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Covid-19 Exposes Health-Care Laws That Kill Competition

Oct. 9, 2020, 8:00 AM

Kentucky entrepreneur Dipendra Tiwari never anticipated something like Covid-19 when he decided to open a home health agency in 2018. All he knew was that thousands of refugees from the Himalayan region lacked services in their native language, Nepali.

The pandemic merely added urgency. In-home care represents an attractive alternative for families reluctant to send their loved ones to long-term care facilities, where visitation remains limited eight months into the emergency.

As an immigrant from Nepal with an MBA, Tiwari had the cultural and business background to fill the market gap in his community. Yet when he and a partner tried to move forward, state regulators told them no. Like many jurisdictions, Kentucky will not let anyone launch or expand a health-care company without a government permission slip called a certificate of need (CON).

Majority of States Require CONs

Overall, 38 states and Washington, D.C., require CONs or something similar. Eight states, including Kentucky, use the regulatory tool across all six categories measured in a new nationwide analysis from the nonprofit Institute for Justice. The areas include hospital beds, beds outside hospitals, equipment, facilities, services and emergency medical transportation.

Instead of encouraging growth, CONs force outsiders to prove a need exists—using government-imposed criteria—before they can enter the market. Hospitals love the protectionism, but the new report reveals a patchwork of arbitrary rules that kill competition.

Alabama, Florida, Kentucky, Oregon, and Washington require CONs only in urban areas, while Nevada does the reverse. New York creates extra hurdles for housing AIDS patients, while Connecticut and Missouri ease restrictions. Most states regulate hospice care, but Connecticut and Maine carve out exceptions.

Only 16 jurisdictions, including Kentucky, require CONs for home health agencies. Besides breaking from the norm, the requirement undercuts one of the main justifications for interfering so severely in the market.

Logic Behind Rule

The purported rationale is to contain costs by blocking “unnecessary” investment in new facilities and equipment. An MRI machine can cost hundreds of thousands of dollars, for example, and a hospital wing can cost even more. But in-home care requires none of that. The biggest expense is labor.

Tiwari’s business plan also forces CON regulators to confront the claim that their police powers somehow improve customer service. That cannot happen when regulators treat patients like interchangeable parts. In Kentucky this means a one-size-fits-all formula to determine need in each county. Cultural factors like race and language do not count. If someone seeks care in Nepali but gets an orderly who speaks English, it looks the same on the government spreadsheet.

The Kentucky case highlights another problem with CON laws. Like 33 other jurisdictions, the state gives established providers a voice in the process. In other words, they have influence over who opens shop down the street.

When competitors object, which they usually do, the result often resembles a full-blown trial requiring the applicant to hire attorneys, consultants, and experts. Kentucky has rigid rules that would have blocked Tiwari regardless of his qualifications, but he also had to face opposition from Baptist Healthcare System, a $2 billion conglomerate.

Rigged System

Rather than accept the status quo, Tiwari partnered with the Institute for Justice and fought back in federal court. In rejecting the state’s motion to dismiss, the judge in the case criticized a rigged system that lets bureaucrats—not doctors or patients—decide if a community has enough care.

“It’s hard to picture this kind of central planning in most other American industries,” the judge wrote. “Just think how different our Commonwealth would look if Kentucky had told the innovators behind Louisville Slugger, Churchill Downs, and Kentucky Fried Chicken we already had enough baseball bats, racetracks, and fast food.”

The favoritism works well for industry insiders with political pull, but the downsides have been pronounced during Covid-19. The Institute for Justice analysis shows that 25 jurisdictions, including Kentucky, issued emergency orders that temporarily lifted or eased their CON requirements.

Despite the pivot, these jurisdictions are still playing catch up to the 12 states that fully repealed their CON laws prior to the pandemic. Research at George Mason University’s Mercatus Center shows that states without CON laws have more hospitals and surgery centers per capita, along with more hospital beds, dialysis clinics, and hospice care facilities.

Other studies have reached similar conclusions. States that want to follow the science should extend their emergency orders, and then work as quickly as possible to make the changes permanent. Returning power to consumers is good public policy in any language or culture.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

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Author Information

Jaimie Cavanaugh is an attorney at the Institute for Justice in Minneapolis.

Daryl James is a writer at the Institute for Justice in Arlington, Va.

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