The story behind the certificate of need: What it is, why it exists, and why it has been a thorn in Virginia’s side for decades

Some lawmakers already sported wry smiles as Sarah Stanton, a staff member with the Division of Legislative Services, walked to a lectern in late November to deliver a presentation on Virginia’s Certificate of Public Need, or COPN, program.

“Everybody’s favorite topic,” she said sarcastically, and both the crowd behind her and lawmakers on the Joint Subcommittee for Health and Human Resources Oversight laughed.

The certificate is a regulation meant to control the number of medical facilities and services available in designated regions. Providers must receive approval from the state certifying that there is a need before they can do things like open a freestanding emergency room or add new hospital beds.

The process is cumbersome and it can take years — and thousands of dollars — to complete.

And it’s been haunting Virginia’s legislature for decades. It started in 1973, and just a little over a decade later the first attempt at reform began. The effort has gone through some stops and starts since then, but like clockwork it presents itself as a puzzle that the General Assembly attempts to solve every few years.

In Virginia’s health care community and among legislators, the program is seen as both hotly contested and an exhausting dispute worthy of an eye-roll. Some consider it to be vitally important, while others view it as a wart on an already ugly and convoluted health care system — and nobody can agree whether it should be cut off.

But to most everyone else, it’s a confusing acronym that they sometimes see in headlines during the General Assembly session and then forget during the rest of the year, unaware of the parade of work groups and studies that have been held on the program every few years over the past three decades.

This year, some legislators have indicated they don’t want to make revisions to the program because they need time to see how Medicaid expansion changes Virginia’s health care landscape.

But Del. Robert Orrock, R-Caroline, has already introduced a bill that proposes a host of changes, many of which have been floated before, such as changing what sort of facilities are required to get a certificate of need and creating an expedited process for some applications.

Whether or not the bill stands a chance, or if this year’s debate will differ significantly from those in the past, remains to be seen. Every group with ties to the program has their qualms with it, and finding a reasonable solution that will please — or at least not infuriate — everybody has, in years passed, appeared like a virtually impossible feat.

Critics of the certificate process want to dismantle it because, they say, it stifles competition, allows hospital monopolies to thrive and foists higher prices on consumers.

But proponents, particularly hospitals, claim that health care is not a free market, and traditional economic rules do not apply. The program is necessary, they argue, to protect hospitals who are required under law to provide care to whoever comes into their emergency rooms. They need patients to come to them for better-paying services, like MRIs, to offset those costs.

During that November committee meeting, Stanton attempted to plow through the program’s cumbersome history in Virginia, revealing that she had been working with lawmakers intent on reforming the program for over a decade.

“It’s been a lot of fun,” she said dryly, to more laughs from the room. “I love COPN so much.”

“You say it with such sincerity and a smile and everything else,” Del. Chris Jones, R-Suffolk, said with a smile.

“I just love it,” she quipped.

In many ways, COPN and the conversation around it is a microcosm of the debate surrounding the entire U.S. health care system  — an example of the inherent tension created by cobbling together a system out of regulations, government-sponsored plans and private entities with the end goal of making a profit.

Insurance or prepaid health care? 

In 1974, the federal government passed a law requiring every state to have certificate of need law on its books. Twelve years later, the mandate was repealed, but laws remain in 35 states.

The reasoning for the mandate was straightforward: Using medical services too much is expensive, and regulating facilities to prevent over-development was a logical way to mitigate spending.

By that time, employer-sponsored insurance was already the norm because, during World War II, the government created wage and price controls. Among the only ways companies could lure talented employees was to offer them benefits, like health plans. The idea was originally born out of a Blue Cross plan that originated in Texas during a time when hospitals were trying to figure out how to get people to seek care before they were fatally sick.

Most Americans get health insurance through their jobs, which is subsidized since the money employers put toward health benefits is not subject to payroll or income taxes. Insurance works best when it is insuring for unlikely but statistically possible events, economists agree. But it doesn’t really work that way in health care.

“It’s turned from insurance to prepaid health care,” said Matthew Mitchell, a senior research fellow with the Mercatus Center at George Mason University who has done extensive research on COPN. “It’s invited this big third-party payer system where, when I go into the doctor and they say, ‘Do you want an x-ray?’ it means nothing to me in terms of price. Whereas if I had to pay for the x-ray, I might say no.”

While patients weren’t informed enough to make cost-effective decisions when it comes to their health, doctors also had incentives to offer more because of the fee-for-service reimbursement model, in which they’re paid based on the number of services they provide.

“The idea was that, because of this implicit lack of information, competition wasn’t sufficient to moderate supply and demand,” said Carolyn Engelhard, a health policy expert and assistant professor of public health sciences and public policy at the University of Virginia. “So, when competition doesn’t work, then you have to turn to regulation.”

That paved the way for the certificate of need.

The safety net

But COPN is just one of many regulations that govern the health care market.

In 1965 the government stepped in and created a safety net for those who could not get insurance through their jobs: Medicare and Medicaid. That, some argue, marked the official end of the free market in health care.

“When Medicare was passed, the federal government got very involved in health care,” said Toni Ardabell, CEO of Bon Secours Virginia Health System. “The federal government controls rates, they tell you what they’re going to give you. There is no negotiating.”

The federal government is the single largest payer for health care in the U.S. About 36 percent of the population was covered by Medicare, Medicaid or another public program in 2017, according to the Kaiser Family Foundation.

“There’s an implicit belief that health care, health insurance, health coverage are important, but because of who we are as a nation we don’t want to say ‘Government, just do it,’ outright,” Engelhard said. “We’d much rather say, ‘Let’s do it through the private sector and let the government give us these bonuses for doing the right thing.'”

And that inevitably leads to huge inequalities.

“If you work for yourself, you don’t get the same tax breaks,” Engelhard said. “If you make too much money for Medicaid, if you’re not old enough for Medicare, you don’t get it. There’s so much fragmentation and disparity based on income and age and all of that. But somehow that fits better into our narrative about who we are.”

Hospitals, then, are at the end of the line, catching all those millions of people who fall through the cracks of the patchwork system in their emergency rooms.

That’s why they need COPN, hospitals argue. The system is already so highly regulated that they need the program to ensure that they can continue providing care for both the uninsured and those covered by Medicare and Medicaid, which reimburses below the market rate.

“Any investor can come in and decide they’re going to build a freestanding surgery center or freestanding radiology center, and never have to take a non-paying patient or a Medicaid patient or a Medicare patient,” Ardaball said. “They can really take the best payers or take cash or whatever scenario they set up. Whereas hospitals have to take every patient that comes through their emergency department.”

Julian Walker, spokesman for the Virginia Hospital & Healthcare Association, points to the fact that hospitals, too, must abide by the certificate of need program. They also provide a host of services, like trauma and burn care, that are expensive and not profitable.

Opponents: The patient is left holding the bill

Karen Simonton, chief financial officer with OrthoVirginia, an independent physicians group with offices all across the state, said she understands hospitals are a needed, valuable part of the community.

“We need a vibrant hospital to take care of our needy residents,” she said. “But they cannot be the sole focus of every decision that’s made for health care, because we see where that has gotten us.”

Simonton said hospitals have become massive health care systems — monopolies that are all-too-often absorbing physicians practices, which typically drives up the cost of care. Requiring the independent physician groups that have survived to jump through a series of hoops and spend hundreds of thousands of dollars to open facilities that they know will help lower health care costs makes no sense to her, she said.

Maureen K. Ohlhausen, former commissioner of the Federal Trade Commission — which has criticized certificate of need laws — wrote in an article that, “Normally, states are not directly involved in the market entry or capital improvement decisions of private firms.” But health care is the exception.

The laws “help to insulate incumbent providers from competition,” she wrote. Yet they persist.

Mitchell, the Mercatus Center researcher, argues that limiting competition is a rather backwards way to pay for uncompensated, or charity, care.

“The idea that we want to get you to provide charity care, so therefore we’re going to give you a monopoly so that you can charge the well-insured, or even those who pay in cash, more and then with the hopes that you’ll divert some of the extra earnings to pay for charity — boy, wouldn’t a much more direct way be a better way to make those reimbursements?” he said.

But Ardabell has a simple response to that argument: It is far-fetched to believe that Virginia will develop another way to adequately pay for charity care.

“Virginia wouldn’t pass Medicaid reform when the federal government was going to pay for it,” she said.

Could Medicaid expansion change the debate? 

There are various shades to the debate over certificate of need in Virginia. While some think it should be repealed entirely, very few are happy with it in its current iteration. Even hospitals are in favor of updating the program to make it easier and more transparent to get through the application process.

The Medical Society of Virginia wants to “modernize” the program to make it simple and equitable.

But whether or not anything will get done this session seems to be up in the air. Del. Mark Levine, D-Alexandria, said he wants to wait until at least another year has gone by under Medicaid expansion before the state does anything radical to COPN.

“I consider COPN a necessary evil whose time is about up,” said Levine, who sat on this year’s COPN work group. “Outside of the health care field, I’m a big supporter of competition. But I recognize the health care market is nowhere close to a free market in any way, shape or form.

“We have this weird hybrid system that’s a mess, and COPN is rough justice,” he continued. “I’m willing to cut back on rough justice after I see a year of Medicaid, and then we’re going to have to tinker with it and kind of figure it out as we go.”