its 	patients.
See 	J. 	Feder 	& W. 	Scanlon, 	Regulating 	the 	Bed 	Supplv 	in 	Nursing
Homes, 	58 	Milbank Mem. 	Fund 	Q. 	54, 	76 	(1980).
£Q/ 	U.S. 	General 	Accounting 	Office, 	Constraining 	Health 	Care
Expenditures: 	Achieving 	Quality 	Care 	at 	Affordable 	Cost, 	at 	93-
94 	(1985).
•

Maston 	T. 	Jacks, 	Esq. 	Page 	8
to 	use 	nursing 	homes 	far 	from 	home 	llJ, 	or 	simply 	to 	do 	without
the 	service 	altogether.
Even 	if 	it 	does 	not 	yield 	acute 	shortages 	of 	services, 	CON
regulation 	can 	substantially 	interfere 	with 	competition 	in 	health
care 	markets. 	First, 	the 	CON 	regulatory 	process 	can 	increase
prices 	to 	consumers 	by 	protecting 	firms 	in 	the 	market 	from
competition 	from 	innovators 	and 	new 	entrants. 	l2/ 	Although 	the
CON 	process 	does 	not 	always 	prohibit 	the 	entry 	or 	expansion 	of
health 	facility 	enterprises, 	or 	the 	development 	of 	new 	services,
it 	generally 	places 	the 	burden 	on 	new 	entrants 	to 	demonstrate 	that
a 	need 	is 	not 	being 	served 	by 	those 	currently 	in 	the 	market. 	In
addition, 	the 	process 	of 	preparing 	and 	defending 	a 	CON 	application
is 	often 	extremely 	costly 	and 	time 	consuming 	(particularly 	if 	the
application 	is 	opposed 	by 	firms 	already 	in 	the 	market). 	l1I 	It
has 	also 	been 	argued 	that 	CON 	regulation 	can 	create 	opportunities
for 	existing 	firms 	to 	abuse 	the 	regulatory 	process 	so 	as 	further
llJ 	Cf. 	"Nursing 	hom~s have 	little 	room 	for 	patients 	who
cannot 	pay,'1 	Arlington 	Journal, 	Apr. 	30, 	1985 	(shortage 	of 	nursing
home 	beds 	in 	northern 	Virginia 	available 	to 	Medicaid 	patients
forces 	some 	to 	use 	nursing 	homes 	in 	other 	parts 	of 	state).
~ 	Posner, 	Certificate 	of 	Need 	for 	Health 	Care 	Facilities:
A Dissenting 	View, 	Regulating 	Health 	Facility 	Construction 	at 	113
(C. 	Havighurst, 	ed. 	1974); 	M. 	Noether, 	supra 	note 	2, 	at 	82 	(CON
restrictions 	on 	entry 	associated 	with 	hospital 	price 	increases 	of
approximately 	4-5%, 	as 	well 	as 	increases 	in 	hospital 	costs 	of
approximately 	3-4%).
~ 	See 	minutes 	of 	Feb. 	16, 	1987 	COPN 	Commission meeting
(presentation 	of 	J. 	RUpp, 	Office 	of 	the 	Attorney 	General 	of
virginia) 	(CON 	decisions 	frequently 	challenged 	in 	court, 	and
jUdicial 	review 	takes 	from 	nine 	months 	to 	three 	years); 	m~nutes of
April 	13, 	1987 	COPN 	Commission 	meeting 	(presentation 	of 	Virginia
Health 	Care 	Ass'n) 	(cost 	to 	nursing 	home 	of 	contested 	application
from 	$ 	5,000 	to 	$ 	25,000); 	minutes 	of 	May 	11, 	1987 	COPN 	Commission
meeting 	(presentation 	of 	C. 	Nelson, 	Medical 	Society 	of 	Virginia)
(professionally 	prepared 	CON 	applications 	cost 	up 	to 	$ 	20,000):
see 	also 	Hospital 	Corp. 	of 	America 	[Chattanooga 	acquisitions), 	106
F.T.C. 	at 	490-92 .
•

Maston T. 	~acks, 	Esq. 	Page 	9
to 	prevent 	or delay 	new 	competition. 	lAJ 	CON 	regulation 	therefore
makes 	entry 	and 	expansion 	less 	likely, 	or 	at 	least 	less 	rapid.
Firms 	in 	any 	given 	market 	need 	not 	be 	as 	sensitive 	to 	price 	or 	to
consumer 	demand 	for 	new 	services 	if 	they 	know 	that 	it 	will 	be
difficult 	and 	expensive 	for 	new 	firms 	to 	enter 	the 	market 	and
offer 	competitive 	prices 	or 	services.
Second, 	by 	reducing 	the 	likelihood 	of 	(or 	at 	least 	increasing
the 	cost 	and 	time 	required 	for) 	entry 	and 	expansion, 	CON 	regu-
lation 	can 	make 	it 	more 	likely 	that 	providers 	will 	£.xploit 	what-
ever 	market 	power 	they 	have, 	individually 	or 	collectively, 	to
raise 	prices 	above 	(or 	reduce 	quality 	below) 	the 	competitive
level. 	~ 	That 	is 	why, 	in 	both 	of 	the 	hospital 	merger 	decisions
issued 	by 	the 	Federal 	Trade 	Commission 	in 	litigated 	cases, 	the
Commission 	cited 	the 	entry 	barrier 	created 	by 	CON 	regUlation 	as 	a
factor 	significantly 	contributing 	to 	the 	potential 	for 	anti-
competitive 	effects 	from 	the 	mergers. 	l§J 	CON 	regulation 	was 	also
cited 	as 	an 	entry 	barrier 	in 	the 	complaint 	accompanying 	a 	1985
Commission 	consent 	order 	concerning 	the 	acquisition 	of 	two
psychiatric 	hospitals 	in 	the 	Norfolk, 	Virginia 	metropolitan 	area. 	£1J
CON 	regUlation 	can 	thus 	render 	anticompetitive 	otherwise 	lawful
~ 	T. 	Calvani 	& N. 	Averitt, 	The 	Federal 	Trade 	Commission 	and
Competition 	in 	the 	Delivery 	of 	Health 	Care, 	at 	9-12 	(prepared 	text
of 	February 	20, 	1986 	presentation 	to 	Joint 	Program 	[of 	the 	Ameri-
can 	Bar Ass'n 	and 	the 	National 	Health 	Lawyers 	Ass'n) 	on 	Antitrust
Issues 	in 	the 	Health 	Care 	Industry} 	(discussing 	potential 	for
health 	providers 	to 	use 	CON 	process 	for 	Ilnon-price 	predation") ;
st. 	Joseph's 	Hospital 	v. 	Hospital 	Corp. 	of 	America, 	795 	F.2d 	948,
959 	(11th 	Cir. 	1986) 	(defendants' 	misrepresentations 	to 	state
health 	planning 	body 	concerning 	plaintiff's 	CON 	application 	not
protected 	from 	antitrust 	scrutiny); 	Hospital 	Corp. 	of 	America
[Chattanooga 	acquisitions), 	106 	F.T.C. 	at 	492.
~ 	This 	is 	most 	likely 	to 	occur 	where 	there 	are 	few 	com-
peting 	providers 	in 	a 	particular 	market, 	see 	Hospital 	Corp. 	of
America 	[Chattanooga 	acquisitions], 	106 	F.T.C. 	at 	487-89, 	such 	as
in 	rural 	areas, 	or 	for 	certain 	hospital 	specialty 	services.
£§I 	American 	Medical 	Int'l, 	Inc., 	104 	F.T.C. 	at 	200-01
(1984); 	Hospital 	Corp. 	of 	America 	[Chattanooga 	acquisitions), 	106
F.T.C. 	at 	489-496.
I1J 	Hospital 	Corp. 	of 	America 	[Forum 	acquisitions], 	106
F.T.C. 	at 	301-02.

Maston T. 	Jacks, 	Esq. 	Page 	10 	'"
conduct, 	and 	aggravate 	the 	anticompetitive 	effects 	of 	antitrust
violations. 	~
III. 	Concerns 	about 	the 	Impact 	of 	Eliminating 	CON 	Regulation
on 	the 	Nursing 	Home 	Industry, 	and 	on 	Medically Under-
served 	Areas, 	Do 	Not 	Justify 	Its 	Retention
Some 	have 	argued 	to 	the 	COPN 	Commission 	that 	CON 	regulation
is 	necessary 	to 	deal 	with 	certain 	specific 	problems, 	even 	if 	its
effect 	on 	health 	care 	costs 	in 	general 	does 	not 	warrant 	its
retention. 	For 	example, 	the 	COPN 	Commission 	has 	been 	told 	that
the 	elimination 	of 	CON 	regulation 	would 	adversely 	affect 	the
nursing 	home 	industry 	and 	its 	principal 	customer, 	the 	Virginia
Medicaid 	program. 	~ 	Concern has 	also 	been 	expressed 	that
without 	CON 	regulation, 	rural 	and 	inner 	city 	areas 	of 	Virginia
will 	have 	more 	difficulty 	attracting 	new 	health 	facilities 	and
retaining 	existing 	facilities. 	lQ/ 	We 	address 	those 	concerns
below.
A. 	Impact 	of 	CON 	Repeal 	on 	Nursing 	Home 	Industry
Elimination 	of 	CON 	regulation in 	the 	nursing 	home 	industry
allegedly 	creates 	the 	potential 	for 	a 	surge 	of 	new 	entry, 	which
would 	SUbstantially 	increase 	Medicaid 	expenditures 	or 	threaten 	the
financial 	viability 	or 	quality 	of 	care 	of 	existing 	nursing, homes.
These 	effects 	would 	occur, 	it 	has 	been 	asserted, 	because 	(1) 	the
unit 	costs 	of 	existing 	homes 	would 	increase 	as 	their 	occupancy
rates 	decrease, 	and/or 	(2) 	utilization 	of 	nursing 	homes 	by Medi-
~ 	In 	particular, 	the 	entry 	barriers 	created 	by 	CON 	regu-
lation 	can transform 	into 	possible 	antitrust 	violations 	poten-
tially 	efficient 	joint 	activities 	by 	health 	care 	providers 	that
would 	otherwise 	be 	lawful. 	For 	example, 	in 	some 	cases 	shared
service 	arrangements 	and 	consolidations 	could 	significantly
threaten 	competition, 	unless 	the 	prospect 	of 	new 	entry would 	keep
the 	market 	competitive 	by making 	any 	significant, 	sustained 	price
increases 	unprofitable. 	CON 	regUlation 	can 	thus 	conflict with 	the
achievement 	of 	health 	planning 	objectives 	by 	limiting 	the 	freedom
of 	providers 	to 	pursue 	efficiencies 	without 	also 	creating
unacceptable 	risks 	of 	anticompetitive 	effects.
~ 	See 	minutes 	of 	April 	13, 	1987 	COPN 	Commission 	meeting
(oral 	and 	written 	presentations 	of 	Virgi~ia Health 	Care 	Ass'n) .
lQ/ 	Id.; 	minutes 	of 	May 	11, 	1987 	COPN 	Commission 	meeting
(presentation 	of 	Statewide 	Health 	Coordinating 	Council); 	minutes
of 	June 	8, 	1987 	COPN 	Commission 	meeting 	(presentation 	of 	Virginia
Poverty 	Law 	Center) .
•

Maston T. 	Jacks, 	Esq. 	Page 	11
caid 	patients 	would 	increase 	to 	fill 	the 	newly-created 	capa-
city. 	211
We 	are 	not 	in 	a 	position 	to 	predict 	how 	much 	growth 	in
nursing 	home 	capacity 	would 	result 	from 	eliminating 	CON 	regu-
lation. 	However, 	there 	appear 	to 	be 	no 	significant 	incentives 	for
the 	creation 	of 	new 	capacity, 	other 	than 	capacity 	that 	would 	be
used 	to 	satisfy 	consumer 	demands 	not 	met 	by 	existing 	nursing
homes. 	dlI 	As 	noted 	earlier, 	Virginia 	Medicaid 	generally 	refuses
to 	pay 	for 	costs 	associated 	with 	empty 	nursing 	home 	beds 12/;
similarly, 	empty 	beds 	do 	not 	yield 	any 	revenues 	from 	private
patients. 	Those 	considering 	building 	new 	nursing 	home 	capacity
therefore 	will 	probably 	be 	very 	careful 	not 	to 	build 	more 	capacity
than 	needed 	to 	meet 	reasonably 	anticipated 	demand. 	Their 	demand
projections 	would 	likely 	also 	reflect 	the 	strong 	incentives
existing 	nursing 	homes 	have 	to 	keep 	their 	existing 	customer 	base.
We 	would 	expect 	that 	new 	nursing 	home 	capacity 	would 	be 	created
only 	to 	the 	extent 	that 	there 	are 	consumer 	demands 	not 	being 	met
by 	existing 	firms, 	and 	that 	existing 	firms 	would 	not 	face
significant 	occupancy 	rate 	decreases 	unless 	their 	existing
customers 	were 	served 	more 	effectively 	by 	new 	entrants.
2l/ 	See 	minutes 	of 	April 	13, 	1987 	COPN 	Commission meeting
(presentations 	of 	Virginia 	Health 	Care 	Ass'n 	and 	American 	Health
Planning 	Ass'n). 	An 	additional 	major 	argument 	is 	that 	CON 	regu-
lation 	promotes 	the 	construction 	of 	nursing 	homes 	in 	areas 	that
need 	nursing 	homes 	but 	could 	not 	support 	them 	in 	an 	unregulated
market. 	This 	argument 	is 	addressed 	in 	Section 	III.B. 	below.
11/ 	Arizona 	and 	Utah 	have 	been 	cited 	to 	the 	COPN 	Commission
as 	states 	where 	relatively 	rapid 	growth 	of 	nursing 	home 	capacity
occurred 	after 	entry 	deregulation. 	We 	note 	that 	in 	1982, 	prior 	to
deregulation, 	nursing 	home 	capacity 	per 	elderly 	resident 	in 	those
two 	states 	was 	much 	lower 	than 	the 	national 	average. 	This 	sug-
gests 	that 	the 	growth 	of 	nursing 	home 	capacity 	may 	have 	been
largely 	an 	appropriate 	response 	to 	acute 	shortages 	in 	those
states. 	By 	contrast, 	Virginia's 	present 	nursing 	home 	capacity 	per
elderly 	resident 	was 	slightly 	above 	the 	national 	average 	as 	of
1982. 	See 	National 	Center 	for 	Health 	Statistics, 	Nursing 	and
Related 	Care 	Homes 	as 	Reported 	from 	the 	1982 	National 	Master
Facility 	Inventory 	Survey, 	at 	11 	(1986). 	The 	Johns 	Hopkins 	Pre-
liminary 	Report 	(at 	ch. 	VI) 	reaches 	similar 	conclusions 	about
nursing 	home 	capacity 	growth 	in 	Arizona 	and 	Utah. 	It 	also 	notes
that 	entry 	deregulation 	in 	Kansas, 	a 	state 	with 	an 	above-average
ratio 	of 	nursing 	home 	beds 	to 	elderly 	population, 	does 	not 	appear
to 	have 	triggered 	any 	major 	growth 	in 	nursing 	home 	capacity.
12/ 	See 	p. 	5 	above.

Maston 	T. 	Jacks, 	Esq. 	Page 	12
It 	is 	also 	far 	from 	clear 	that 	even 	significant 	increases 	in
nursing 	home 	capacity 	would, 	on 	balance, 	have 	any 	adverse 	effect
on 	Medicaid 	and 	its 	beneficiaries. 	Increased 	competition 	result-
ing 	from 	deregulated 	entry 	may 	increase 	the 	costs 	per 	patient 	day
of 	nursing 	homes 	that 	lose 	patients 	to 	competitors lj/, 	but 	Medi-
caid 	has 	no 	obligation 	to 	pay 	for 	those 	costs 	(and 	indeed 	dis-
claims 	any 	such 	obligation). 	Furthermore, 	competitive 	market
forces 	can 	be 	expected 	to 	limit 	the 	ability 	of 	such 	nursing 	homes
to 	pass 	on 	the 	increased 	per 	unit 	costs 	in 	the 	form 	of 	diminished
quality 	of 	patient 	service 	(or 	price 	increases 	to 	private
patients), 	because 	they 	would 	risk 	losing 	additional 	patients 	to
competitors. 	12/
In 	any 	event, 	Medicaid 	may 	benefit 	on 	balance 	from 	the
offsetting 	cost 	savings 	that 	increased 	competition 	among 	nursing
homes 	may 	make 	possible. 	For 	example, 	to 	the 	extent 	the 	competi-
tion 	stimulated 	by 	entry 	deregulation 	reduces 	prices 	to 	private
patients, 	they 	will 	exhaust 	their 	resources 	at 	a 	slower 	rate, 	and
thus 	will 	become 	eligible 	for 	Medicaid 	less 	often 	and 	less
rapidly. 	Those 	reduced 	prices 	may 	also 	spur 	greater 	efforts 	by
nursing 	homes 	to 	minimize 	operating 	costs, 	thus 	decreasing 	Medi-
caid 	reimbursement 	of 	such 	costs. 	Medicaid 	operating 	cost 	reim-
bursement 	would 	also 	decrease 	to 	the 	extent 	that 	existing 	nursing
homes 	are 	displaced 	by 	new 	competitors 	that 	are 	more 	efficient.
And 	entry 	deregulation 	may 	reduce 	Medicaid 	hospital 	expend~tures
for 	patients 	whose 	hospital 	discharges 	are 	presently 	being 	delayed
until 	space 	becomes 	available 	in 	a 	nursing 	home. 	1&/
l±/ 	Minutes 	of 	April 	13, 	1987 	COPN 	commission meeting
(presentation 	of 	Virginia 	Health 	Care 	Ass'n) .
l2/ 	Similar 	constraints 	would 	face 	a 	new 	nursing 	home 	that,
for 	whatever 	reason 	(such 	as 	being 	unable 	to 	outperform 	existing
firms), 	could 	not 	fill 	its 	beds. 	This 	prospect 	would 	deter 	the
construction 	of 	nursing 	homes 	in 	areas 	where 	consumer 	demands 	are
already 	being 	met 	reasonably 	well 	by 	nursing 	homes 	already 	in 	the
market.
Because 	of 	these 	constraints 	on 	recovery 	of 	costs 	attri-
butable 	to 	unused 	capacity, 	it 	is 	possible 	that 	the 	most 	un-
successful 	nursing 	homes 	in 	a 	competitive 	environment 	would 	fail,
causing 	inconvenience 	to 	their 	customers. 	Id. 	The 	alternative 	to
letting 	such 	nursing 	homes 	fail, 	however, 	is 	to 	keep 	them 	in
business 	despite 	their 	inadequate 	performance, 	and 	by 	eliminating
an 	impo~tant incentive 	for 	them 	to 	improve 	their 	performance 	in
order 	to 	avoid 	business 	failure.
12/ 	See 	pp. 	7-8 	above .
•

Maston T. 	Jacks, 	Esq. 	Page 	13
It 	is 	possible 	that, 	notwithstanding 	Medicaid's 	efforts 	to
avoid 	paying 	for 	unnecessary 	nursing 	home 	utilization, 	increases
in 	nursing 	home 	capacity may 	result 	in 	increased 	utilization 	of
nursing 	homes 	by 	Medicaid 	patients 	who 	do 	not 	actually 	require
nursing 	home 	care. 	l1J 	However, 	the 	substantial 	unused 	capacity
in 	nursing 	homes 	in 	many 	states 	(and, 	until 	recently, 	Virginia)
suggests 	that 	state 	Medicaid 	programs 	have 	had 	at 	least 	modest
success 	in 	resisting 	any 	tendency 	for 	increased 	Medicaid 	utili-
zation 	to 	absorb 	unused 	capacity. 	1]/ 	In 	any 	event, 	given 	the
overall 	adverse 	effects 	of 	CON 	regulation 	discussed 	above,
creating 	an 	artificial 	shortage 	of 	nursing 	home 	bed 	supply 	through
CON 	regulation 	seems 	to 	be 	a 	particularly 	costly 	utilization 	con-
trol 	strategy. 	Among 	the 	most 	conspicuous 	of 	its 	costs 	are 	the
inconvenience 	and 	indignity 	to 	Medicaid 	patients 	who 	need 	nursing
home 	care 	but 	now 	have 	difficulty 	finding 	nursing 	homes 	with
available 	space. 	J2/
B. 	Impact 	of 	CON 	Repeal 	on 	Promotion 	of
Health 	Facilities 	in 	Underserved 	Areas
Another 	concern 	is 	that 	elimination 	of 	CON 	regulation 	might
deprive 	the 	state 	of 	a 	mechanism Jor 	encouraging 	the 	establishment
of 	health 	facilities 	in 	rural 	and 	inner-city 	areas 	that 	are 	rela-
tively 	unattractive 	fro~ the 	business 	standpoint. 	In 	our view,
CON 	regulation 	is 	neither 	necessary 	nor 	appropriate 	as 	a 	mechanism
to 	address 	that 	problem.
It 	has 	been 	asserted 	that 	CON 	regulation, 	by 	shielding 	health
facilities 	from 	competition, 	furnishes 	a 	"guarantee 	of 	success"
necessary 	for 	developers 	to 	proceed 	with 	the 	construction 	of
l1J 	Compare 	minutes 	of 	March 	9, 	1987 	COPN 	Commission 	meeting
(presentation 	of 	R. 	Sorrell, 	director 	of 	virginia 	Medicaid 	pro-
gram) 	(Virginia 	Medicaid 	has 	effective 	utilization 	controls 	for
nursing 	home 	care) 	with 	minutes 	of 	April 	13, 	1987 	COPN 	Commission
meeting 	(presentation 	of 	J. 	O'Donnell, 	American 	Health 	Planning
Ass'n) 	(presence 	of 	unused 	capacity 	often 	undermines 	utilization
controls 	in 	state 	Medicaid 	programs).
1]/ 	National 	Center 	for 	Health 	Statistics, 	Nursing 	and
Related 	Care 	Homes 	as 	Reported 	from 	the 	1982 	National 	Master
Facility 	Inventory 	Survey, 	at 	11 	(1986); 	Center 	for 	Health
Statistics, 	Virginia 	Dep't 	of 	Health, 	1981 	Survey 	of 	Virginia
Hospitals 	and 	Nursing 	Homes 	at 	29.
J2/ 	See 	"Nursing 	homes 	have 	little 	room 	for 	patients 	who
cannot 	pay," 	supra 	note 	20 .
•

Maston T. 	J~cks, 	Esq. 	Page 	14
health 	facilities 	in 	inner-city 	and 	rural 	areas. 	~ 	This 	argu-
ment 	warrants 	close 	and 	skeptical 	scrutiny. 	An 	unregulated 	market
will 	provide 	sufficient 	incentives 	to 	invest 	in 	a 	new 	health
facility 	(including 	incentives 	to 	incur 	whatever 	risks 	are 	in-
volved 	in 	the 	venture) 	in 	an 	area 	with 	sufficient 	consumer 	demand
to 	support 	a 	new 	health 	facility. 	The 	new 	health 	facility 	need
only 	meet 	th~ demands 	of 	consumers 	as 	effectively 	as 	it 	can, 	and
better 	than 	can 	any 	possible 	competitors, 	to 	maximize 	its 	pros-
pects 	for 	success. 	Health 	facilities 	that 	effectively meet 	con-
sumer 	demands 	have 	no 	need 	for 	protection 	from 	competitors: 	CON
regulation 	only 	offers 	protection 	for 	those 	that 	do 	not 	effective-
ly 	meet 	consumer 	demands 	(because 	of 	excessive 	prices 	or 	inferior
quality, 	or 	because 	they 	are 	inefficient), 	by 	deterring 	or 	block-
ing 	entry 	by 	firms 	that 	could 	do 	better. 	The 	COPN 	Commission
should 	consider 	carefully whether 	such 	state 	protection 	from 	com-
petition 	really 	promotes 	the 	development 	of 	health 	facilities 	in
underserved 	areas, 	and 	whether 	the 	costs 	of 	that 	strategy 	to 	con-
sumers 	(particularly 	those 	in 	the 	underserved 	areas) 	are 	justified.
CON 	regulation 	might 	also 	be 	used 	to 	compel 	firms 	to 	allocate
resources 	to 	underserved 	areas 	that 	they 	would 	otherwise 	have 	used
more 	profitably 	elsewhere, 	such 	as 	by 	denying 	permission 	to 	re-
locate 	a 	facility 	out 	of 	an 	underserved 	area, 	or 	by 	requiring
creation 	of 	a 	facility 	in 	an 	underserved 	area 	as 	a 	condition 	of
approval 	for 	a 	more 	lucrative 	project. 	Even 	where 	the 	state
legitimately 	seeks 	to 	ensure 	that 	an 	underserved 	area 	is 	served 	by
a 	health 	facility 	the 	market 	would 	not 	otherwise 	support, 	we 	doubt
that 	CON 	regulation 	is 	the 	best 	means 	to 	achieve 	that 	end: 	We
believe 	that 	the 	COPN 	Commission 	should 	consider 	alternative
mechanisms 	that 	would 	not 	impair 	the 	efficient 	functioning 	of
health 	care 	markets 	as 	CON 	regulation 	does. 	~
~ 	See 	minutes 	of 	April 	13, 	1987 	COPN 	Commission 	meeting
(presentation 	of 	Virginia 	Health 	Care 	Ass'n).
ill 	Direct 	subsidies 	funded 	by 	tax 	dollars 	may 	be 	a 	more
attractive 	mechanism 	for 	that 	purpose 	than 	maintaining 	CON 	regu-
lation. 	CON 	regulation, 	in 	effect, 	imposes 	a 	"hidden 	tax" 	on 	con-
sumers 	of 	health 	services 	in 	the 	form 	of 	higher 	prices 	and 	lower
quality. 	That 	"tax" 	may 	be 	more 	costly 	to 	society 	than 	conven-
tional 	forms 	of 	taxation 	because 	of 	its 	interference 	with 	health
facility 	competition; 	moreover, 	the 	burden 	of 	that 	"tax" 	falls
disproportionately 	on 	those 	in 	poor 	health. 	See 	R. 	Posner,
Taxation 	by 	Regulation, 	2 	Bell 	J. 	of 	Econ. 	22 	(1971); 	C. 	Havig-
hurst, 	Regulation 	of 	P.ealth 	Facilities 	and 	Services 	bv 	"Ce!"'::'-
::cate 	of 	Need", 	59 	Virginia 	L. 	Rev. 	1:~3, 	1188-94 	(1973).

Maston 	T. 	~acks, 	Esq.
IV. 	Conclusion
Page 	15
We 	believe 	that 	the 	continued 	existence 	of 	CON 	regulation
would 	be 	contrary 	to 	the 	interests 	of 	health 	care 	consumers 	in
virginia. 	Ongoing 	changes 	in 	the 	health 	care 	financing 	system,
including 	prospective 	payment 	mechanisms 	and 	increased 	consumer
price 	sensitivity 	fostered 	by 	private 	insurers, 	are 	eliminating
the 	principal 	problem 	that 	prompted 	CON 	regulation. 	Moreover, 	the
CON 	regulatory 	process 	does 	not 	appear 	to 	serve 	its 	intended
purpose 	of 	controlling 	health 	care 	costs. 	Indeed, 	it 	may 	defeat
that 	purpose 	by 	interfering 	with 	competitive 	market 	forces 	that
would 	otherwise 	help 	contain 	costs. 	We 	believe 	that 	concerns
about 	the 	impact 	of 	eliminating 	CON 	regulation 	on 	the 	nursing 	home
industry, 	and 	on 	efforts 	to 	improve 	access 	to 	health 	care 	for
medically 	underserved 	populations, 	_do 	not 	show 	that 	maintaining
CON 	regulation 	would 	serve 	consumer 	interests.
We 	would 	be 	happy 	to 	answer 	any 	questions 	you 	may 	have
regarding 	these 	comments, 	and 	to 	provide 	any 	other 	assistance 	you
may 	find 	helpful.
Sincerely 	yours, 	~
ltu~~e~ 	~~I 	.-~irector
Bureau 	of 	competition
Enclosed 	FTC 	staff 	reports:
competition 	Among 	Hospitals 	(1987)
Certificate 	of 	Need 	Regulation 	of
Entry 	Into 	Home 	Health 	Care 	(1986)
•