HEALTH PLANNING SERIES

The Bureau of Health Planning is a primary resource for cur-
rent information on a wide variety of topics related to health
planning. To facilitate the dissemination of this information
to health planners, the Bureau issues publications in the
following series:

Health Planning Methods and Technology

This series focuses on the technical and ad-
ministrative aspects of health planning. included
are such areas as methods and approaches to the
various aspects of the health planning process,
techniques for analyzing health planning informa-
tion and problems, and approaching to the effec-
tive dissemination and utilization of technical in-
formation.

Health Planning Information

This series presents information on the analysis
of issues and problems relating to health planning
including trend data, data analysis, and sources of
data to support health planning activities.

Health Planning Bibliography

Bibliographies on specific health planning sub-
jects are published in this series. Subject areas
are selected by the frequency of inquiries on
specific topics and from suggestions by Bureau
staff and health planners throughout the nation.

Certificate of Need Programs: A Review, Analysis, and An-
notated Bibliography of the Research Literature is the
twelfth publication in the Health Planning Bibliography
Series.

 

 

For sale by the Superintendent 0! Documents, U.S. Government Printing Office, Washington. D.C. 20402

 

Certificate of Need Programs:
A Review, Analysis, and
Annotated Bibliography

of the Research Literature

Prepared by:

Urban Systems Research and Engineering
1218 Massachusetts Avenue
Cambridge, Massachusetts 02138

and

Policy Analysis, Inc.

1577 Beacon Street

Brookline, Massachusetts 02146

Contract No. HRA-231-77-0114

November 1978

HRP-O301201

US. DEPARTMENT OF HEALTH, EDUCATION, AND WELFARE
Public Health Service

Health Resources Administration

Bureau of Health Planning

Division of Regulatory Activities

DHEW Publication No. (HRA) 79-14006

FOREWORD

This report has been prepared for the Bureau of
Health Planning by Policy Analysis, Inc., and Urban
Systems Research and Engineering. The report is
divided into two parts. Part I is a review of the
research literature related to certificate of need.
This includes a review of major studies, as well as
an analysis of ten hypotheses based on the literature.
Part II is an annotated bibliography of the most
important evaluation and research material related to
certificate of need programs. Annotations include
information on availability of the documents.

As the Bureau receives additional information on
this subject, it will be distributed. We welcome
comments, suggested references, and any documents
you consider important additions to this subject
area. Please address these to the Division of Regulatory
Activities, Bureau of Health Planning, Center Building,
Room 6—50, 3700 East—West Highway, Hyattsville, Maryland

OHM

Colin C. Rorrie, Jr., Ph.D.
Acting Director

Bureau of Health Planning
Health Resources Administration

ii

PREFACE

This review and analysis of the research literature on
Certificate of Need (CON) Programs is a product of a study
performed by Donald Cohodes and Carol Cerf at Urban Systems
Research and Engineering, and by Jerry Cromwell at Policy
Analysis, Inc., on a subcontract. The work is a part of a
much larger evaluation effort under contract to the Bureau
of Health Planning, Health Resources Administration (HRA),
Department of Health, Education, and Welfare.

The larger study is an ongoing two—year comprehensive
evaluation of the effects of the CON programs, scheduled
for completion in October 1979. The purpose of this litera-
ture review and analysis is to identify and critique the
most important and relevant material which describes or
analyzes the effects of CON programs.

iii

ACKNOWLEDGMENTS

Without the contributions of a number of individuals,
the review and analysis of the research literature could
not have been produced. Dan Ermann, of the Bureau of
Health Planning, Division of Regulatory Activities,
served as project officer for this contract and sig—
nificantly improved the quality of the product through his
careful review. The reviews and comments of Nancy Worthington
and Helena Reilly were likewise invaluable in the final
production. Lynda Morris tracked down numerous references
for the annotated bibliography. Last but not least,

Susan Graydon and Dorothy Meshorer displayed unusual
persistence in typing a seemingly endless number of "final"
revisions.

iv

CONTENTS

 

 

Page
FOREWORD ........ .................. ..... ........................ ii
PREFACE ......................... ...... ........................ iii
ACKNOWLEDGMENTS ... ..... ......... ...... ......................... iv
PART I: A REVIEW AND ANALYSIS OF THE RESEARCH
LITERATURE ON STATE CERTIFICATE OF
NEED PROGRAMS
INTRODUCTION .............. ..... ......................... ..... ... 1
Overview of Literature Review and Analysis .......... ....... 1
Certificate of Need: What is it? .................... ..... . 3
HYPOTHESIS ABOUT CON ............. .......... .... ..... . ..... ...... 7
METHODOLOGY CRITIQUE ...... ........... ..... ..... ................ 38
Measures of CON Performance ... ....... ..................... 38
Methodological Approaches ......... ....... ................. 46

Case Studies .............................................. 48
Outcome Analysis: Interrupted Time Series

Design With Controls . ..... ............. 53
Econometric Analysis: The Salkever and
Bice Study ........... ......... ..... 55
Econometric Analysis: The Cromwell, Ginsburg
and Hamilton Study .. ..... .......... 67
Econometric Analysis: The Hellinger Study ................ 67
Econometric Analysis: The Katz Study ......... ..... ....... 71

Methodology: Summary ..................................... 73

RECOMMENDATIONS ON CERTIFICATE OF NEED ......................... 74

QUESTIONS FOR FUTURE RESEARCH ... ..... .......................... 81
PART II: CERTIFICATE OF NEED: AN ANNOTATED

BIBLIOGRAPHY
ANNOTATIONS .......... ..... ...... ..... .......................... 89
SUPPLEMENTARY CITATIONS ........ ..... .......................... 171

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PART I: A REVIEW AND ANALYSIS OF THE RESEARCH LITERATURE
ON STATE CERTIFICATE OF NEED PROGRAMS

INTRODUCTION

Overview of Literature Review and Analysis

The rise in the cost of medical care, the presence of
excess capacity within the system, and concern over inadequate
access to health care have prompted state governments to
regulate capital expenditures of health care providers by
requiring certificates of need. An extensive descriptive,
theoretical, and empirical literature has accumulated on the
subject with little review of its content and implications
for program effectiveness and future public intervention in
the health care sector.

Much of the literature on Certificate of Need (CON) pre-
sents hypotheses about the likely impact of CON processes.
Only a few studies, however, have made a serious attempt to
test those hypotheses scientifically and most of these studies
have methodological weaknesses of one sort or another. This
literature review is designed to cover both the content and
implications of the literature with special emphasis upon the
analytic and empirical studies measuring program effects. The
more descriptive process literature is referred to only as it
bears upon a particular hypothesis or research question.

The literature review is organized into two major parts:
a review and analysis of the literature in Part One and an
annotated bibliography in Part Two. The review and analysis
of the literature is divided into four component sections.
Section I identifies the ten major hypotheses about CON raised
in the literature, indicates the authors that have postulated
them, and briefly describes any studies presenting evidence to
support or disprove the hypotheses. Section II is a detailed
methodological critique of the major studies on CON. These
studies are analyzed across four dimensions: the measurement

of impact, the unit of analysis, the time period of the study,

and the specification of causal relationships. The reader
should be advised that, while every effort has been made to dis-
cuss the methodological issues in unambiguous terms, certain
portions of the discussion are rather technical. If the reader
is interested in understanding the trustworthiness of the re—
search, he/she is urged to read this section, skimming those
parts which are too technical. The third section of the review
and analysis of the literature describes the various recommenda-
tions found throughout the literature, and identifies the authors
who first proposed them. Section IV reviews what we have found
through our analysis and identifies questions which remain to

be answered.

The second major part of this report consists of an
annotated bibliography on the literature pertaining to CON
programs. The annotated bibliography has two sections. Section
I presents annotations of pertinent articles, books, and un-
published papers which analyze, describe or evaluate CON or
related programs and activities. The annotations are intended
to provide concise references for interested readers on material
relevant to CON. Section II consists of a large list of cita-
tions which discuss regulatory issues in broad terms, provide
limited descriptions of program activities, or represent articles
on the periphery of the topic. Because of their indirect content
value, these references are not annotated, though they are pro-
vided for the reader. The annotated bibliography and the cita-
tion list reflect the literature on certificate of need through

the fall of 1977.

Certificate of Need: What is it?

 

State programs directed at controlling unnecessary or
duplicate hospital investment in plant and equipment first
surfaced in the 19605. New York enacted the first Certificate
of Need (CON) law in 1964, followed by Rhode Island (1968),
Maryland (1968), Connecticut (1969) and California (1969). In
October 1972, Congress enacted P.L. 92-603, amending the Social
Security Act. This act, which reinforced state CON initiatives,
stipulates that federal funds under the Maternal and Child
Health, Medicare, or Medicaid programs may not be used to support
“unnecessary capital expenditures made by or on behalf of health
care facilities or health maintenance organizations which are
reimbursed under such programs." Implementation of Section
1122 of P.L. 92—603 requires a plan for health facilities and
services review and a formal agreement between the state and
the federal government. The funds to which Section 1122 refer
are for interest, depreciation, or dividends from capital
expenditures. States participate in the program on a volun—
tary basis; currently thirty-seven states have agreements with
DHEW to administer Section 1122. The Section 1122 review program
differs in many ways from the state—sponsored CON programs.

The differences relate to the sanctions which the programs can
invoke, the contractual linkage between the state and federal
government, program scope and procedures, and the appeals pro-
cess. As of September 1977, thirty-six states had passed some
form of CON legislation. The remaining fourteen states can be
expected to enact legislation soon, since P.L. 93—641, the
National Health Planning and Resource Development Act of 1974,
requires states to develop and administer CON programs or lose
Public Health Service funds.

Certificate of Need (CON) laws vary considerably from
state to state. But whether established on state initiative
or because of federal prodding, CON programs require written

evidence of a determination made by a legally empowered

governmental agency that a proposed capital expenditure project

or service change is needed. "Need" is determined by an authorized
agency based on its perceptions of the public's requirements for
various institutions or services over a predetermined time frame.
Until now one of three organizations has generally assumed
responsibility for granting or denying a Certificate of Need

in accordance with the state plan of need: independent boards

or commissions, the State Department of Health, or the State
Comprehensive Health Planning Agency (now replaced by the State
Health Planning and Development Agency).

The particular form and scope of CON legislation which
evolves in a state represents a product of the economic con—
ditions in a state and the political interaction between legis-
lators, governmental planners and regulators, providers (hos-
pitals, nursing homes, and physicians), insurance companies, and con-
sumers. Each of these parties has specific goals and objectives
which they hope to see realized through a CON program. For
example, governmental planners may have as their principal
objective the minimization of cost increases in the hospital
sector, while providers may want to avoid the duplication of
services and prevent potential competitors from gaining access
to their market. The balancing of these different, and at
times conflicting, objectives has contributed to a lack of
uniformity in CON laws across states. CON laws vary with
respect to the type of facility covered, the change in service
or scope of operation covered, the dollar cutoff for review,
standards for review, the organizational structure of the review
process, and program sanctions.

CON laws generally cover hospitals, nursing homes, and
other related licensed facilities such as ambulatory facilities
and laboratories. Except Georgia, all states with CON programs
regulate hospitals. Michigan, on the other hand, is the only
state which limits its program solely to hospitals. The trend

in recent legislation, both for new programs and for amendments

to existing ones, has been toward broader coverage: the in—
clusion of all facilities under the program's jurisdication which
are licensed or certified by a state. Three types of activities
are regulated by CON programs: (1) investment in new plant and
new beds, (2) investment in new services and equipment, and

(3) expenditures for renovation and equipment to support exist-
ing services.

All certificate of need programs have established minimum
cutoff points for the size of an expenditure that will be re-
viewed. This cutoff point, or threshold level, is expressed
in dollar terms. The threshold for new beds and plant ranges
from $50,000 to $200,000; for equipment the cutoff point for
review ranges from $10,000 to $200,000. For both new beds,
new plant and equipment, the modal threshold is $100,000.

In general, thresholds for the review of bed capacity are more
restrictive than those for other proposed changes in equipment
and services.

States employ a wide mix and variety of standards in
reaching decisions under their CON programs. All states pre-
pare comprehensive health plans reflecting current health care
resources and future unmet needs. Often, however, these plans
are limited to projections of needed or desired bed supplies
for specific types of short-term hospital beds (medical-surgical,
pediatric, etc.). Comprehensive health plans serve as a guide
to the future state of the health system for review agency staff
and prospective applicants. Unless the plans themselves are
extremely detailed, they are of limited usefulness in specific
project review decisions. Moreover, as the state plans of
need become more specific and clarified, controversy over them
may grow.

The need for standards to assist and protect the various
parties involved in the CON process has been noted by many
observers. Standards currently lack specificity and coherence,

though exceptions can be found. Massachusetts' CON program, for

example, has made special efforts to specify and clarify the
standards that are employed in the project review program.
Standards assist project staff in their planning and review
functions in four areas: current and future bed needs; the
purchase of new equipment and the effect of the introduction
of new technologies; financial feasibility; and quality of care.
The organizational structure of the CON review process
and the number of agencies involved in the reviews vary by
program. The New York and Massachusetts CON programs have
provisions for three agencies in the review process; others
such as Illinois and Maryland have provisions for two reviews.
The review process normally flows from the areawide planning
agency (now the Health Systems Agency -— HSA) to the state
planning agency (now the State Health Planning and Development
Agency —— SHPDA) to the CON decision-making authority and finally,
if necessary, to an appeals board. In most instances, the
reviews are sequential, with areawide planning agencies assuming
the responsibility for the initial assessment of applications
in CON programs having such agencies. Where reviews are con—
current at the state and areawide level, they are conducted

simultaneously and coordinated.

HYPOTHESES ABOUT CON

 

Various authors have postulated the ten hypotheses about
CON that are listed in Table 1. Many of these hypotheses are
related: one hypothesis may follow from another, or one hypothesis
may be in effect a subset of another. For each hypothesis, an elab—
oration is first presented, indicating which authors have proposed
the hypothesis in one or another form. Then a summary is made of

any evidence found to support or dispute the hypothesis.

Hypothesis 1: CON will not be able to limit capital expansion
in beds and equipment as intended.

 

Hypothesis: Although many authors (e.g.,‘McClure, 1976;
Correia, 1975)* contend that certificate of need laws can curb
the excessive expansion of the health care industry, others argue
that CON processes will have only limited success in curbing
capital growth because of provider influence, consumer and
government ambivalence, and internal subsidies in the health
care industry. Havighurst (1973), Frech (1975), Posner (1974)
and N011 (1975) postulate that provider control over CON processes
(Hypothesis 3) will make those processes able to affect only
those supply restrictions which a hospital cartel would promote
to maximize its own welfare. Both Ginsburg (1976) and Havig-
hurst (1973) point out that consumers have much greater interest
in expanding access to health facilities than in reducing health
care costs; hence many consumer representatives of CON boards

will be reluctant to veto proposals to expand investment in services

 

*
Complete citations for the sources mentioned in this literature
review are provided in the annotated bibliography.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

 

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despite the cost implications. Kinzer (1977) argues that the
political vulnerability of the CON program will prevent it from
obtaining its objectives with respect to the containment of the
rate of growth of bed supplies and equipment. Curran (1974)
contends that,in many instances, the primary objective of the
state legislatures in passing CON laws was not a reduction in
the rate of industry capital expansion, but rather a broader
concern directed at reconciling cost and access objectives.
This ambiguity of direction is witnessed in the enabling legis—
lation by the presence of grandfather clauses which undermine
the potential impact of the program. Havighurst (1973) argues
that CON will not be able to limit capital expansion because it
fails to address the underlying conditions of third-party cost
reimbursement and provider influence over demand. Since CON
laws will not change these conditions, hospitals would continue
to prefer to offer more services than are economically justified.
Evidence that CON does NOT curb excessive capital growth:
A number of studies have sought to assess CON's impact on capital
growth in the hospital industry. These studies are of two general
types--those which simply look at CON process and approval and
disapproval rates and those which attempt an econometric analysis
of CON's impact.
One of the process studies in the first category is that
done by Lewin (September 1975). Reviewing CON and 1122 decisions
in twenty states, Lewin found that states approved more than 93
percent of all projects submitted, with particularly high approval
rates for hospital expansions and for proposals to purchase equip-
ment and add new hospital services. Nearly 75 percent of the
sample states and areas approved hospital beds in excess of 105
percent of the published need projections for five years hence. The
review agencies claimed that, despite the high approval rates, they
had deterred capital expansion by discouraging applicants from sub-
mitting proposals or by causing applicants to modify proposals before
final approval decisions were made. However, Lewin concluded that
capital expenditure controls, as presently administered, do not

prevent unnecessary captial investment in health facilities.

10

Two studies of hospital bed approval rates in specific states
also cast doubt on the effectiveness of capital expenditure con-
trols. Somers' (1973) review of CON decisions in New Jersey
suggested that the state would be more overbedded in 1975 than
it was in 1971 when the CON law was passed. However, Somers
did point out that "it is quite likely that the situation would
have been worse without the law." Dolan's (1977) summary of
Missouri's 1122 program, which was in effect from 1973 to 1976,
found that approval rates were lower in Missouri than in other states
studied by Lewin. The hospital bed supply grew, however, from a
reasonable one in 1970 to one substantially in excess of the demand
for services in 1976 (as witnessed by the steady decline in average
occupancy rates of hospitals in every section of the state).

The studies looking at approval rates for hospital equipment
do not present an encouraging picture of CON's impact on capital
expenditures either. The Lewin study (September 1975) found that
in the states surveyed, proposals to purchase equipment were almost
always approved. The principal exceptions were x—ray and other
scanner equipment, where the still infrequent denials were largely
the result of several institutions applying to purchase the same
new equipment and only one being approved. Cromwell, Ginsburg, and
Hamilton's (1975) analysis of hospital equipment investment decisions
indicated that CON had no effect on the adoption rates of seven of the
ten types of equipment studied. Fineberg's (1977) survey of the exper-
ience of states with CAT scanners found that, on average, 10 out of 11
applicants for scanners were approved, and the observed variation in
the ratio of scanners to population was a consequence of differences
in proposal rates, not in approval rates.

Lewin's (February 1975) survey of CON programs found that
consumers on review agency boards tended to value ready availability
of services over cost containment concerns and hence to support
expansion proposals. In a similar vein, Cares‘ (1977) saga of
health care planning in New York State underlined the fact that
serious regulation of the health system is extremely difficult
because, "with the exception of government budgeters, little

constituency exists for closing hospitals."

11

These studies, focusing on approval rates, show that the
hospital industry has continued to grow at a steady pace despite
CON laws. But no reliable evidence is provided to refute the
possibility that capital expansion might have been even greater
without the CON laws. No data have been collected on projects
that were never developed into formal proposals because of antici-
pated rejection by the CON agency.

Two econometric studies provide better evidence of the
limited impact of CON on hospital investment. Based upon an
analysis employing data from 1968-1972, Salkever and Bice (1976)
concluded that CON controls did not reduce the total dollar amount
of hospital investment. CON controls did appear to restrict the
growth of new bed supplies, but the reduction in bed growth was
compensated for by an increase in other types of investment. Salkever
and Bice estimated that the results for CON controls in force for
the entire 1968-1972 period would include a 5.4 to 9.0 percent decline
in the growth of bed supplies and a 15.2 to 19.7 percent rise in the
increase in plant assets/bed. In effect, hospitals have reacted to
tight controls on beds by increasing their investments in less tight-
ly monitored alternatives such as equipment.

Utilizing 1971—1973 data and a simple partial adjustment model
of investment as the empirical model for his analysis, Hellinger
(1976) concluded that CON had not significantly lowered hospital
investment and that hospitals anticipated the effects of CON legisla—
tion by increasing investment in the period preceding enactment of
the legislation. (See the Methodology Section for a discussion of
the specific methodological issues which limit the confidence one can
place in the Salkever and Bice, and the Hellinger studies.)

Evidence that CON does inhibit capital growth: Some evidence
that CON processes do curb capital growth is offered both in

studies of CON approval rates and in econometric studies.

12

Bicknell and Walsh's (1975) survey of CON decisions in
Massachusetts during the first nineteen months after the law's
enactment found that CON approved 5,247 general hospital beds,
precluded the addition of 443 beds, and reduced the number of
existing beds by 25. For long—term care facilities, an increase
of 7,948 beds was requested, but 1,885 of these were not approved.
Bicknell and Walsh did not examine the effect these decisions had
on the rate of growth of capital expansion, nor did they consider
that the quality of the application may have been a factor in the
decision of the CON agency.

While on the surface Bicknell and Walsh's findings encourage
optimism regarding program effects, closer examination and inter-
pretation of their results may suggest otherwise (see Methodology
Section). Roark's (1977) analysis of CON decisions in Texas,
which found that 250 of the 649 beds considered by the review agency
were denied, and 16 of the 722 beds proposed were withdrawn from
consideration by the applicant, also suffers from the same methodologi-
cal problems which affect Bicknell and Walsh's study.

Dolan's (1977) study of Missouri's short-lived 1122 program con-
cluded that under the program there was no unnecessary prolifera—
tion of special services such as open—heart surgery units or cobalt
therapy units. CAT scanners, however, were an exception to this.
Cromwell, Ginsburg, and Hamilton's (1975) analysis of national data
from the American Hospital Association found that CON decreased the
adoption rates of three of the ten types of equipment studied: x—ray
therapy equipment, cobalt therapy equipment, and radium therapy
equipment. In sum, analysis of CON approval rates indicates that CON
does prevent at least some capital investment, but these studies do
not show whether CON agencies are denying enough applications or
denying the right ones to achieve the goals envisioned for the

program.

13

Howell's (1976) review of the literature concluded that CON
programs may become more effective in time. Denial rates in
both Massachusetts and New York rose after the CON programs had
been in effect four to five years, and some of the CON programs
judged by the Lewin study (February 1975) to be more effective were
older programs. Howell's hypothesis is supported by Hellinger's
finding (reported above) that hospitals speeded up investment when
enactment of CON laws seemed in the offing. The acceleration in
investment would create a spurt in hospital growth rates during the
early years of a CON program and thus would conceal any dampening
effect that CON might be having on hospital investment. Even with—
out such a speed-up, much of the new investment in early CON years
would be the result of projects begun before CON went into effect.

Three other studies provide some evidence that CON programs
have inhibited capital growth in at least some settings. One of
these studies is that done by Cohodes (1976), which compares the
experience of five states with early CON programs to seven roughly
matched control states. The pre-CON period was 1963-1968 and the
post—CON comparison period was 1969-1974. Cohodes' major findings
were that: l) the rate of growth in bed supplies, though generally
decreasing, had decreased more rapidly in those states with CON
programs; 2) there was considerable variation in the experience
of individual CON states in controlling the rate of increase in
investment in plant assets; 3) in the aggregate, CON control appeared
to have slowed the rate of increase in the growth of plant assets per
bed, though there was significant variation among the states; and
4) CON programs appeared to be more effective in curbing capital
growth in smaller states with smaller hospital industries. Cohodes
does point out that on average, CON states have much higher levels
of plant assets per bed than non—CON states, and it is therefore possible
that the slower growth in this variable in CON states may simply re—

flect greater sophistication in levels of care.

14

Employing a step-wise multiple regression procedure on a
limited one year (1973-1974) cross section of 3,000 hospitals,
Katz (1977) concluded that CON is reducing both bed and non-bed
investment in most states. Katz found that there are a few
states with CON where the growth rate in plant assets per bed
is very much above that of other CON states and even above that
of uncontrolled states. Katz, like Cohodes, points out that the
hospital industry tends to be different in CON states than in
others. In the 1973-1974 study period, states with CON had a
greater number of hospitals, more beds per hospital, more teaching
hospitals, higher plant assets per bed, and more urban hospitals
than states without a CON program. These differences in the hospital
industry may account for some of the differences witnessed in capital
growth.between CON and norrCON states.

Rothenberg's (1976) study of the CON experience in New
York State lends further support to the contention that CON
controls capital growth, as she concluded that the rate of
growth in short-term hospital beds was slower in the post—CON-
period than in the pre-CON period. (See the Methodology Section
for the reasons why confidence should not be placed in Rothenberg's
conclusions.)

Conclusion: Conclusive evidence on CON's impact on capital

growth is not in. Many factors affect growth rates, and it is
difficult to isolate the impact of CON. CON programs clearly
do not provide an automatic cure for excessive growth in the
hospital industry. Despite high approval rates, CON programs
do seem to curb at least some types of capital expansion in
some states, although they may provoke increases in other types.
The effectiveness of CON programs appears to vary from state to
State, and research is needed to ascertain what legal, political,
economic, and technological factors make some programs more
effective than others. Longer-term data are also needed to
test the hypothesis that CON programs become more effective

after they have been in operation for a number of years.

15

Hypothesis 2: CON will not control cost increases.

 

Hypothesis: Although CON controls are often advocated as
a means of dampening inflation in health care costs (Correia,
1975; McClure, 1976; Institute of Medicine, 1976), CON skeptics
contend that CON processes are an ineffective method of cost
control. In the first place, CON procedures control only capital
expenditures, and capital expenditures alone constitute but a
small fraction of health care costs (Gaus and Cooper, 1976). In
the second place, the cost control benefits of CON will be
limited by the reactions of providers who, for example, may
react to curbs on capital expenditures by substituting unregulated
labor for regulated capital (Havighurst, 1973; Schlenker, 1973).
Finally, restrictions on capital outlays may lead to increased
prices or non-price rationing (Newhouse and Acton in Havighurst,
1974; N011, 1975; and Havighurst, 1973).

Prices may rise under CON both because higher prices will
be needed to finance the subsidies and inefficienciescreated by
regulation and because supply restrictions may cause a dis-
equilibrium between supply and demand. Elaborating on the last
point, Havighurst (1973) points out that one of the key rationales
for CON laws is the so-called "Roemer effect,” namely that
increases in the supply of health services, particularly of
hospital beds, appear to generate new demand. Martin Feldstein's
(1971) analysis of the "Roemer effect" indicates that an increase
in the supply of beds leads to an increase in demand, but it may
also lead to a somewhat lower price.

CON controls provide only one tool to cope with the multi—
faceted problem of hospital cost inflation. CON controls do
not address the underlying conditions of third-party cost reim-
bursement and provider influence over demand, which contribute
to excessive hospital growth and undue escalation in health care
costs. (Havighurst, 1973; State of New York, 1977). Thus, even
if CON processes succeed in curbing capital expenditures, they

may not curb overall health care cost inflation.

l6

On the other hand, CON advocates contend that certificate
of need controls will slow the escalation in health care costs by
preventing the construction of unnecessary facilities, by rational-
izing the distribution of high cost services, and by reducing the
utilization of services (Correia, 1975; Institute of Medicine, 1976;
McClure, 1976). This contrary hypothesis assumes that there is waste—
ful duplication of services in our health care system and that the
excess services are often underutilized and thus cannot operate
as efficiently, as economically, or as effectively as fully util-
ized facilities. A further contention is that excess facilities
stimulate excess utilization, the so—called "Roemer effect," where-
by supply creates demand. Excess utilization, in turn, pushes
up health care expenditures unnecessarily. CON disciples main—
tain that, with widespread health insurance and current reimburse—
ment practices, competition in the health care system is insufficient
to eliminate wasteful duplication and that CON controls are the
most direct method of tackling this problem.

Evidence that CON does NOT curb cost increases: Two types of

 

studies have sought to assess the impact of CON controls on health
care costs: econometric studies and studies evaluating costs with-
out attempting to isolate the effect of certificate of need laws.
Salkever and Bice's econometric study (1976) provides the best
evidence of CON's limited impact on costs. Using 1969-1972 data,
these authors conclude that CON did not substantially lower per
capita hospital costs or hospital inpatient costs per day and in
fact may have increased these costs slightly. CON did, however,
lower the utilization of inpatient services. Salkever and Bice es—
timated that the impact of CON on cost levels is not significant.
Under the worst conditions the effect of the CON program over the
1968-1972 period may increase a typical state's per capita hospital
costs in 1972 between 1.54 and 2.44 percent; under the best con—
ditions, costs may decrease by 1.09 to 1.85 percent. Salkever and
Bice did find that CON had a negative impact on the volume of in—
patient services ranging from —2.15 to —8.30 percent, and on the

number of admissions per capita ranging from -4.92 to -8.30 percent.

17

Other studies with negative findings on CON's cost
effects are based on data from years before CON programs were
widely in effect, although some areas did have health planning
efforts designed to eliminate wasteful duplication and to pro-
mote rational development of the health care system.* Using
1950-1969 data, Zellner (1973) concluded that, if CON programs
are successful in restricting capital investment, they may
have the perverse effect of increasing expenditures for in-
patient and outpatient care. A number of Zellner's estimating
assumptions are tenuous, limiting the confidence which one can
place in his conclusions.

The other, non—econometric studies may be said to provide
clues, but not hard evidence, that CON controls have little
impact on costs. Kinzer (1977) points out that Massachusetts,
although a relatively early CON state, has experienced a rate
of growth in hospital expenditures greater than that in the
nation as a whole or in any neighboring New England state.
Dolan's study of Missouri's short—lived 1122 program concluded
that the program had little impact on the economic and financial
characteristics of the state's health care industry. The state
of New York's legislative audit found that despite the planning
program, patient day costs have risen faster in that state than
in the nation as a whole. None of these studies, of course,
attempts to isolate the impact of CON from other forces impinging

on health care costs.

 

*Analyzing 1952-1963 data, May (in Havighurst, 1974) found
that costs per patient day increased 98.4 percent in areas with
health planning and 94.1 percent in areas without health planning.
By other measures, cost increases were somewhat less in areas with
planning: cost per admission increased by 97 percent in areas
with planning and by 100 percent in areas without planning;
operating costs per acute hospital bed rose 154 percent in
areas with planning and by 169 percent in areas without planning.
Overall, then, health planning seems to have a negligible impact
on costs. The time frame of May's analysis is so dated that the
findings can only be viewed as suggestive at best.

18

Lewin's (September 1975) analysis of approval rates in CON
and 1122 programs in twenty states prompted the conclusion that
capital expenditure controls, as presently administered, do not
prevent unnecessary capital investment and thus are not an
effective means of containing health care costs. Lewin's con—
clusion is based on Hypothesis 1, not on a separate analysis of
CON's impact on costs. Lewin does make the interesting point
that need projections used by review agencies were based on
current levels of efficiency and placed a ceiling on capacity,
not costs. Furthermore, fewer than half the state and area
agencies surveyed by Lewin shared the federal government's com-
mitment to contain health care costs; they placed a much higher
priority on improving the quality and distribution of health
care resources.

Evidence that CON controls DO curb cost increases: There
are apparently no studies offering direct evidence that CON
controls have curbed overall health care cost increases. The
Cohodes (1976) and Katz (1977) studies, reported under Hypothesis 1,
did find that CON apparently slowed the rates of growth both
for hospital bed supplies and for plant assets per bed in
some settings. Since capital expenditures generate many costs
beyond the initial outlay for the new facility (e.g., interest,
depreciation, staff and supplies to operate the facility, etc.),
presumably the slower growth in beds and in plant assets per bed
have resulted in a slower rate of hospital inflation than would
have occurred without CON controls. However, no empirical
evidence exists to support this presumption.

Conclusion: The evidence that exists does not encourage
much optimism about CON's ability to curb health care infla-
tion. But CON's impact on costs, like its impact on capital
expenditures, may vary by state and depend on the age and sophis-
tication of the CON program, and the political and economic environ-
ment in which it operates. It is also possible that any dampening
effect CON may have on costs may be obscured by the many other

forces causing those costs to go up.

19

Hypothesis 3: CON processes will be controlled by providers,
protecting existing providers and reducing competition and
efficiency.

Hypothesis: There are two versions of the hypothesis that
providers will dominate CON processes: "capture theories" and
"political—economic theories" (Noll, 1975). "Capture theories"
assert that regulation is an institution proposed and supported
by regulated industries as a mechanism for supplanting competition
with a legal cartel. (Noll, 1975; Havighurst, 1973; Posner,

1974; Schlenker and Ellwood, 1973). The regulators are simply
tools of the industry, giving a veneer of legality to the
industry's monopolistic practices. ‘

"Political—economic theories" assume that regulators are
not consciously handmaidens of providers but try to serve some
concept of the public interest. However,it is difficult to
identify this interest because the society contains numerous
groups with conflicting goals, some of whom are in a better
position than others to provide information to regulators, to
influence legislators, and to get regulators' decisions over-
turned in court (Noll, 1975; Havighurst, 1973 and 1975; Marmor,
1976; Krause, 1975; Frech, 1975; Carr, 1970).

Providers, for example, are considered to have special expertise
in health care delivery, and their expert opinions are likely to
be heeded by consumers as well as regulators. Providers are also
one of the main sources for the data needed by regulators to make
intelligent decisions. Incentives to influence CON decisions are
greater for providers than consumers. Policies to combat medical
care inflation have a major impact on providers, but, because of
the risk-sharing introduced by insurance, any expected benefits or
costs of such policies would be diffused among millions of health care
purchasers and are therefore relatively unimportant to the consu-
mer. Since in the "political market" greater power is wielded
by those who have "concentrated" rather than "diffuse" interests

(Marmor, 1976), there is little pressure on political leaders to

20

take any action likely to arouse the opposition of politically
potent providers. In most instances, providers are organized
and have the resources to influence legislators and to appeal

to the courts, while, in general, consumers are poorly organized
and politically ineffective lobbyists.

It is argued that whether regulators are consciously con-
trolled by or unconsciously influenced by providers, the net
effect of CON is likely to be cartelization of the health care
industry accompanied by supply restrictions and price levels
roughly equivalent to those which a hospital cartel would seek
to maintain to maximize its own welfare. (Havighurst, 1973;
Posner, 1974; N011, 1975; Pauly in Havighurst, 1974).

Because CON processes will be controlled by providers,
they will be used to protect existing institutions (Noll, 1975;
Havighurst, 1973 and 1975; Posner, 1974; Hyman, 1977; Frech, 1975;
Marmor, 1977; Pauly article and Lave article in Havighurst,

1974). CON programs are thus likely to result in the preservation
of the status quo and restrictions on entry for "outsiders,"

While increased industry concentration may not be the goal of
capital controls, it is likely to be the unintended effect.

Regulators traditionally have a protective attitude toward
the regulated firms and this "sunk cost obsession" (Havighurst,
1973), biases regulators in favor of established providers and
against new entrants that might threaten the investment or rev-
enues of existing institutions. As a consequence, CON controls
will necessarily reduce competition among health care providers,
and this reduction in competition will cause some loss both in
efficiency and in responsiveness to consumer desires (Havighurst,
1973; N011, 1975; Frech, 1975; Kinzer, 1977; Posner, 1974). Effi—
ciency will be damaged by CON's protection of possibly inefficient
current providers and by CON's discouragement of innovation
(Hypotheses 6 and 7). As long as the need requirement is enforced,
internal subsidies will continue to support not only under-

priced services but also inefficient or unneeded ones.

21

Correia (1975) presents an alternate view as he argues

that CON is unlikely to reduce competition because little com-
petition exists even without these controls. There is little
price competition among hospitals, and there is a tendency for
even relatively inefficient health care institutions to stay in
operation and not be driven out by competition from other insti—
tutions. CON can be considered a remedy for inadequate compe—
tition and thus a means of reducing the wasteful duplication of

services that results from inadequate competition.

Evidence that CON processes will be controlled by providers,

 

protecting existing providers and reducing competition and

 

efficiency: It is difficult to obtain clear—cut evidence of
provider control of CON processes, for that control may be
exercised in subtle ways, not readily measurable in a scientific
manner. However, some case studies and empirical observations
of CON processes contain clues that provider domination is a
legitimate worry in assessing the impact of CON programs. For
example, Macro Systems (1974) and Curran (1974) point out that,
in general, state hospital associations have actively supported
CON passage, and the Codman report (1977) asserts that provider
reaction to regulatory decisions, with a few glaring exceptions,
has been surprisingly moderate. This lends some credence to

the "capture theories" that "regulation is an institution pro—
posed and supported by regulated industries as a mechanism for
supplanting competition with a legal cartel."

The State of New York study (1977) complained that decisions
reached on CON applications are not always in line with the
State Health Plan and that there is an adversary relationship
between the State Department of Public Health and both regional
planners and providers of care. This implies that while pro-
viders may not dominate the State Department of Health, the

Department's plans do not structure CON decisions.

22

Bicknell, former Commissioner of Public Health in Massa—
chusetts (Bicknell and Walsh, 1976), reports that providers tend
to have undue influence over Certificate of Need decisions be-
cause of their financial resources, their technical expertise,
and their skill in presenting expansion plans in a total package
designed to appeal to consumers. However, Bicknell believes
that it is possible for the state to devise methods to ensure
that consumer interests are given sufficient weight.

The Lewin study (February 1975) reports mixed evidence of
provider control.

The extent to which providers dominate CES
(Capital Expenditure and Service control)
planning and review is highly variable,
especially at the areawide level. Several
factors operate to affect the extent and
impact of provider dominance. One factor
is attendance at committee and board meetings.
Providers are more likely to participate so
that committees and boards with narrow con-
sumer majorities tend to develop working
provider majorities. In this sense,
providers come to dominate the review
process. Observation suggests that

this dominance may create biases against
new entrants, but further documentation

of this situation is needed. (pages 2-23)

Lewin's observations of CON processes (February 1975) also
suggest that provider dominance may create biases against new
entrants, but further documentation of this situation was felt
to be needed. Lewin's analysis of CON approvals and disapprovals
(September 1975) found that new facilities (including for-profit),
which represented a small proportion of the hospital proposals
received by all states, had a comparatively low approval rate,
while expansion proposals, which made up a large proportion of
all hospital proposals, had a comparatively high approval rate.
Lewin, however, makes no attempt to evaluate the quality of the
various proposals to determine if there was any justification

for the different approval rates.

23

Both the Britton study of Massachusetts (1975) and the
State of New York legislative audit (1977) found that, after
several years of CON operation, inequities in the distribution
of health resources were as great as or greater than before the
institution of CON; that is, under CON, expansion of services
was generally greater in areas already well served than in under-
served areas. This preservation of the status quo occurred
despite the fact that one of CON's expressed goals was to make
health care more readily accessible to all segments of the
population. However, there may be reasons other than CON (e.g.,
technological change or population change) for the continuing
inequities in the distribution of health care resources.

Evidence that CON processes will NOT be controlled by
providers: As indicated above, Bicknell and Lewin suggest that
provider control of CON processes need not be absolute. Sapolsky
(1977) implies, but does not supply evidence, that provider
dominance can be diluted through forceful action by state bureaucrats,
alarmed by burgeoning Medicaid costs, and by assertive consumer
HSA board members, influenced by HSA staff who are graduates
of professional programs of public health or public policy,
imbued with the planning ethic. Codman (1977) reports that!
most provider members of the HSA board (other than the applicant)
generally defer in cases of facilities review, leaving the
individual applicant institution and the HSA planners to nego—
tiate and to maneuver for consumer support. Codman, however,
also reports cases where provider members of HSA boards present
an active and unified front in opposition to planning.

Conclusion: The evidence for and against provider dominance
is limited. The limitations stem from two causes: the reliance
upon case studies as the principal methodological framework for
the various works; and a measurement problem resulting from
the difficulty in separating provider and regulatory interests
(e.g., regulatory goals to limit the rate of growth in hospital
investment may inadvertently support provider goals to limit

competition).

24

A tentative conclusion is that provider control of CON
processes is a real threat but it is not inevitable. Provider
dominance is likely to vary from area to area, depending on the
character of local providers and their devotion to the concept
of planning, the personalities and interests of the consumers
on the review boards, the quality of the HSA staff, and the
determination of the state to curb hospital cost inflation.
While CON may well be helping to protect existing providers,
these providers are often powerful institutions, with a battery
of weapons in their arsenal to protect themselves from compe—
tition. No studies have clearly isolated the role CON plays
in discouraging new entrants or measured how much CON strengthens

the organizational inertia in our health care system.

Hypothesis 4: CON will favor the expansion of politically
potent institutions at the expense of smaller ones

 

 

Hypothesis: CON processes will not only be dominated by
providers (Hypothesis 3); they will be controlled primarily by
the bigger, more influential institutions (Havighurst, 1973)
barring new entrants in the health care field and favoring the
expansion of politically potent institutions at the expense of
smaller ones. "Technical" decisions on need assessment will
tend to become inextricably bound to social and political
issues (Cohen, 1973).

Evidence that CON favors more politically potent institu—

 

tions: There is some evidence that CON decisions favor big
teaching hospitals in major urban centers. Lewin's (September
1975) review of CON and 1122 decisions in twenty states found that
medical centers with highly specialized services appeared to be
virtually exempt from effective review and control. Britton's
(1975) analysis of CON decisions in Massachusetts concluded that
favorable decisions were more likely to be rendered on applications
from larger institutions, affiliated with medical schools and

located in the Boston area. The state of New York's (1977)

25

legislative audit of the state‘s health planning efforts found
that, after more than a decade of planning, health care resources
were even more inequitably distributed than they had been earlier.
The audit found that

"On the whole, the condition of general hospital
bed distribution between 1966 and 1974 moved
further away from regional equality. One of the
three areas which contained a greater number of
beds per 1,000 residents than the statewide average
gained relative to the rest of the state. Three of
the four areas that had capacity levels lower than
the statewide average lost beds relative to their
population."

This presumably means that, as in Massachusetts, the greatest
expansion had occurred in major urban centers. The audit also
found that the number of large facilities had grown in New York
State. Promoting larger facilities, however, was a deliberate
state policy, and CON appears to have just accelerated a trend
that began before its enactment. Macro's (1974) survey of CON
programs found some evidence that these programs favored the more
powerful, established health care providers. Moreover, Codman's
(1977) case studies of CON and 1122 programs found that political
and organizational dynamics are always more decisive than the
technical aspects of planning (e.g., CON staff recommendations
based upon the best available methodology were overturned by CON
boards). This implies that need determinations tend to be "politi-
cal" rather than "scientific."

Evidence that CON does NOT favor more influential institutions:

 

No study provides evidence to dispute the hypothesis that CON
processes favor the bigger, more influential institutions, but
no well—conceived analytic studies have investigated this issue.
Conclusion: A tentative conclusion can be made that CON
processes to date have tended to favor major hospitals, particu-
larly the big teaching hospitals in urban centers. More evi-
dence needs to be collected on this point. Future analysis

could determine whether differences in the effectiveness of CON

26

programs are attributable to the number of major medical centers
in a State or to other factors. It is possible that the influence
of the larger teaching hospitals may diminish now that they no
longer contribute financially to HSAs (as they formerly did with
the now defunct Comprehensive Health Planning "B" agencies). It
is also possible that the influence of the larger providers will
weaken as HSAs grow more sophisticated about determining needs

and reaching decisions on project applications. An alternative
explanation of the favoritism apparently shown the larger teaching
hospitals is what has been termed the technological or "quality"
imperative. Large teaching hospitals are already centers of
technological sophistication. Many planning agencies believe

that these tertiary care facilities should be equipped with the
latest and most sophisticated resources, as it is expected that
they will serve as referral centers for the more complex cases

in a community. Thus, it may not be political power but a shared
belief of planners and teaching institutions in centralized
sophisticated resources which lends credence to the hypothesis

of favoritism in the review process.

Hypothesis 5: CON processes will be biased against certain
types of providers, such as for—profit institutions and nursingAhomes

 

 

Hypothesis: A corollary of Hypothesis 4 is that CON
agencies will reflect the biases of the medical establishment
against certain types of providers, such as for-profit insti-
tutions (Kushman, 1977; Frech, 1975) and HMOs (Correia, 1975;
Havighurst, 1973). CON's possible prejudice against HMOs is
discussed under Hypothesis 6 (that CON will stifle innovation
in delivery mechanisms), for many HMOs are just coming into
being. But CON processes could also be biased against established

HMOs.

27

Evidence of CON bias against certain types of providers:

 

Lewin's (1975) analysis of CON and 1122 decisions found that
proprietary hospitals were discriminated against in the review
process. Members of the planning agencies interviewed by Lewin
expressed strong opposition, on philosophical grounds, to the
entry of for—profit institutions.

A further hint of discrimination against for—profit hospi—
tals is found in Cares' (1977) report that some years ago, when
the New York Health and Hospitals Planning Council proposed the
closing of 27 hospitals, most of those targeted for closure
were either municipal hospitals or small proprietary hospitals.
In 1975 the HSA drew up a different list of hospitals to be
closed, and this list included several major voluntary hospitals.
However, the HSA's draft list raised such an outcry that a final
plan for hospital closure was never adopted, and in fact no
hospitals—-voluntary or proprietary-—have ever been closed by
government fiat. The Cares report, of course, does not indicate
the results of CON review decisions; it primarily provides
evidence of the difficulty CON programs are likely to encounter
if they oppose the medical establishment.

There is also some evidence that CON processes may dis—
criminate against nursing homes and other long—term care facilities.
Lewin's (September 1975) analysis of CON and 1122 decisions found
much lower approval rates for nursing homes than for hospitals.
Britton's (1975) analysis of Massachusetts CON decisions found
that decisions were more likely to be favorable on applications
for acute—care beds than long—term care beds. Bicknell and
Walsh's (1975) summary of Massachusetts CON decisions found
that 24 percent of new long-term care beds requested were disap—
proved, while the disapproval rate for acute-care beds was far lower.

It should be pointed out that the lower approval rates
for nursing home beds do not necessarily reflect bias. Many

nursing home proposals are of very poor quality or the financial

28

arrangements are unacceptable. Sometimes two different pro-
prietors will propose establishing a nursing home in a given
area, and the CON agency can legitimately approve only one of
the two. Hospitals, on the other hand, do not usually submit
such blatantly duplicative proposals.

Evidence of CON's lack of bias: Although much of the above

 

evidence of CON‘s bias is weak, there is no clear evidence that
CON processes are NOT biased against proprietaries or nursing
homes.

.Conclusion: There may be some bias in CON processes
against for-profit hospitals and nursing homes, but the evidence
is weak since no systematic analysis has been made of the
quality of the proposals made by these institutions. It is
always possible that there were solid reasons for the higher

disapproval rates for these proposals.

Hypothesis 6: CON will stifle innovation in delivery mechanisms.

Hypothesis: By erecting barriers to new entrants in the
health care field, CON will curtail innovation in service de—
livery (Havighurst, l973; Noll, 1975; Hyman, 1977; Lave article
and Newhouse article in Havighurst, 1974). In particular, CON
processes will slow the introduction of such innovative delivery
mechanisms as Health Maintenance Organizations (HMOs), which
provide comprehensive care for a fixed monthly fee; surgicenters,
which do surgery on an outpatient basis; free-standing ambula-
tory care facilities; and other institutions that hold some
promise of providing care in a less expensive, less resource
intensive fashion than existing modes.

Evidence that CON slows innovation in service delivery:

The evidence on the growth of service innoVation indicates
that innovation in delivery modes is emerging at a snail's pace,

but no studies have identified CON as a cause of this slow growth.

29

Evidence that CON does not slow innovation in service delivery:
Two studies indicate that CON processes are not inevitably biased
against Health Maintenance Organizations (HMOs). O'Donoghue's
1972 survey of HMOs (see Havighurst, 1974) found that most HMOs
had had very little contact with Comprehensive Health Planning
Agencies, and, where there were contacts, the vast majority
were not prejudicial against HMOs. Schlenker (1974) found that
most HMOs surveyed in.l973 did not feel CON laws were a signif-
icant barrier to HMO formation, but 35 percent worried that CON
might impede HMO growth.

The Schlenker and O'Donoghue findings suggest that to date,
CON review agencies have not displayed providers' traditional
antipathy to HMOs.* Yet, an agency might still reject an HMO's
request to build a hospital on the grounds that the area was
already overbedded. Such a decision would reflect one of two
factors: the failure to consider the existing institutions,
while meeting current needs, may not be doing so in the most
efficient or economical fashion, or the political inability to
change (reduce) existing capacity in the system to allow the
substitution of alternatives. Thus, in preventing the creation
of excess capacity, CON agencies may become roadblocks to inno-
vation, artificially preserving the existing structure of the
health care system.

The State of New York legislative audit (1977) concluded
that health planners simply react when a CON application is
submitted and usually take no initiative in exploring the
possibility of less costly alternatives or the use of shared
services. This seems to indicate not that CON stifles innova-
tion, but that it fails to stimulate it. This agrees with the
finding in Lewin's review of CON and ll22 decisions in twenty

states (September (1975) that there is no hard evidence that

 

* Both the Schlenker and the O'Donoghue studies treat HMOs
as though they were homogeneous. This may be misleading. Some
HMOs, a la Kaiser, seek to purchase and operate their own hos—
pitals, others purchase hospital bed days from existing providers.
Providers will have very different reactions to Kaiser type
HMOs than to HMOs which purchase bed—days from them.

30

review agencies block innovations such as HMOs, but other factors
prevent innovative proposals from being developed. Of the 163
"innovations"* found in the Lewin study sample, all but four were
approved. "The small number of innovations proposed, plus the
fact that nearly half were in three States which actively spon-
sored and subsidized their development (New Jersey, New York and
Virginia), suggests that factors other than {capital expenditure}
controls are preventing innovative proposals from reaching the
formal proposal stage." Among the factors mentioned by agency
personnel interviewed by Lewin were provider opposition to HMOs
and to ambulatory surgical facilities, and third-party reimburse-
ment policies. Together these create an environment in which
any development that has the potential to reduce the level of
utilization of inpatient facilities will be met with strong
establishment opposition or will be financially infeasible.
Conclusion: There is as yet no hard evidence that CON
processes block innovation in service delivery, but they may
be unwitting handmaidens to providers' conservatism, reinforcing

the inertia in our health care system.

Hypothesis 7: CON will slow technological innovation.

Hypothesis: Most assertions that CON processes will dis-
courage innovation do not distinguish between technological and
organizational innovation. In most cases, it is clear that the
primary concern is the impact of CON on innovations in service
delivery mechanisms. However, Hanley (1977) and Havighurst (1973)
both specifically postulate that CON will inhibit technological
innovation because of CON's stifling of competition (Hypotheses

l and 3).

 

*Lewin never explicitly defines "innovations," but this
category includes: HMOs, surgicenters and similar delivery
alternatives to inpatient care.

31

Evidence that CON slows technological innovation: No studies

 

have produced evidence that CON has discouraged technological
innovation.

Evidence that CON does NOT slow technological innovation:

 

Cromwell, Ginsburg, and Hamilton's 1975 analysis of hospitals'
decision making processes for equipment purchases found that

CON decreased the adoption rates of certain pieces of equipment
(X—ray therapy equipment, cobalt therapy equipment, and radium
therapy equipment), but had no effect on the adoption rate of
other equipment. The authors concluded that although CON slows
down the proliferation of new equipment already diffused through
the system, it does not impede the introduction and diffusion of
new technologies. Fineberg (1977) in a survey of state and
local planning agencies found that over the past two years
(1975—1977) there has been sustained an almost linear growth

in the placement of CAT scanners nationally, averaging approxi—
mately 25 new installations per month.

Conclusion: While CON may impede organizational innovation,
the little evidence available indicates that as yet it has not
discouraged technological innovation. Traditionally, our health
care system has been extremely cautious about organizational
change, while avidly encouraging and supporting technological
change. Presently, it seems unlikely that CON will change these
entrenched Views. If, in fact, our rate of technological change
in health care does slow down in time, it may be difficult to
ascertain how much is due to CON and how much is due to other
factors such as reduced funds for medical research or new rate

review and reimbursement policies.

32

Hypothesis 8: Local HSAs with CON responsibilities will advocate

 

health facilities growth in their own area.

 

Hypothesis: One reason that CON programs will have dif-
ficulty curbing capital growth (Hypothesis 1) is that each
local health planning agency is likely to be eager to add
services in its own area. The support for expansion of local
resources is a consequence of a number of factors including:
consumers' desire for more and better health services, rivalry
among areas about the services available in different towns,
and the knowledge that each community bears only a portion of
the full costs of its decisions.

As Sapolsky (1977) points out,

Over a hundred HSAs will lack within their

territory a medical school and the sophis-

ticated facilities and services that are

attracted to them. As the disparities are

discovered, as they will be, pressure will

develop to acquire matching facilities and

services. Communities compete for prestige

and economic growth. Those that lag behind

in medical resources will want to catch up

and those that are ahead will want to keep

ahead.
The desire to expand local services is fostered by the fact
that local services are paid for in large part by broader jur—
isdictions. Adding a CAT scanner in Cleveland increases Blue
Cross rates not just in Cleveland but throughout the State of
Ohio, so that the cost impact is diffused while the service
benefit is concentrated.

Rivalry among areas for expansion of local services is
one reason many authors contend that final decisions on CON

applications should rest with state rather than local agencies.

(Correia, 1975; Bicknell and Walsh, 1976; Lewin, February 1975).

33

Evidence of local advocacy of health facilities growth:
There is little concrete evidence for this hypothesis other
than the finding from Codman's (1977) case studies that in many
instances consumers on HSA boards support technological expansion
and capital investment based on parochial local interests. Addition-
ally, Bicknell and Walsh (1976) and Lewin (1975) observed in
Massachusetts and in twenty other states respectively, that local

decisions reflect local interests rather than broader concerns.

Evidence that local agencies are not always advocates of.
growth: The Codman (1977) case studies also found instances
where HSA consumers opposed expansion because of a history of
community—hospital antagonism or because of strong support
for planning goals. The Codman study noted that consumers on
HSA boards do not behave homogeneously. Altman (1977) has
also witnessed this variation in consumer behavior. Consumers
selected to serve on HSA boards may not be a representative
sample of consumers from within a community. They may, in fact,
have been chosen for the very reason that their views are non—
parochial.

Conclusion: The Codman study which touches directly on
this point confirms the danger that rivalry among areas can
hamper the efforts of CON programs to curb excessive growth.
But the Codman study does point out that parochialism may not

be inevitable in local CON agencies.

Hypothesis 9: CON will be expensive to administer.

 

Hypothesis: CON laws will impose not only the administra-
tive coSts of the regulatory program but also the considerable
costs of compliance incurred by the applicants themselves.
(Havighurst, 1973; Noll, 1975; May in Havighurst, 1974; Kinzer,
1977). These costs will reduce or eliminate any cost-savings

induced by CON controls.

34

Evidence of high CON administrative costs: Kinzer (1977)

 

contends that, in Massachusetts alone, compliance with CON and
other regulations costs hospitals an estimated $80 million
annually. Kinzer, however, does not support his assertion
with specific data.

Dolan's (1977) study of Missouri's 1122 program concluded
that a by-product of the program was an increase in the amount
of time and cost required to implement a capital expenditure
decision, but no statistics are offered to buttress this con-
tention.

Evidence of low CON administrative costs: Lewin's (February

 

1975) survey of state and local regulatory activities in fourteen
states found that capital expenditure controls were relatively
inexpensive to administer. Lewin estimated that the total costs
to CES (Capital Expenditure and Supply) agencies for planning
and project review activities, and the direct expense to insti-
tutions for submission of applications for review would be
approximately 0.4 percent of the annual national expenditures for
hospital and nursing home care. Cost estimations consisted of
three components: average agency review costs per application,
application costs for the applying institution, and the number

of applications per institution. Caution should be employed in
accepting Lewin's cost estimates since the procedures for
calculating the three component portions were heuristic at best

(e.g., institutional costs were assumed to be equal to the combined

 

statewide cost of agency review). In Texas, Roark (1977) asserts

that the total costs of the CON decision process for hospitals

represents less than 2 percent of the cost of the project. However,

it is unclear if Roark looked at the indirect compliance costs,

such as increased data gathering, attributable to the CON program.
Conclusion: More research clearly needs to be done on the

administrative and compliance costs imposed by CON laws. Direct

costs may not be unduly high, but none of the literature surveyed

35

looked in any detail at the indirect costs. Examples of indirect
costs include extra hospital time devoted to planning, and the
higher construction costs, which hospitals claim were caused by

construction delays arising out of the CON process.

Hypothesis 10: CON programs will be hampered by the difficulty
of developing standards.

 

 

Hypothesis: CON agencies will be unable to make rational
determinations of need because of the near impossibility of
developing methodologically sound and/or politically acceptable
standards and criteria (Carr, 1970; Cohen, 1973).

Evidence of the lack of standards: The literature is

 

replete with complaints about the lack of standards and criteria
for reaching judgments on projects submitted for CON approval.
For example, after surveying CON and 1122 agencies in twenty
states, Lewin (September 1975) concluded that few agencies have
well developed need projections, review criteria, or data
resources.

Evidence that the development of reasonable standards is

 

possible: Although few CON agencies are using well developed
standards or criteria, Lewin (September 1975) contends that
nearly all types of need projections and review criteria have
been developed by at least some agencies, so there are not
methodological obstacles to developing such criteria. McClure
(1976) argues that although methods to identify excess capacity
Kare crude, they are adequate to initiate reasonable CON reviews.
Melum's (1975) review of current bed need criteria found that,
while there is still a long way to go in developing optimal
bed need criteria and standards, considerable progress has been
made by some agencies. For example, planners are now beginning
to employ statistical estimation techniques to account for random
fluctuations in a hospital's daily census. They are also beginning

to take into account appropriateness and efficiency of care,

36

in addition to the amount of care currently demanded, and to
consider such variables as the demographic composition of the
target population, the type of medical service, the size of
hospital or service, and the extent to which the setting is urban
or rural. Some methodologies adjust bed need projections for
special circumstances, such as the fact that a hospital serves
a substantial population outside of the planning area.
Conclusion: It would seem that the review criteria
currently used by CON agencies are often methodologically ques—
tionable, leaving the agencies open to accusations that their
decisions are arbitrary. Developing reasonable standards is a
difficult but apparently not impossible undertaking. Developing
better standards is clearly a high priority task, but CON
review procedures could possibly be improved simply by educating

agencies about existing standards, imprecise as they may be.

37

METHODOLOGY CRITIQUE

The literature on CON and its impact is limited, but growing
rapidly. The vast majority of published articles on CON have
been either descriptive or hypothesis—raising pieces. Many of these
studies have tended to look at the political, administrative and
managerial aspects of the program without formally addressing
evaluation questions. Careful, systematic evaluation studies of
the CON program have not been prepared, though some initial
analytic assessments have been completed.

The first section of this literature review identified and
assessed the evidence regarding the various hypotheses which have
been raised about the CON program. This section is divided into
two parts. The first identifies and discusses the various
measures which have been employed to assess CON performance.

The second critically appraises the research methodologies

utilized in the evaluation studies.

Measures of CON Performance

 

Measuring the performance of any regulatory intervention is
a difficult process. For CON, this problem has been compounded
by the variation across states in program goals, structure,
coverage provisions and implementation barriers. Other dif—
ficulties exist in measuring the "effects" or the "success" of
the program. For instance, program successes may be masked
by external factors such as: the introduction of new health

service delivery modes (HMOs, ambulatory surgical treatment

38

centers, etc.) as complements rather than substitutes for the
existing supply of health services; general economic trends (e.g.,
inflation or recession); malpractice effects (e.g., increasing
rates, pressure on hospital prices); and reactions to future
anticipated regulations, among others. By the same token, program
failures may also be masked by external factors. For example,
the Economic Stabilization Program (ESP) or the various state
rate setting authorities could have created outcomes which hid
the failures of state CON programs.

Clearly, there are many problems present in selecting the
appropriate criteria to measure CON performance. Depending
upon the expectations and the criteria selected, CON programs
will be judged as either successes or as failures. Both interme-
diate_or process oriented measures and final outcome measures
have been employed to assess program performance and operatiOn.
Few studies make any attempt to utilize both and some studies
select the less appropriate of the two.

Exhibit 1 provides a listing of the different measures
employed in the major evaluationsof CON. In isolation,
many of the utilized measures provide an ambiguous picture of
the effects of the program. Application denial rates are a
case in point. On the CON agency side, staff will tell
you that the rates understate the program's effectiveness.
They argue that many proposed applications are not submitted after
the applicant has had an initial discussion with the agency staff.
Furthermore, the mere necessity of obtaining a CON raises the
cost of expansion to an applicant. Marginal projects,then,
are not even presented to the CON agency for initial discussion.
On the other hand, providers may engage in a conscious strategy

of submitting a larger volume of applications than they would

39

Exhibit 1

Measures of CON Performance

 

 

 

l)

2)

3)

4)

5)

6)

Process Measures

Application Denial (Approval)
Rates

Conformance of decisions with
State plans of Need
(Similar to 6a and 6b)

Presence or Absence of Standards
(Quality of Standards)

Degree of Inter-Agency
Cooperation

Intensity of Review

Effectiveness Factors:

a) Acute Care Beds:
Beds Existing + Approved
Beds Needed (According to
Hill Burton)

 

b) Long term beds:
Beds Existing + Approved
Beds Needed

 

c) Assets: Assets Approved
Assets in Place
(Analogous to percentage

change in assets)

d) Overall Scale: Average of
first three measures

Study

Bicknell and Walsh
Britton

lewin

New York State

Britton
Rothenberg
New York State
Lewin

Codman

Lewin

Codman

New York State
Lewin

Bicknell and Walsh
New York State
Codman

Lewin

New York State
Codman

a) Lewin

b) Lewin

c) Lewin

d) Lewin

 

4O

 

Exhibit 1 continued

 

 

7)

8)

9)

10)

ll)

12)

13)

14)

Outcome Measures

Changes in the distribution of
Resources

Change in bed supply

Change in investment:
a) Plant assets

b) Plant assets/bed

c) Nonbed investment/bed
Change in hospital costs,
Total Expenditures

Change in hospital size

Change in type of service

Change in utilization,
average length of stay

Change in payroll

Stud:

Britton
Rothenberg
New York State
Lewin

Codman

Bicknell and Walsh
Cohodes

Salkever and Bice
Rothenberg

Lewin

Katz

Codman

Katz

Salkever and Bice
Cohodes

Hellinger

Salkever and Bice
Cohodes
Katz

Katz

Salkever and Bice
New York State
Codman

New York State
Katz

New York State

Salkever and Bice

Lewin

Cromwell, Ginsburg,
and Hamilton

Salkever and Bice
New York State

Codman

Cohodes

 

41

 

have in the absence of a program, bearing in mind that a certain
percentage will be denied. Providers may submit applications pre-
destined to fail, closely followed by an application which repre-
sents their major interest. In this instance, denial rates are

an artifact of the strategies which providers undertake.

The key question is "What do denial rates tell us?" If, as
has been suggested above, hospitals increase the volume of their
applications in order to be certain that their growth objectives
are attained, then a high denial rate begs the question. Denial
rates fail to reflect whether the rates of growth in investment
in beds, plant assets, or equipment have slowed or accelerated
with the introduction of controls; whether the quality of the
application was high or low; whether building plans were
accelerated by hospitals prior to the onset of the CON program;
whether the projects which were not approved were intended to
fail by providers; or whether hospitals and other institutions,
upon finding their investment options in beds partially fore—
closed, instead chose to invest in equipment and labor. In
sum, denial rates are ambiguous. In conjunction with other
measures, they can begin to convey the direction of program
effects, but not the magnitude of the effects.‘

A number of studies have utilized conformance with state
plans of need as an indicator of the performance of CON programs.
While interesting, the value of this indicator, whether it is
measured directly or through some effectiveness scale, is open
to question. In principle, conformance with bed need plans
represents one of the best means of assessing program perfor-
mance. However, in practice there are numerous difficulties.

The first is that well developed, articulated methodologies to
estimate "need" are simply not available. Need is not a complete—
ly arbitrary concept, but a subjective one. This subjectivity

is reflected in state plans. While most states still rely on some

42

variant of the Hill-Burton methodology to determine bed need,
there is a great deal of inconsistency in bed need plans across
states. This inconsistency reflects different state goal pri—
orities and the variation in the political resources of the
hospital and nursing home industries. Bed need plans may or

may not reflect need and remain relatively poor reference points
to assess CON program performance. In addition, bed need plans
Change over time. They may change as a result of compliance
with new federal guidelines, or as a consequence of a change in
methodology, or even as a result of a change in the administration
of the program. The point is that bed need plans do change over
time resulting in an inconsistent reference point for comparison
purposes.

Other process measures which have surfaced in the literature
include the presence, absence, and quality of standards, degree
of inter-agency cooperation, and the intensity of review. While
potentially useful in theory, the use of these measures in the
existing studies all suffer from a similar deficiency--a depen—
dency upon the subjective interpretation of the CON agency's per—
formance on the measure. Systematic evaluation criteria (with
the exception of Lewin's estimate of applications per staff,
which itself can be questioned) are conspicuous by their absence.
Clearly, some criteria are being employed to judge the quality
of standards or the extent of inter-agency cooperation, yet
these criteria are never explicitly identified. Moreover, the
procedure for acquiring much of this information is apparently
based upon unstructured field interviews and then synthesized
into a conclusion. While there is nothing intrinsically
wrong with this approach to acquiring data, there must be some
safeguards built into the data collection procedures to ensure

that consistent and valid information is gathered.

43

Lewin's use of effectiveness scales as measures of program
success merge process and outcome measures. Lewin's first two
effectiveness measures employ "beds needed" as the denominator.

The limitations of bed need plans have already been discussed.
Suffice it to say that measures of effectiveness which purport

to measure program success according to highly subjective, unre—
liable, and possibly invalid bed need plans, are themselves poor
indicators of what they attempt to measure. The third measure,

the ratio of assets approved to assets in place, is analogous to

the percentage change in plant assets. While it is an improvement
over the first two measures of effectiveness, this third measure is
also burdened by a number of deficiencies similar to those

discussed for denial rates. The numerator, "assets approved,"

does not reflect the final dollar value of the investment. Bicknell
and Walsh (1975) found significant cost overruns in 60 percent of the
sample of projects they followed up. The use of assets approved
will overstate the effectiveness of a program if any cost over-

runs occur.

In addition, all three measures of effectiveness measure
efficiency at a point in time, not over a period of time. Examining
the effectiveness of a program at a point in time implicitly assumes
that all of the programs are at a point in their development
where effects could be expected to surface. This may not be
the case. Like denial rates, this asset measure fails to
reflect the number of projects deterred, postponed, or modified
as a consequence of the presence of the CON or 1122 program.
Moreover, all three measures of effectiveness treat the CON
program as homogeneous. An examination of CON legislation
clearly indicates the danger in this, as CON laws vary in
coverage provisions, thresholds, sanctions and in other sub—
stantive ways.

Finally, Lewin's overall effectiveness scale is a simple average

44

of the rankings of each state on the three effectiveness
scales. The validity of each of the overall effectiveness
scale's components has been questioned in this discussion.
Obviously then, these questions can also be raised regarding the
validity of the overall scale. Yet there is a separate issue
that pertains to the overall scale: why should equal weight be
given to achievement on all three components? No justification
for equal weighting is given; the reader of the study is left
to draw the conclusions that all three components are of equal
value——a conclusion that is somewhat at odds with CON's focus
on acute care beds.

A number of authors have utilized the rate of change in a
set of dependent variables as a measure of the program's effects
(Measures 7-14). Examples of such measures include the change in
bed supply, change in investment, or change in the distribution
of resources.* Measures of this type do provide some understanding
of program effects. There are, however, a number of considerations
which may limit the value of such measures. One is a need to
adjust the measures for any variation in regional prices. The
failure to do so yields measures integrally linked to state
and/or regional price movements. A second problem involves
the absence of a reference population. Examining rates of
change in a set of dependent variables alone fails to convey
the relative effects of the program.

A final issue concerning the use of rates of change is a
measurement issue. To date, the existing studies which utilize
comparisons between rates of change have tended to employ averages

of these changes in dependent variables between CON and non-CON

* The discussion of measurement issues in the Salkever and
Bice, Hellinger, Katz,and Cromwell, Ginsburg, and Hamilton studies
is presented in the methodological approach section which follows.
Because of the importance of understanding all aspects of these
studies the critique of measurement issues is integrated with the
discussion of the unit of analysis, the time period of analysis,
and the specification of causal relationships.

45

states as a means of judging performance. This may, in fact,

be misleading. Utilizing average rates of change to compare

CON and non—CON states assumes that both the original bed supply
and the rates of change in the dependent variable were identi-
cal in the states before the introduction of CON. This is
extremely unlikely.

The question then remains: "How do we measure the effects
of CON on the supply of beds?" Taking the average of the rate
of change from the introduction of CON to the point of measure—
ment and comparing it with the experience of a non-CON state
is clearly incorrect, since it ignores the original differences
between the two states. Looking at the CON program alone would
also be incorrect. The change in the slope, before and after
the introduction of CON, only tells half the story. It fails to
explain any changes which have occurred in the non—CON state.
Examining the post—CON difference between CON and non—CON states
also fails to account for any changes which occur prior to the
introduction of the program. The appropriate interpretation
of the effect of CON on beds (or any other dependent variable)
can be measured by the actual difference in bed trends over
the CON period being studied less the difference which would
have existed in the absence of any changes. In other words, the
effect which CON has on the supply of beds can be measured by
the post-CON actual differences minus the pre—CON actual
differences between study states with CON and control states

without CON.

Methodological Approaches

 

The vast majority of major evaluation studies on the effects
of CON programs have principally relied upon a case study method-
ology as their evaluation strategy. Exhibit 2 identifies the

various studies on CON and the methodological approach employed.

46

Exhibit 2

Methodological Approaches Utilized

In Major CON Studies

 

 

 

l)

2)

3)

4)

5)

Methodological Approach

Case Study-—Process Orientation

Case Study-—Comparative Analysis

Case Study——Epidemiological Analysis

Outcome Analysis--Interrupted Time
Series Design with Controls

Econometric Analysis

Major Studies

Bicknell and Walsh
Britton

Rothenberg

New York State
Lefkowitz

Havighurst

Curran

Lewin and Associates
Macro Systems

Codman

Cohodes

Salkever and Bice

Katz

Cromwell, Ginsburg,
and Hamilton

Hellinger

 

47

 

The evaluation literature contains three types of case studies——
process, comparative, and epidemiological——, outcome analyses using
an interrupted time series approach, and a small number of multivariate
econometric models. The major studies employing each of these methodol~

ogies are critiqued in the next three sections.
Case Studies

As an evaluation approach the case study method serves a par-
ticular function. While it offers the advantages of explaining the
dynamics of the CON implementation process at a point in time and the
ability to pinpoint unusual circumstances surrounding a particular
program, there are major problems in generalizing the results of
the study findings to other settings. Campbell and Stanley
(1966) have elaborated upon the limitations of the case study
design in some detail. The design fails to account for any
changes in what Campbell and Stanley call history, maturation,
selection, mortality, and the interaction of selection and treat—
ment. In other words, case studies on CON fail to account for:

1) Any changes which may occur between the introduction
of CON and the point of observation (e.g., such as
the ESP program). Ignoring such changes may result in
inappropriately attributing certain witnessed out—
comes to the CON program when other factors are in-
fluential;

2) Any changes in CON programs over time. Over time,
the CON program may change as a result of amendments
to the legislation, political pressure, or compliance
with Federal guidelines. In addition, providers
will also change over time; for example, they may
learn how to develop effective strategies to cope
with the various requirements of the CON program;

3) The self-selection of CON by the states with programs;

4) The behavior of providers. Provider response to CON
may vary by program; and

48

5) The possible unrepresentativeness of the CON
program and the state being studied. The par-
ticular CON program being studied or the state
may be sufficiently different from other pro—
grams or other states so that the results of the
case study cannot be generalized.

The representative set of case study assessments discussed
in the following pages concern themselves with different programs.
In general, they are more descriptive than evaluative. Bicknell
and Walsh's (1975) study and Britton's (1975) are complementary
analyses of the Massachusetts experience. Bicknell and Walsh re—
corded the number of proposed expansions and the percentage approved
by the Massachusetts Public Health Council (the state's CON board)
during the first nineteen months of the program's operation.
Britton's study concentrated on the impact of CON decisions on
different types of short-term general hospitals in Massachusetts.
Lefkowitz's (1975) study is similar in spirit to that of Britton.
It is a case study of the political dynamics of health planning
and CON regulation in Maryland, particularly of an application in
Howard County. It concentrates on explaining both the "how"
and "why" of program decisions. Numerous program participants
were interviewed and the history and outcome of a particular
institution's application are traced. Like the other case studies,
it does not attempt to draw broad conclusions for evaluation pur-
poses,but rather, seeks to increase our understanding of the
interactions and decision points in the CON process.

New York State's recent audit (1977) of its health planning
process and Rothenberg's (1976) study both focus on the New York CON
program. The New York audit concentrates on assessing the adminis-
trative procedures of the program and the results the program
has achieved since its 1966 date of effective operation, a year
and a half after its passage in 1964. The audit concentrates on
assessing the review process and concludes that it is unneces-
sarily complex and time-consuming. Decisions were often found

to be inconsistent with the State Health Plan. Moreover, the

49

increase in the costs of health care in New York State has not
been contained since the program's inception. The New York
audit is a comprehensive, single-state study of the program's
process combined with a limited assessment of effects.

Rothenberg (1976) studied a non—random sample of 25
counties in New York State to determine the relative change in
the number of short-term general and other hospital beds between
the pre—CON period (1960—1965) and the post—CON period (1965—1970).
Because of a concern over confounding from the Economic Stabiliza-
tion Program (1971 to 1974) and the rate setting authority (1969 on),
the period after 1970 was excluded from the study. While Rothen—
berg's concern is valid, it is unfortunate that she chose not to
extend her analysis into the 19705. New York has had the longest
experience to date with CON. Many observers of the CON procedure
have hypothesized that there is a learning curve associated with
the process. Had the study been extended into the 19705, some
partial conclusions regarding this and other hypotheses might have
surfaced. Three other weaknesses compound this limitation and
severely undermine the utility of the study: a concentration
on only one outcome measure--the change in the number of short-
term beds, the exclusion of important independent variables from
her limited regression analysis, and the failure to account for
the introduction of Medicare and Medicaid.

While of limited utility, in and of itself, the case study
method is intrinsically valuable as it enhances our understanding
of the dynamics of the health planning and regulatory process.
Case studies are by no means uniform. Some studies such as
Lefkowitz's (1975), Bicknell and Walsh's (1975) and New York
State's (1977) concentrate on explaining the process of program
operation in a particular setting. Other case studies are more
ambitious, and it is to those that we will now turn.

The Macro Systems study (1974) and Curran's (1974) survey

50

of state CON laws provide descriptive and structural comparisons
of the various CON programs. Macro Systems surveyed twenty-three
states with CON programs as of 1972. Seven state programs were
reviewed carefully, while the others received less intensive
treatment. The Macro Systems study stratified states into three
categories based upon the maturity of the CON program at the
time the study was implemented. It identified the different
goals and coverage provisions of the various CON programs, dis—
cussed the application review process, and compared the experiences
of different states with the program. However, while this study
succeeded in describing the review process, it failed to provide
much in the way of evidence regarding the hypotheses discussed
in the first portion of this literature review. It was not so
much an evaluation as a description of program structural char-
acteristics and activities. Similarly, Curran's survey of CON
programs compares them with respect to their coverage provisions,
thresholds, due process procedures, administrative review structure,
appeal mechanisms, sanctions and so forth. The emphasis is on
description, not evaluation. Curran's survey does succeed, however,
in highlighting the wide variation in program structure.

Lewin and Associates, Inc.'s (1975) study analyzed the
effects of a number of Section 1122 programs, both alone and in con—
junction with CON programs, and then contrasted them with states
which only operated CON programs. This study provides a far—reaching
description and analysis of decision making within a regulatory program.
Lewin and Associates studied twenty states during the 1974 calen—
dar year. The states were selected to represent the variety of
capital expenditure controls in operation. Extensive interviews
were conducted with various state and regional agency personnel
and with the provider organizations involved in the review process.
Lewin and Associates employ both quantitative and qualitative

measures to assess the performance of 1122 and CON agencies.*

*The limited value of some of these measures is discussed in
the first portion of the methodology section.

51

Overall, the study concludes that neither CON or 1122 controls
have effectively prevented hospital capital expenditures,
implying that hospital cost increases have not been slowed.
In addition, Lewin concludes that capital controls seem to work
best in those states where other regulatory mechanisms, such as
rate regulation, are in operation. The weaknesses of the study
lie with its choice of effectiveness measures (discussed earlier),
and the use of unstructured interview instruments for data
collection, which potentially compromise the validity and
reliability of the field information.

A variant of the case study method has been utilized by the
Codman Research Group. The Codman (1977) study combines two evalu-
ation methodologies, case studies and epidemiologic analysis, to
assess the impact of health planning and regulatory programs on the
expenditure and use patterns in five selected health planning areas
in New England. A descriptive analysis of the dynamics and mechanics
of planning and regulation in the hospital sector is combined with
population-based epidemiologic analysis of the change in the pattern
of hospital expenditures and use over time, to provide an integrated
evaluation of the impact of the government's regulatory strategy.

The Codman approach to assessing the effects of planning and
regulatory decisions is interesting, but some concerns regarding
the methodology must be raised. First, the process studies which
Codman has produced are case studies, replete with the limitations
cited earlier. Still, the Codman Research Group has attempted to
integrate the cases and extract conclusions which cut across the five
planning areas studied, while remaining cautious about over-generaliz—
ing their findings. A second and more severe problem concerns the
tenuous linkage between the case (process) studies and the epidemiologic
analyses. The linking of facility review decisions to changes in hospi—
tal use patterns is particularly difficult without a theoretical model
that relates regulatory actions to epidemiologic outcomes. Theory would
help to explain the impact of the individual regulatory programs and the
effects of various potential confounding factors. Without such a model,

attributing a witnessed effect to a cause requires that any number

52

of alternative explanations for the observed change be granted
equal attention and validity. In effect, the Codman study is
missing an integrative theory which links the process activity
and outcome changes together.

The Codman study has also been potentially compromised due
to its data collection methodology. The main method of data
collection for the process portion has been the unstructured
interview supplemented by file review. This methodology, while
providing increased flexibility to the interviewer, limits the va—
lidity and reliability of the information gathered. It places
a significant burden on the interviewer; much depends upon the
skill and sensitivity of these individuals. While it is certainly
possible that the results obtained by the Codman group are valid
and reliable, their unstructured methdology places the burden of

proof upon them.

Outcome Analysis: Interrupted Time Series Design With Controls

 

In an outcome analysis, Cohodes (1976) employs an inter—
rupted time series design with nonequivalent control groups to
measure the effects of the CON program. Campbell and Stanley
(1966) point out that the main weakness of this design concerns
its external validity (the generalizability of the results). In
his study Cohodes attempted to measure the impact of CON on four
variables: percentage change in bed supply, percentage change
in total plant assets, percentage change in plant assets/bed, and
percentage change in payroll. The five states with early CON
programs were selected as the study group, and seven non—CON
states roughly matched for geographic location, size, and number
of hospital beds were selected as controls. The states were
compared with each other and with the United States in the pre—
CON (1963-1968) and post-CON periods (1969-1974). Cohodes ob-
served that confounding due to other regulatory programs is a
problem shared by both CON and non—CON states. The problem was

not resolved, however, and the analysis is weaker for it.

53

There are a number of particular methodological problems
which, while not critical, undermine Cohodes' study. First, the
study and control states were not systematically matched, almost
certainly resulting in a control group which is different than the
self—selected group of CON states, and these selection differences
may explain the differences in behavior which Cohodes observed.

A separate and minor criticism is that Cohodes' asset measures

were unadjusted for population changes or for inflation, leaving
open the question of whether these factors were critical explainers
of the witnesses variation.

In theory, the interrupted time series design with control
groups offers a very useful framework to evaluate regulatory
interventions such as CON. However, the design must be modified
to cope with the pecularities of the intervention being studied.
In the case of CON the following adjustments to the interrupted
time series design are necessary to enhance its evaluative
abilities:

1) Selection of a control group(s) which can be used

as a comparison series (e.g., control groups where
similar supply and demand conditions are present);

2) Multiple measures of the CON program at a point in
time and over time. The CON program has changed over
time in some states. These changes must be reflected
in the design;

3) Accurate measurement of CON effects (see discussion
in measurement section of this literature review);

4) Adjustment for the self—selection bias of early CON
adopters (if not in the design, then in the analysis);

5) The incorporation of estimates of the effects of other
regulatory programs such as the ESP program at a
point in time and over time;

6) Depiction of any changes in program implementation
policy over time;

7) Program effects are believed to lag program introduction
by a number of years. The design or analysis should
reflect the consequences of this lag on the evaluation
scheme.

54

Adjustments such as controlling the self—selection bias of
CON adopters will be extremely difficult to achieve in the research
design or analysis phases of any evaluation employing this approach.
Supplemental information on the reasons why different states chose
to adopt CON programs when they did is needed to resolve the self—
selection bias problem. Such information is difficult and costly
to obtain; possibly it is unobtainable in reliable fashion. Still,
on balance, the interrupted time series design with control groups
offers one of the better approaches to assessing the effects of a
program such as CON.

There have been four studies on the effects of CON which employ
econometric techniques to estimate program impacts. Three of the
studies; Cromwell, Ginsburg, and Hamilton; Katz; and Hellinger, are
limited in nature and will be only briefly described and analyzed.

The fourth study by Salkever and Bice is the major completed evaluation
work on CON now available. The discussion which follows will, therefore,

focus most heavily on their work.

Econometric Analysis: The Salkever and Bice Study

 

The Salkever and Bice (1976) study is the first published
quantitative assessment of the CON program. The study received
wide attention and its conclusions have been quoted repeatedly.
They are, briefly:

l) CON controls did not reduce the total dollar

amount of investment;

2) CON controls appear to have restricted the growth
of new bed supplies;

3) CON appears to have altered the composition of
investment by reducing growth in beds and increasing
other types of investment;

4) CON did not substantially lower per capita hospital
costs and may have increased them slightly; and

5) CON lowered the utilization of inpatient services

55

Since the publication of the study,additional research efforts
have surfaced which raise questions conerning the validity of
the Salkever and Bice conclusions. Many planning and regulatory
agencies have accepted Salkever and Bice's conclusions at face
value and have structured their program operation and regulations
accordingly. An issue of critical importance to future CON
regulatory policy then concerns the credibility of Salkever and
Bice's efforts.
The evidence regarding the conclusions reached by Salkever
and Bice is discussed at length in the initial hypothesis section
of this literature review (see Hypotheses l and 2). As additional
research becomes available, it can be expected to question further
the results of Salkever and Bice's work for two reasons. The
first has to do with the great variation in CON programs across
states. CON programs vary in scope, coverage, thresholds, sanctions,
age, administrative organization and with respect to the complexity
of the hospital industry they are intended to regulate. One
could expect, then, that this diversity would be related to program
performance. The performance of an "average" CON program may be
difficult to discern because there are no "average" programs. Differ—
ent types of CON programs with different environmental conditions
may produce widely differing outcomes. The result will be that
some states will have the outcomes which Salkever and Bice document,
while others will not. And if an aggregate analysis is undertaken,
this statewide variation may be masked, yielding conclusions of
limited use to CON agency personnel, planners, and policy makers.
The second reason that future work will probably undermine
that of Salkever and Bice concerns the methodological flaws in
their analysis. Although to date the study is the most rigorous
and comprehensive assessment of CON, the evaluation has many
serious drawbacks which limit its utility for policy making.
Because of its prominence, the Salkever and Bice study deserves

careful evaluative attention. The problems in the Salkever and

56

Bice study are analyzed in four dimensions: the measurement of
impact, the unit of analysis, the time periods examined, and the
specification of a causal relationship.

Measurement of Impact

 

The difficulties in the measurement of CON effects in the
study stemmed from the manner in which the dependent impact
variables were defined and measured. The set of impact variables
employed by Salkever and Bice include:

1) Percent change in hospital plant assets, beds, and

plant assets per bed;

2) Hospital, inpatient, and outpatient costs per capita;

3) Inpatient days per capita;

4) Inpatient admissions per capita:

5) Percent change in beds and services in CHP regions;

6) Medicare Part A and B expenditures per enrollee.

An indirect criticism of the Salkever and Bice study is
their use of American Hospital Association (AHA) data for plant
assets and beds. For example, plant assets include the value of
land along with the value of buildings and equipment assets. Land
values are very sensitive to changes in population density -- a
condition not accounted for by Salkever and Bice in their invest—
ment equations. A more serious drawback related to the use of AHA
data on plant assets is the inclusion of funds set aside for
investment in the plant asset measure. These funds may or may not
be deployed, depending in part on the outcome of CON application
decisions.

A more preferable measure for hospital investment would be the
real value of investment undertaken over the evaluation period.

In addition, as a consequence of differences in input prices over time
and across locations, plant assets will vary. Deflating plant assets
by regional price indices over time would provide an estimate of

real investment, independent of price movements. Although Salkever

and Bice recognized this problem in their hospital cost equations,

57

which were deflated by the Consumer Price Index, apparently they
failed to adjust for price differences in their plant assets equations.
The result was that intertemporal investments were incomparable in
real terms.

The AHA defines statistical beds as the average number of beds,
cribs, and bassinets set up and staffed for inpatient use during a
reporting period. Though Salkever and Bice are never clear on this
particular point, they apparently employed statistical beds as
their measure to monitor bed changes, net of bed additions or
closings. For certain analyses, however, net additions alone
would be preferable. This problem is aggravated by the authors'
use of "regularly maintained" statistical beds. A hospital may
add new beds, shift staff, and leave beds lying fallow without
producing a net change in the average number of beds. Yet, over
time there is a tremendous temptation to use those beds. A more
preferable measure would be total beds, staffed or not.

Salkever and Bice interpreted the measure of the ratio of
plant assets to beds as an indicator of the shift in investment
from beds to equipment. There are, however, a number of difficul—
ties with the ratio as a shift indicator. One involves the failure
to adjust for price inflation in the recorded value of the plant
assets measure. Equipment replacement does not necessarily imply
that a shift in investment has taken place; it may simply reflect
the fact that equipment asset values have increased with inflation.
Without recognizing this dynamic, one interpretation is that
the hospital has shifted investment from beds to equipment. This may
not be the case, particularly in a situation where bed denials are
accompanied by chronic inflation in replacement costs of other non—
bed assets. The combination of bed denials and inflation in replace-
ment costs will automatically bias the plant asset/bed ratio upwards.
The bias in the ratio occurs because the numerator is in dollar terms
and is unadjusted for inflation, while the denominator is in real terms.
Deflating the numerator by an input price index is necessary to

adjust this ratio for its upward bias.

58

A separate, though minor, problem concerns the time period
over which the data are reported. The large majority of hospitals
report on a fiscal year which differs from the calendar year.

Given the relatively short time period of the study, errors-in-
variables may be generated which could affect the statistical
significance, though probably not the sign, of the CON coefficient.

As a proxy for total health care expenditures per capita,
Salkever and Bice employ Medicare Part A and B expenditures per
enrollee. The use of the Medicare data raises a number of questions.
First, the Medicare population may not be representative of the popu-
lation as a whole, which makes the use of Medicare data potentially
biasing. Moreover, Medicare Part B participation is optional.
Individual states may choose to buy into Part B (through their Medi-
caid program) if they conclude that it would cost them less than
paying for physician services directly. If the presence of CON is
correlated with this buy-in preference, it could result in an
upwardly biased estimate of program effects. On the other hand, Part
A and B expenditures exclude HMO capitation payments. If CON is
found in states with significant HMO growth, a downward bias may exist.

Unit of Analysis

A problem closely related to the measurement issues concerns
the unit of analysis. The large majority of Salkever and Bice's esti-
mated investment and cost equations employed the state as the unit
of analysis. As the authors recognize, using the state as a unit of
analysis potentially masks any intrastate variation in hospital in-
vestment or cost experience. Different CHPs (now HSAs) within a state
are likely to have different policies regarding hospital investment
applications in their areas. Employing the state as a unit of analysis
means that the effect of the CON variable on the dependent variable is
equivalent to the effect of the average HSA-CON variable on the dependent
variable. This is an appropriate level of aggregation if intrastate
HSA variation is limited. Otherwise, estimating the effect of the
average HSA's decisions on hospital investment may not be useful,

since there may be very few "average" HSAs.

59

While there are some measurement advantages to aggregating CON
measures at the state level (e.g., reporting errors tend to
cancel out), there is only a tenuous relationship between
hospital expansion and costs and population changes at this
level. Conceivably states could exhibit zero population growth,
but new hospital investment could still be justified if signif—
icant population shifts were taking place. Though it is unlikely
that the decision to adopt a CON program would be significantly
correlated with intrastate population migration, it is possible.
A smaller unit of analysis such as the county would more closely
approximate natural health service delivery areas, and it would
help to identify intrastate variations in program operation. When
Salkever and Bice did choose to employ regional comprehensive
health planning (CHP) data on beds, they were unable to corrobor-
ate their state findings on the impact of CON, although this may

be due to the sample size utilized in the study.
Time Period of the Study

Salkever and Bice's study is an analysis of the impact of
CON during the 1968—1972 time period. The authors selected this
period for two principal reasons: a number of states had adopted
CON programs during this period,and it avoided many of the con—
founding influences of Section 1122 and the Economic Stabilization
Program (ESP). While utilizing the most current data available
at the time their analysis was initiated, there are major problems
in seeking to measure the effects of relatively immature programs.
Of the twenty states with CON programs which Salkever and Bice
examined, only five had passed programs by the beginning of the
study period; the other fifteen states had programs in operation
for only one to two years. Compounding this difficulty, Salkever
and Bice excluded two of the original five states, New York and
Maryland, from some (but not all) of the cost and investment
equations due to data problems.

Given the study's short time frame and the limited state

experience with CON, it should come as no surprise to discover

6O

that Salkever and Bice's conclusions regarding the effectiveness
of CON programs were generally pessimistic. The time horizon of
hospital investment decisions (3—5 years), the presence of grand—
father clauses in the legislation, and CON agency start—up time
are all factors which suggest that early observations of program
effects will not be very informative for evaluation purposes.

In fact, in those states with generous grandfather clauses the

a priori expectation would be that the impact of CON would be
nil. This lag problem may be further exacerbated by pre-

emptive investment which may have been undertaken in expecta-
tion of CON adoption and implementation (See Hellinger 1976).

If hospitals do react to the impending passage or implementation
of a CON program by increasing their rate of investment, an eval-
uation which is conducted over a short time span will weigh this
transitional phenomenon far too heavily, consequently biasing the
interpretation of the program benefits towards zero. While

this concern should not detract from the problem which antici-
patory investment creates, policy makers in their assessment

of CON program effects should be sensitive to drawing con-
clusions from a study conducted over a limited time span in

the formative years of many CON programs. This is particularly
so as the effects of CON decisions in time "t" will not be
witnessed until time "t + n“ and "n" could be 1, 2, 3 or more
years. As a result, the effects which are witnessed early in

the program's life may misrepresent the longer run effects of the
program.

Salkever and Bice's selection of the 1971—1973 time period
for their analysis of regional CHP data is also less than ideal.
Given the unevenness of investment patterns, considerable year
to year variability can be seen in hospital investment in new
beds. A two—to-three year time period may be too short an interval

to identify any significant behavioral changes in bed expansion,

61

particularly at the regional CHP level. A more serious problem
with this analysis concerns its limited sample size. Of the
eight states selected for this analysis, all but two had a CON
program for some portion of the 1971—1973 period, and four states
had CON for the entire period. The null findings witnessed may
well have been a consequence of the very limited number of non-
CON observations in the analysis.

§pecification of Causal Relationship

 

There are a series of methodological problems in the Salkever
and Bice study concerning the specification of the causal relation—
ship between CON and the various impact, or outcome, measures. First,
in the investment equations CON was defined by the percent of
time the program was in effect over the 1969—1972 period. The
authors note that this specification assumes an additive, pro—
portional relationship, e.g., programs in effect twice as long
should have twice as much impact. Yet, in an earlier discussion
it was pointed out that grandfather clauses coupled with antici—
patory investment lead to a prediction of a "U" shaped
relationship with investment actually higher in the early years
of the program and declining thereafter. The specification
of CON combines the long- and short—run effects, biasing the
estimations towards a null finding. Accentuating this specification
problem are the lags in hospital investment behavior. The presence
of CON in, for example, 1970, may have nothing to do with observed
investment behavior over the entire 1968—1972 period. By including
CON the analysis is, in effect, lagging the dependent variable
rather than the CON variable. A different specification utiliz—
ing a cross—section time—series approach with no CON effects for
the initial years of program operation may be more appropriate.

This approach would also have partially avoided an anticipatory in-
vestment problem. Apparently Salkever and Bice chose not to include
lagged CON variables because of a concern that degrees of freedom
would be used up in adjusting for autocorrelation. The resulting

specification error may then be a consequence of an attempt to

62

avoid errors in estimation through the use of ordinary least
squares regression procedures. Which of the two problems is
the more serious is, however, unknown.

Specifying the CON program as either the percent of time
the program is in force or as a (0,1) dummy variable (as in the
cost equations) fails to consider any program to program varia—
tion. Specifications such as those employed by Salkever and
Bice ask the general question, "On average, what impact have
CON programs had?" While this question may be of some policy
interest to decision makers (even though it is not clear that
there are "average" CON programs), it does not aid in identifying
structural or process characteristics which may lead to effective
or ineffective programs. To the extent programs vary in structure
and the rigor with which they are implemented, the simple measures
employed as indicators of a program by Salkever and Bice are
likely to result in some error, biasing the results toward
null findings. For example, the positive effects of rigorous
programs may be masked by the averaging effect of a large number
of ineffective or immature programs.

For policy purposes, a preferable specification would be a
multi-dimensional measure of CON characteristics designed to
reflect the "toughness" of the program. Calculating such a
measure remains an arduous task, requiring primary and secondary
data collection and analysis on all programs. Though difficult,
however, it is not an impossible task and the potential policy
payoff from doing so is significantly greater. If the components
of successful programs can be identified, public policy makers
can seek to create incentives to encourage unsuccessful CON
programs to adopt the procedures or processes which will enhance
their effectiveness.

A related specification concern is the treatment of CON
as independent of prior industry performance when, in fact, it
may be related (i.e., endogenous). Endogeneity problems may

exist in two forms, each implying that CON's impact on inflation

63

will take an undesirable direction. If CON is adopted by
states experiencing greater than average rates of hospital
investment and cost increases, then a simultaneous relation-
ship is established between the dependent variable and CON.

The consequence of this relationship may be a witnessed upward
bias in the CON coefficient. As a result of the exclusion

of pre—CON experience in the analysis, it is unclear whether
CON programs have led to a significant deflection in inflation
rates. The CON variable may simply be serving as a shift co—
efficient reflecting historically aberrant rates of change.
Salkever and Bice did employ lagged independent variables in an
attempt to capture these historical differences, but left—out
variables clearly remain ( R2 in the investment equations between
.5 and .7). More direct measures of historical investment
patterns in CON states, such as hospital teaching status and
ownership, could have adjusted for this endogeneity difficulty,
but they were not utilized.

A second form of endogeneity concerns industry capture.

If the CON agency is successfully "captured" and its subsequent
implementation policy reflects this orientation, then a measure
which simply reflects the presence of a CON program may bias
the results towards a null finding. Distinguishing the effects
of "captured" and "non—captured" programs has important impli—
cations for policy purposes. Measuring this distinction, how-
ever, entails careful analysis and direct field work in CON
states. While desirable, this may prove to be a costly and/or
intractable endeavor.

Salkever and Bice attempted to measure CON impacts in two
different ways. One is the dummy variable approach discussed
in the previous pages. The second approach to measuring the
impact of CON compares the difference between actual and pre-
dicted values of investment and costs for the five states (New
York, Connecticut, Rhode Island, Maryland and California) which

had CON legislation for at least one—half of the 1968 to 1972

64

period.* Predicted values were obtained by estimating regression
coefficients for the non—CON states and applying them to the data
from CON states. The methodology attempts to estimate what the
level of investment or costs would have been in the absence of
CON. The difference between the actual and predicted values
reflects the impact of CON. For the three investment equations
(plant assets, beds, and plant assets/bed), only two of the five
states demonstrated statistically significant deviations, and
these states only exhibited this significance for one of the
dependent variables (Maryland for change in beds and Connecticut
for change in plant assets/bed). Salkever and Bice also report
that the deviations between predicted and actual investment for
the six other CON states (for which data were not presented) did
not consistently follow the pattern of less bed investment and
more growth in plant assets/bed. Only three of the six states
had less growth in beds than predicted. Four of the six de-
viations were also negative for the growth in plant assets and
plant assets/bed. In addition to yielding inconclusive results,
there is reason to expect bias in this approach. Namely, Salkever
and Bice assume that the witnessed differences between actual and
predicted investment and costs is due solely to the presence of
CON and not to other factors excluded from the model (e.g.,
measures of other regulatory programs, availability of funds,
hospital wage rates).

The attempt to hold other investment and cost—influencing
factors constant raises problems. First,the exclusion of other
regulatory programs such as prospective rate—setting, wage and
price controls, and utilization review may lead to problems in
attribution. If states which adopt CON programs are also states
which are more likely to adopt other regulatory programs such
as rate setting (New York is a good example), then some of the
effects attributable to CON may actually be due to other regula—

tory activities. In addition, the fact that the Economic

 

*The cost equations only compared four states.

65

Stabilization Program (ESP) was in effect for the last one-third
of the evaluation period could conceivably be the explanation
of some of the negative findings on bed expansion. Howeven the
exclusion of these essentially complementary programs should
attribute m9£e_not less weight to CON's cost control effects.
In essence, their exclusion should overstate the attributed
impact of CON by some unknown factor.

The second problem resulting from the attempt to hold
other factors constant pertains to the hospital cost equations.
CON's impact on hospital costs was based upon a quasi-reduced
form specifications with endogenous variables (e.g., plant
assets per bed, bed expansion per capita) and a separate CON
dummy. The authors did not offer an a priori reason for the
inclusion of a separate dummy variable measure of CON effects
(the effect of CON was to be witnessed through bed and nonbed
investment), but they did speculate a posteriori that CON may
be restricting competition, encouraging hospitals to increase
the intensity and costliness of care. Given the relatively
short time frame of the evaluation, this anti-competitive effect
seems unlikely. Even so, the total impact of CON on hospital
costs was calculated by adding the CON dummy coefficient to the
indirect effects via the other two endogenous variables. Esti—
mates of indirect effects were derived from the CON coefficients
in the investment equations. The rather small negative CON
effect on hospital costs estimated by Salkever and Bice can be,
in large part, attributed to the positive, direct dummy variable
measure of CON in the cost equations. Yet, the positive co-
efficient of the dummy variable was uniformly insignificant and,
hence, its addition to the estimation is questionable. If this
insignificant direct effect were to be excluded from the esti—
mations, then CON's apparent control over bed growth would
dominate any positive impact it might have on plant assets
per bed. When recalculated, excluding the direct measure of

CON, the negative effects on hospital costs change from —l.l

66

percent and —l.9 percent to a more robust —3.3 percent and
—3.5 percent. This suggests that if CON successfully controls
bed supply without seriously discouraging price competition,
Salkever and Bice's results tend to support, rather than deny,

a significant program impact on hospital costs per capita.

Econometric Analysis: The Cromwell, Ginsburg, and Hamilton Study

 

Cromwell, Ginsburg, and Hamilton's study was directed at
explaining the hospital's investment decisions regarding equip—
ment; it was not designed to evaluate the effects of the CON
program. Utilizing a regression analysis for a one year cross—
section of 1973 data taken from the American Hospital Association
Guide Issues, the Cromwell, Ginsburg, and Hamilton study esti—
mated the impact of CON on investment in ten specialized services.
CON was found to decrease the adoption rates of certain pieces
of equipment: X—ray therapy equipment, cobalt therapy equip—
ment, and radium therapy equipment, and to have no effect on
the others. The authors concluded that CON laws apparently
do not impede the diffusion of new technology, but rather they
slow down the adoption of services which have completely diffused.

CON was represented by a simple (O,l) dummy variable in
the equipment equations. The dichotomous specification of CON
(present or absent) assumes that all CON programs are the same,
that all programs are implemented in an identical fashion. This,

as discussed earlier, is clearly not the case.

Econometric Analysis: The Hellinger Study

 

Hellinger (1976) developed and tested a simple partial
adjustment model of hospital capital investment in order to
determine the effectiveness of CON in controlling hospital capital
expansion. Hellinger reached two basic conclusions: first,

CON did not significantly lower hospital investment; and second,
hospitals anticipated the effects of CON programs by increasing
investment in the period preceding the enactment of the legislation.

While partially corroborating the findings of Salkever and Bice,

67

the Hellinger study suffers from many of the same problems and
from some separate methodological deficiencies.

The only dependent variable employed by Hellinger was the
American Hospital Association (AHA) reported plant assets. The
same measurement criticisms discussed at length in the preceding
pages concerning AHA asset measures also apply to this study.
These concerns include: (1) the inclusion of land; (2) the
inclusion of funds set aside and not necessarily invested;

(3) the absence of regional adjustments for variations in cap-
ital prices; (4) the failure to account for inflation in capital
prices; (5) the absence of an adjustment for the reporting of
assets on a fiscal rather than a calendar year (although Hellinger
used this difference later in his paper to test for the anticipatory
investment phenomenon); and in addition (6) neither the dependent
or independent variables were adjusted for population growth.
Possibly, an even more serious limitation is Hellinger's failure
to adjust assets by the number of hospitals in a state. Katz
(1976) found that CON states in the Hellinger study had signifi—
cantly larger hospital industries than non—CON states, suggesting
an upward bias in total investment at the state level. However,
this does not account for Hellinger's findings of a negative

(but insignificant) coefficient for CON. Expressing the dependent
variable as a ratio or in percentage change terms would have
avoided this bias.

Hellinger utilizes the state as the unit of analysis. As
the discussion of the Salkever and Bice analysis pointed out,
the use of the state as a unit of analysis has the potential
to create serious errors-in—variables to the extent that intra-
state variation in hospital investment exists.

Hellinger also employed a much shorter time period (1971—
1972) than that used in the Salever and Bice study. Since hos-
pital investment has a three to five year gestation period and
many CON laws include significant grandfather clauses, the choice

of such a limited time period for study runs the grave risk of

68

capturing little of the actual effects of a CON program. This

is particularly true if special attention is given to bed expan-
sion rather than equipment. The 1971-1972 interval was also a

time period when the ESP was in operation for 15 of a possible 24
months. Hellinger's null findings could be explained by the

varying incentives created for hospitals by the ESP and CON programs.

CON was specified through the use of a (0,1) dummy variable
with the dummy set equal to one if the state had passed a CON
law by January 1, 1973. In an attempt to enlarge the number of his
capital expansion-control states, a second dummy variable was added,
in effect, combining CON and 1122 states. However, since only eight
states had adopted 1122 for as much as three months of 1973, the
addition of this dummy variable added very little, if anything, in
terms of potential capital—control states to the study. The
fact that the estimated coefficients for the two dummy variables
were Virtually identical underscored the limited value of adding
alleged Section 1122 states. The use of (0,1) dummies also
ignores any inter-program variation which may be occurring.
Hellinger himself admits that this may result in some errors—in-
variables if the rigor of CON implementation is related to program
effectiveness.

There are also potentially serious drawbacks stemming from
left-out variables in the specification of the balance of the
capital investment equation. For example, measures of excess
capacity such as occupancy rates were excluded from the equation.
Moreover, the only demand variables employed were average weekly
earnings in manufacturing and population density. A major
omission was the level of insurance coverage. As a proxy for
wage rates, the ratio of hospital payroll to fulltime equivalents
(FTE) was employed to capture the substitution effect of capital
for labor. The insignificance of this variable may be a conse-
quence of the considerable error in hospital reporting of FTEs.

(The sign of this variable was also negative, which is theoretically

unexpected.)

69

The inclusion of lagged dependent variables (the capital
stock variables) as independent variables dominated the estimated
equations. The estimated R2's were all over .97, leaving little
for CON or any other variable to explain. The large coefficients
for the lagged dependent variable imply a significant adjustment
lag in investment, a point which Hellinger makes in his discussion
of findings. Hellinger, however, fails to point out that single
years changes in capital stocks will be almost completely deter—
mined by prior behavior. The consequence of this is a bias towards
zero in all coefficients. In this case, a CON dummy variable
would be more reflective of historical investment patterns than
changes in current behavior.

The estimation procedure employed was ordinary least squares
regression on a cross—section of states with a lagged, prede—
termined dependent variable. As states vary significantly in
the size of their hospital industry, the failure to adjust for
the number of hospitals in a state leads to heteroscedastic
disturbances in the error term and inefficient estimates. Con—
ceivably, a size adjustment might have improved the statistical
significance of the independent variables, including the CON
variable.

Hellinger sought to estimate the potential size of the antici—
patory investment phenomenon by regressing the change in assets
on the year in which CON was enacted. Differences in reporting
periods and legislative enactment dates (not to mention the
actual time of effective program operation) provide a period during
the year in which some investment was taking place just prior to
CON adoption. Unlike the negative CON coefficients in the original
equations, the coefficients supposedly representing anticipatory
investment were positive and statistically significant. In
essence, the hospitals had a very short time interval, six months,
to accelerate their investment plans. Hellinger notes that this
anticipatory effect may be even larger if hospitals react more

than six months prior to the passage of CON. An alternative

70

interpretation of these positive results may be that the same
states with very high rates of investment in hospital facilities
were the ones who enacted a CON program in order to arrest the
trend. The short two—year study period prevents a test of the
two interpretations.

There are two other minor concerns regarding Hellinger's
study. The potential problem of CON being at least partially
determined by the rate of industry growth is not addressed by
either Hellinger or Salkever and Bice in their short time-series.
This endogeneity problem takes on added importance if industry
capture is a real phenomenon. Finally, given the negative but
insignificant signs in Hellinger's original investment model, it
is somewhat unfortunate that he did not choose to exclude those
states where anticipatory investment seemed to be taking place

and then retest for CON's effect on investment.

Econometric Analysis: The Katz Study

 

Katz (1976) employs AHA data on hospital assets and beds
for 1973-1974 to estimate the effects of CON on capital expan-
sion. Katz‘s model of hospital investment was first developed
by Paul Ginsburg.* Employing a stepwise multiple regression

analysis on cross-sectional data Katz found:

1) CON states differ from non—CON states;

2) Within the set of CON states there is a wide variation
in performance;

3) In most cases, CON has reduced (or kept down) the
growth in plant assets/bed;

4) There are dynamic aspects to the hospital investment
response to CON controls;

5) Growth in plant assets/bed is taking place in states
which have less sophisticated (assets/bed) facilities.

While superficially similar to the Hellinger study, the Katz

study is different in important respects. First, the dependent

 

*See Paul Ginsburg, Capital in Non—Profit Hospitals, doctoral
thesis, Harvard University, 1970.

71

variables are measured as ratios of 1974 to 1973 values rather
than as absolute values. Secondly, a much larger set of inde—
pendent variables are employed to explain investment, including
sources of capital, utilization changes, and insurance coverage.
Thirdly, real bed changes are analyzed in addition to changes in
total plant assets. However, the state is still employed as the
pertinent unit of analysis and a (0,1) dummy variable is used

to represent the CON program.

Katz's study, like Hellinger's and Salkever and Bice's, is
constrained by the use of AHA asset and bed data and by the
short time period of the analysis, although Katz's inclusion of
industry characteristics adjusts to some unknown degree for
historical differences in industry growth.

Katz devotes a number of pages to justifying the use of a
(0,1) dummy as a measure of CON rather than Salkever and Bice's
"percent of time in force." Katz's criticism of Salkever and
Bice's CON specification is based upon a concern that it gives
too much weight to older programs. This argument, however, is
not very convincing. While it is true that extreme CON programs
can significantly affect regression coefficients, extreme pro—
grams are defined in terms of the dependent, not the independent
variable. It is not at all clear that older CON programs will
be the more effective ones or display more pronounced or abnormal
effects. Weighing earlier programs more heavily is a useful
specification, but it should not be the sole specification.
Katz's (0,1) specification is by no means better since it treats
new and old programs identically and ignores any interprogram
variation that may exist. The limitations of this specification
have been discussed earlier.

There are a number of reasons why the Salkever and Bice and
Katz studies did not yield consistent results. These reasons
include: the manner in which CON was specified, the way in
which the dependent variable was calculated, and the non—over—

lapping time periods. Neither study really addresses in an

72

empirical fashion the nonlinear response of the hospital industry
to CON controls over an extended period of time. The fact that
some of Katz's conclusions contradict earlier findings may well
be due to variable definition and measurement and not to a
superior analytic technique or more complete data base. What
these results do imply is that specification and measurement

make a difference in assessing program effects, and that more
study is required to understand the time-path of CON implemen—

tation and industry response.

Methodology: Summary

 

While all of the studies reviewed suffered from one flaw or
another, such shortcomings should not be grounds to completely
discount them. No study is perfect; every study can be improved
upon. The critical question is a question of validity: "Can
the results of these works be trusted?" The judgment of validity
is ultimately made by a consensus of experts. Validity can be
decomposed into two complementary components: internal validity——
assessing the confidence that one should have in the inferences
drawn about the setting being researched, and external validity--
assessing the trust one should have in generalizing those findings
to other settings. To evaluate the validity of these studies in
a technical sense would demonstrate that the vast majority of the
literature reviewed would fail to measure up to all criteria as
strictly applied.

A more realistic approach, and one which is employed here,
asks the question, "Do the methodological flaws indicate that the
results of the literature are without policy relevance?" In the
aggregate the answer is unfortunately a qualified yes. The review
of the evidence and methodological approaches on CON indicates
that the vast majority of the identified hypotheses have not
been carefully tested. Though consensus is beginning to form

in some areas, numerous questions still remain to be answered.

73

RECOMMENDATIONS ON CERTIFICATE OF NEED

 

Scattered through the literature are an assortment of
recommendations for making CON processes more effective in
curbing capital expansion and cost inflation in the health
care industry. The more frequently cited recommendations in

the literature are described below.

Recommendation 1: Coordinate CON with rate review.

 

Rate review seeks to prevent hospitals from increasing
prices to a level that generates a surplus which could be used
for investment purposes. CON is more of a reactive process than
rate review. Together, however, they can monitor hospitals'
prices, net revenues, and supply response. Rate review can act
as a monitoring mechanism for CON decisions, ensuring that pro—
jects do not change in scope or in cost. In any case, rate
review and certificate of need reviews should be coordinated
to ensure that they do not work at cross purposes (Bauer and
Altman, 1975; Brown, 1976; Hanley, 1977; Schlenker, 1973;
Lefkowitz, 1975; Lewin, February 1975).

A variation on this recommendation is O'Leary's (1973)
assertion that CON controls should include not only capital ex—
penditures but also operating and maintenance costs to prevent
inefficient substitution of variable factors for capital equip-

ment.

74

Recommendation 2: Develop better criteria for CON reviews.

There is some disagreement about the feasibility of developing
reasonable standards and criteria, but it is universally agreed that
if CON controls are to continue, every effort must be made to develop
such criteria and to educate CON agencies about any criteria that
are developed. Furthermore, it is often pointed out that these
criteria should be based on need, not the demand for health care——
on real medical requirements and not on historical utilization pat—
terns (Havighurst, 1973; Britton, 1975; State of New York, 1977;
McClure, 1976). Although quantitative criteria and standards should
be developed, CON agencies should display some flexibility in adhering
to these criteria so that their decisions take into account special

situations (Bicknell and Walsh, 1975; Institute of Medicine, 1976).

Recommendation 3: CON agencies should put more stress on
planning.

 

CON agencies are often so preoccupied with certificate of
need decisions that they devote inadequate time and attention to
developing a health service plan for their area. As a conse—
quence, in many instances CON requests are evaluated piecemeal,
not in light of an overall plan. To remedy this, CON agencies
should put a higher priority on planning, should assign specific
staff members responsibility for developing the plan, and should
set fixed deadlines for completion of the plan (Macro, 1974;

Havighurst, 1973; Lefkowitz, 1975; State of New York, 1977).

Recommendation 4: Regulation should be separated from planning,

Although there is general agreement that CON decisions should
be based on overall health service plans, some authors express
concern about tying regulation to planning. For example, Cohen
(1973) points out that regulation may require the various parties
to assume an adversary relationship, while planning ought to be
a political process with a free exchange of ideas and information.

Merging planning with regulation may thwart the development of

75

planning amithe accommodationof political realities. Macro
Systems (1974) suggests that the conflict between planning and
regulation can be reconciled by having separate staffs for each

function within a CON agency.

Recommendation 5: All types of hospitals should be subject to
CON reguirements.

In some states, CON laws have applied only to certain types
of hospitals. Even when the CON net has been cast fairly widely,
it has customarily not included federal facilities. It is dif-
ficult to develop an intelligent health service plan if it does
not include all types of hospitals in an area, and CON controls will
be ineffective if a significant number of institutions are beyond
its grasp (American Hospital Association, 1972; Comptroller General,

1972; Institute of Medicine, 1976; Technical Work Group, 1973).

Recommendation 6: Certain types of providers should be exempt
from CON requirements.

 

 

This recommendation, of course, conflicts with Recommenda-
tion 5, but the conflict may not be as blatant as it seems at
first glance. In this case, it is recommended that certain
types of providers should be excluded from CON requirements
because CON processes may raise barriers to entry in the health
care field (Hypothesis 3), may stifle innovation (Hypothesis 6),
and may be biased against certain types of providers (Hypothesis

5). On these grounds, Pauly (in Havighurst, 1974) argues that
CON controls should limit the expansion of existing facilities

but should not encompass the construction of new facilities

(i.e., reduce concentration, increase competition). Both Correia
(1975) and Havighurst (1973) contend that ambulatory care facilities
should be exempt from CON controls, and Havighurst even argues that
all HMO facilities, whether inpatient or outpatient, should be

exempt.

76

Unlike any other author, Havighurst (1973) proposes that
nursing homes be excluded from CON controls since he argues that
here consumption decisions are somewhat more in patients' hands
than in hospitalsfi and both utilization and investment decisions
are less likely to reflect doctors' judgments. Havighurst's
recommendation is based on the assumption that both hospital
utilization and hospital investment decisions are largely con—
trolled by doctors, and doctors are not likely to be cost—conscious
since payment for services comes through patients' insurance and

not from the doctors' pockets.

Recommendation 7: CON agencies should be able to close existing
facilities.

CON agencies should not only be able to review proposals
to expand or change facilities; they should also look at all
existing facilities to determine if they are needed or are
providing quality care in an efficient manner (American Hospital
Association, 1972; Dorsey, 1973; Lewin, February 1975; McClure,
1976). To deal with existing facilities found unnecessary,
government financial assistance should be provided to help meet
the costs of closing the excess facilities, and third—party
reimbursement policies should be changed to support closure

(Institute of Medicine, 1976; Melum, 1975; McClure, 1976).

Recommendation 8: Consumer involvement in CON should be
encouraged.

 

Because of the danger of provider control of CON programs
(Hypothesis 3), a concerted effort must be made to promote real
consumer involvement (Bicknell and Walsh, 1976; Lewin, February
1975). CON agencies must devise methods to ensure that consumer
interests are given sufficient weight while avoiding a purely
adversary relationship with providers. Bicknell and Walsh con-
tend that some consumer—provider polarization and confrontation
is inevitable and probably valuable as a means of countervailing

provider influence.
77

The Institute of Medicine (1976) is concerned not just about
ordinary consumer involvement but also about representation on
CON boards by employees, labor unions, and other major purchasers
of health care, all of whom may be more dedicated to cost—containment
than ordinary consumers.

Consumer involvement in the CON process, while admirable in theory,
faces problems in practice. Consumers are not homogeneous and while
some will support CON objectives, others will support local providers
in their attempts to expand. Thus, the involvement of consumers in
the CON process does not guarantee that the consumers will share the
same goals and objectives of the planners and regulators running the
program.

Recommendation 9: There should be a rational division of authority between
state and local agencies, with certain key powers reserved to the state.

Because of the danger of parochialism in local CON agencies
(Hypothesis 8), final power to approve projects submitted for review
should be in the hands of the state rather than local agencies
(Correia, 1975; Bicknell and Walsh, 1976; Lewin, February 1975; McClure,
1976). Central bodies are more likely to be articulate advocates of
cost containment, while equity goals are better served by local bodies.
Local participation in planning works against the concentration of re—
sources either geographically or by type of medical specialization
(Sapolsky, 1977). Local agencies should review proposals and should
have the power to reject them, but final decisions on approval of pro—

jects should be left to state agencies (Bicknell and Walsh, 1976).

Recommendation 10: Stage agencies paying health care costs
should have a voice in CON decisions.

To ensure that cost-containment is given a high priority in
CON programs, a voice in CON decisions should be given to state
agencies paying health care costs (e.g., the agencies controlling
Medicaid expenditures) (Havighurst, 1973; Lewin, February 1975;

Marmor, 1976).

78

Marmor even goes so far as to argue that the most effective
method of controlling health care costs is centralizing expendi-
tures via national health insurance. National health insurance
need not have a strong inflation control mechanism built into it,
but it will increase the effective pressure for controlling
medical inflation in the future by increasing the portion of

medical expenditures that flow through the federal budget.

Recommendation 11: CON agencies should have the power to attach
conditions to certificates of need.

 

If CON agencies must either approve or disapprove complete
applications as filed, they will not have the flexibility to
negotiate agreements which result in better distribution of
services within a community (Lewin, February 1975). Bicknell and
Walsh (1976) also advocate giving agencies power to attach
conditions to certificates of need, but they point out that
attempts to do so in Massachusetts led to such heated controversy
that the agency in time drew in its sails and began limiting its

stipulations to those directly bearing on the project.

Recommendation 12: CON agencies should have better staff and
funding.

A theme running throughout the literature is that CON
agencies with insufficient staff, poorly trained staff, or
inadequate funding cannot operate an effective program. Lewin
(September 1975), for example, concludes that one reason some
programs are more successful than others is that their state agency

directors have comparatively high salaries and a low turnover.

Recommendation 13: Cut costs through prospective reimbursement.

Traditionally, health insurers, public and private, have
reimbursed health care providers on the basis of incurred costs.
Since their costs were reimbursed almost automatically, providers

had no incentive to keep their costs low. Providers, however,

79

can be given such an incentive by the use of prospective reim-
bursement, which specifies in advance the rates at which a given
provider will be reimbursed and thus creates incentives for the
provider to keep his costs below the prescribed ceiling.
Although prospective reimbursement can take a variety of
forms, the net effect, in theory at least, is to foster cost—
consciousness among providers (Gaus and Cooper, 1976; Lave,
1974; Ginsburg, 1976; Bicknell and Walsh, 1975; Institute of

Medicine, 1976).

80

QUESTIONS FOR FUTURE RESEARCH

 

While the volume of studies on CON has markedly increased in
the last few years, it has not succeeded in answering many of
the questions regarding the effects of the program. O'Donoghue's
1974 comment that "there is no evidence supporting the effective-
ness or efficiency of capital expenditures regulation" basically
still rings true. There are exceptions, however. Our review of
the literature shows that while evidence regarding the various
hypotheses is in many cases inconclusive, there are areas
where consensus is beginning to form. The unanswered questions,
though, are more striking.

An area of considerable controversy concerns the extent
to which CON affects capital expansion (Hypothesis 1). The
evidence to date indicates that the ability of CON controls to
limit provider capital expansion varies considerably from state
to state. It is thus increasingly important to understand what
factors play a role in these variations among the states. Is
it the coverage specified in the CON law; the program's adminis-
trative procedures; variation in sanctions; the quality of the
CON staff; the presence of other regulatory programs (e.g., rate
review); the political atmosphere in the state; the power of the
provider industries; the age of the program; or some combination
of these factors that cause this variation? A corollary concern
relates to CON's impact on the composition of investment. Is CON

limiting investment in one area (beds), only to see investment

81

accelerate in less stringently monitored areas (plant assets/bed)?
Finally, are the observed changes in provider capital expansion
plans due to CON laws alone or to other factors such as limited
access to capital markets or new reimbursement policies?

A critical element of any assessment of the CON program is
the extent to which it has succeeded in curbing cost increases
(Hypothesis 2). The available evidence, while not conclusive,
does not encourage optimism about CON's ability to curb health
care cost inflation. Many questions remain to be answered before
this pessimistic observation is fully accepted. Do CON efforts
to curb capital expenditures result in an increase in investment
in substitutes (e.g., labor)? What are the separate and joint
impacts of CON and other factors (e.g., change in technology,
change in reimbursement) on the rate of increase in costs? Are
CON controls potent weapons in the inflation fight only when
they are combined with rate review? What is CON's impact on
utilization rates?

The extent to which CON processes are dominated by providers
(Hypothesis 3) is not well documented, though provider control
is certainly a real danger. There is much that we would like to
know about this relationship. Have votes on CON decisions re—
flected a provider—consumer split? Do providers exert influence
not revealed by simple vote counts? To what extent does pro—
vider dominance of the CON process vary from state to state?
Does provider influence diminish as a CON agency grows more
sophisticated and more sure of its judgments on proposals?

Will CON be used to protect existing providers and bar new
entrants? Finally, is provider influence affected by: 1) the
size or character of consumer representation on the CON board;
2) the size and quality of the CON agency staff; and/or 3) the
resources of the health care industry in a state?

There is some evidence that CON processes are biased in
favor of large teaching hospitals in major urban centers

(Hypothesis 4), but is unclear whether this bias is due to CON

82

processes themselves or to the technological imperative of new
methods of health care. Would the growth of large teaching
hospitals occur at much the same rate in the absence of CON
laws? Are CON processes playing a role in reducing the number
of smaller facilities? Is there a legitimate economic reason
for closing down smaller institutions, or can these smaller
facilities provide certain types of care more efficiently than
larger establishments? Are CON processes improving the distri—
bution of health care resources? Are there reasons, other than
CON, for any changes occurring in resource distribution?

There is a body of evidence that indicates that there are
differences in application approval rates for different types
of institutions. For-profit institutions and nursing homes
appear to receive biased treatment in the CON review process
(Hypothesis 5). Research is needed to determine if there are
legitimate reasons for the different approval rates, or if the
apparent explanation of bias is justified.

Hypothesis 6 and 7 concern themselves with the effect of
CON on technological and service delivery innovation. Our
review of the evidence indicates that it is limited, fragmented,
and inconclusive. Questions, as yet unanswered, include: Are
any perceived changes in the rates of innovation the result of
CON or of other forces? Does CON hamper some types of innova—
tion but not others? What has been the impact of CON laws on
the formation and growth of HMOs? Does this impact vary from
state to state, and if so, what are the apparent reasons for
such variation?

Local parochialism has been cited as a danger in placing
final decision authority for CON applications in the regional
HSAs rather than the state agency, (Hypothesis 8). The available
evidence indicates that while parochialism is a danger, it is
not inevitable. More information would serve to clarify the
evidence. Are providers able to influence local HSA agencies

more successfully than the state agency? Do local agencies

83

feel that the decisions of the state agency are unfair to their
own area? Will increasing the power and authority of the state
agency hinder or help attainment of CON's equity goals?
Finally, the other hypotheses generate a further set of
questions for which answers are needed. These include:
1) What are the costs, direct, indirect and adminis-
trative of a CON program (Hypothesis 9)?

2) Is it feasible to develop reasonable standards and
criteria for CON reviews (Hypothesis 10)?

3) Is it desirable to develop standards for some ser-
vices but not for others?

4) Can standards be sufficiently flexible to accomodate

technological change?

Two areas where research is still required have been
virtually ignored in the existing literature: CON's effect on
internal decision making within a hospital, and CON's impact
on the distribution of and access to facilities and services.

How has the internal balance of power within a hospital changed
as a result of CON? Does the CON process enhance hospital ad—
ministrators' bargaining power vis-a-vis their medical staffs?
Answers to questions of this nature would shed light on the
response of non-profit institutions to governmental regulations.

Even though CON's primary function is not to improve
access per se, the program's policy decisions affect access.

The major unanswered policy questions are the following: 1) Have
CON programs led to a more equitable distribution of resources
among areas considered to be medically underserved relative

to areas considered to be adequately served? 2) Have CON
programs affected certain population groups in a different way
than others?

Clearly, there are numerous unanswered questions concerning
the consequences of CON programs. Hard policy research is needed
to respond to these information deficiencies. Soon, because of
the incentives found in the National Health Planning and Resources

Development Act of 1974, all states will have CON programs. If

84

the program is to continue as a device to control the rate of
growth of hospital expansion, and ultimately, hospital costs,
it is essential for policy makers to have useful and valid data
on the effects of CON programs. Such information would provide
guidance in structuring the program, or it could conceivably
demonstrate that alternative methods of cost control are more
worthy of governmental support. We may discover, for instance,
that our rush to regulate health facilities construction has
resulted in unintended consequences which have vast cost impli-
cations.

The government's commitment to regulation in the health
sector has grown over time, partially in recognition of the
failures of the health marketplace, and partially as a conse-
quence of regulatory momentum. It may be that our incremental
commitment to CON has reached the point where politically it
is impossible to turn back. The CON process is very visible
to the public. Intuitively, it makes a great deal of sense
to consumers: it is argued that unnecessary hospital expansion
causes costs to rise and thus, if we put a lid on expansion,
costs will fall. Unfortunately, it is not that simple. Yet,
in many states the commitment to CON is relatively longstanding.
Even if evidence surfaces that the program is not "succeeding,"
the evidence will in all likelihood not be clearcut. These
ambiguous or mixed conclusions regarding program effectiveness
will not serve to generate a clamor for its shutdown, since CON
programs have created their own constituencies. Participants
in the system, government staffers, provider industry represen-
tatives, and financial institutions all have a stake in en—
suring that the system perpetuates itself.

What then is the role of evaluation information in this
politicized policy arena? Will negative results lead to the
abandonment of the program or will cosmetic or even substantive
changes be called for? The answer to both questions is depen-

dent upon the men and women in policy-making positions. Though

85

political influence is inevitable, decisions should be based
upon the best information available. The final judgment on
whether the program should continue as is or be modified should
be reached after consideration of two factors: 1) whether
the perceived benefits (economic and political) exceed the
costs; and 2) whether an investment in alternative cost control
activities would be more cost effective in political and/or
economic terms. Yet, in practical terms, it may be impossible
to separate out "pure" evaluation information from political
interpretations. Data are not value free, and the same set of
data can be used to support opposing viewpoints.

The pessimism of this discussion is a reflection of the
pessimism in the literature on regulation in general and CON
in particular. The most enthusiastic program advocates in the
literature argue that CON is effective on theoretical grounds
(stemming from the public interest theory of regulation). The
reality of the evidence, however, only suggests that in some
settings and under certain circumstances, the program may
yield results consistent with its goals. While the final ver-
dict is not yet in, the preliminary hearing has not been encour-
aging. What we need to know is under what circumstances and
conditions a CON program achieves results consistent with its
goals, and whether these conditions, if duplicated in another
setting, would turn around poorly performing CON programs.
Policy research is required to identify these conditions, to
determine whether they are amenable to control by the govern—
ment, and to find out if the creation of these conditions in
new settings can succeed in improving a poorly functioning CON
program. While there are many unanswered questions on CON, the
most pressing is simply, “Does it work and, if not, can we get
it to work?" Future research directed at answering this ques—
tion would be both timely and pertinent, and it would serve to

fill a substantial information gap.

86

PART II: CERTIFICATE OF NEED:
AN ANNOTATED BIBLIOGRAPHY

 

 

Documents which are noted in
this bibliography as available
NIIS may be purchased (by
order number) from the follow-
ing address:

National Technical Information
Service

5285 Port Royal Road
Springfield, Virginia 22161

Journal articles and books
cited as references may be
obtained at a local university
library or in a Regional Medi-
cal Library. Other copyrighted
documents are available from
the publishers as listed.

87

 

 

 

W

Altman, Drew. "The Politics of Health Care Regulation: The
Case of the National Health Planning and Resources Development
Act." Unpublished Paper. M.I.T. Department of Political
Science, August 1977.

This paper examines the political and bureaucratic dynamics
of health regulation under the National Health Planning and
Resources Development Act and, to a lesser extent, under the
Carter Cost Proposal now before Congress. A number of underlying
issues that affect the day to day exercise of health planning are
considered, including the contest between state and local and fed-
eral government for program control, jurisdictional conflict
between state and local planning agencies, and the appropriate
roles for professional planners, consumers, and providers. When
we assess regulatory policy in health, these complicating factors
must be added to the long list of handicaps that already exist.
One important finding is that local planning agencies have em-
braced the task of health regulation more fully than had been
expected. A number of explanations for this are offered. In
short, the controlling factors in health planning are political
rather than technical. Health planning is more prevalent at the
state and local level than many had predicted, but its impact is
not likely to be dramatic.

Altman, Drew and Harvey M. Sapolsky. "Writing the Regulations
for Health." Policy Sciences 7 (1976): pp. 417—437.

This study is an analysis of the development of governmental
regulations. The authors contend that the development of regula—
tions in health is much more than a purely technical procedure.
Rather it involves decisionmaking and bargaining processes that
engage a wide range of individuals and organizations with diverse
interests and varied resources. Attempts at statutory precision
and goal clarification may improve, but will not fundamentally
alter the regulation writing experience. The dynamics of regula—
tions development are revealed in three cases. The primary case,
the Health Maintenance Organization Act of 1973, suggests that
despite the efforts of the regulations writers themselves, there
are limits to the extent to which basic interest conflicts and
questions of health policy can be resolved in the process.

Other cases examined are the Professional Standards Review
Organization Act of 1972 and the National Health Planning and
Resources Development Act of 1974.

American Hospital Association. Guidelines for Implementation

of Certification of Need for Health Care Facilities and Services.
Chicago: American Hospital Association, 840 Lake Shore Drive,
Chicago, Illinois 60611, February 1975.

 

This American Hospital Association document provides guide—
lines to a state contemplating certificate of need legislation.
The AHA recommends that the certifying agency be empowered to

89

reopen certificates as community need changes and to promote
relocation, merger, or closure of part or all of a facility as
needs change.

American Hospital Association. Suggested Model Legislation
for Implementation of State Certificate of Need. Chicago:
American Hospital Association, November 15, 1972. Out of print.

 

This proposed model for state certificate of need legisla—
tion recommends that CON authority be extended to include all
hospitals, nursing homes, and other health care institutions,
all persons practicing medicine or surgery or operating a
clinical or radiological laboratory; and prepaid group practices
and HMOs. Certificates should be required not only for the
acquisition or construction of a facility but also for the
operation of one. Certificates should be issued on the basis
of public convenience and necessity, the criteria for which
should include: economic feasibility; a demonstration of need
supported by specific data; consistency of the proposed change
with the institution's and the community's overall health
plan; evidence of review by community planning bodies; and
evidence that the proposed facility will be located so as to
ensure the availability of manpower and accessibility to trans-
portation.

Applications should be reviewed by both state and area-
wide planning agencies, and there should be provisions for
public hearings on applications and for rehearings and
appeals. This model legislation also provides for continuing
review of need and of adequacy of performance or, as an alter—
native, automatic expiration of a certificate of need.

American Hospital Association. Survey Report: Review of 1971
State Certification of Need Legislation. Chicago: American
Hospital Association, 1972. Out of print.

The American Hospital Association describes, by state,
all certificate of need legislation passed, pending, or defeated
as of 1971. This survey reports in detail on such things as
the status of legislation, the types of changes and of facilities
covered, agencies involved in the review process, and the time
limitations in the review process. There is also an analysis of
trends in the implementation of CON laws.

90

Aspen Systems Corporation. Certificate of Need/1122 Project Reviews:
An Annotated Bibliography. Germantown, Md.: DHEW Publication No.
(HRA)77—14541, August 1977. Available NTIS HRP-0300601.

 

This annotated bibliography includes over one hundred references
to documents on Certificate-of-Need and Section 1122 Project Reviews.
The citations have been categorized into four broad classifications:

I) Descriptive and Analytic Reports and Studies
II) Project Review Procedures and Manuals
III) Examples of Application Reviews
IV) Other Related References
In addition to the annotation, each citation provides the follow—
ing information: title, author, number of pages, date, and information

on how to obtain the document. Each annotation is relatively brief,
totalling fifteen.or twenty lines.

Bauer, Katherine G. Cost Containment Under P.L. 93-641: Strengthening
The Partnership Between Health Planning and Regulation. DHEW, HRA
Contract #230-76-0222. Harvard University Center for Community Health

and Medical Care. January 1978. Available NTIS HRP-0900132.

 

The purpose of this study was to clarify the issues that surround
the linking of health planning to certain types of health regulation
under the 1974 National Health Planning and Resources Development Act
in the search for cost containment, and to this end, to explore ways
in which such linkages could be forged or strengthened.

The particular question addressed was whether, and how, the various
agencies created by the Planning Act could successfully conjoin their
efforts to contain out—of-control increases in the nation's expenditures
for health services, and to secure better value for the health dollars
spent. (Even during the short span of the project, national health
expenditures were reported to jump from approximately $122 billion
annually to approximately $140 billion.) The particular focus was on
the relation of planning and state rate setting as they apply to the
specific regulatory and review functions spelled out in the Act, namely:
to the reviews and state regulation of new institutional health services;
to the periodic reviews of the appropriateness of existing services and
facilities; and to the review and approval of federal program funding.

91

The principal mode of analysis was the case study method. Six
case studies covering a range of situations having to do with cost
containment were prepared. The recommendations which resulted for
strengthening the linkage between planning and regulation in an
effort to contain costs include:

I)

II)

III)

Recommendations for action or emphasis within the
present structure:

1.

2.

Prime emphasis should be anticipatory planning.
Special efforts should be made to involve physician
leaders and hospital boards in cost containment

activities.

Better state/HSA coordination of policy and strategy
via joint problem solving activities.

Continued monitoring of linkage experience.

Incentives to promote coordination of health policy
and strategy at the state and HSA level.

Government should begin to rationalize multiple
regulatory activities that impact on hospital costs.

Recommended changes in P.L. 93—641 Law or Regulations:

1.

The scope of mandatory certificate of need laws and
appropriateness reviews should be broadened.

Federal hospitals should be included.

Hospital plans and review criteria should be
required to be compatible with HSA and state plans.

Additions to review criteria.
Elaboration of letter of intent.

Exception procedures for HSAs from federal and
state standards and criteria.

Provide incentives for states to adopt decertifica-
tion laws.

Strengthening the infrastructure of information:

1.

The information required for health planning and
regulation should be generated at the level of
government or private sector where it can be most
economically supplied.

92

Information from hospital cost and budget reports
should be made routinely available to all P.L. 93-641
agencies.

Information from PSROs or other sources of hospital
patient data should also be available.

Long range institutional plans should be commonly
formated.

Special studies at the federal level should validate
proposed standards with empirical evidence and expli-
cate their cost to benefit relationships.

Routine analyses and special studies by rate setting
program staff.

IV) Fundamental changes linking health planning to financing:
1. National caps on capital spending and operating cost
increases provide an essential framework for health
planning and regulation for cost containment.
2. Within the framework of a national cap, health
planning flexibility should be built in.
3. Funding for state and regional maxicap experiments.
4. Short of a national (or state and regional) cap,
there are many opportunities for linking health
planning and regulation with financing.
Berg, Gordon H., and William J. Bicknell, M.D. "Project Planning

Without Tears." Trustee 30 (February 1977): pp. 14—16.

The
planning
familiar
hospital
projects

authors outline the legislative history of health care
for hospital administrators and trustees who are not yet
with the new regulations. Guidelines follow for
officials contemplating new construction or renovation
to aid them in adopting a new "planning philosophy" that
will insure compliance with the laws and heighten their project's
chances of approval by planning authorities.

Above all, the authors recommend that hospital officials who
want to plan cost effective capital projects with high approval
potential should: 1) design to cost; 2) become familiar and stay
up—to-date with state and areawide regulations; 3) remember to
utilize three key disciplines early in the project planning process
-— finance, law, and health care planning.

93

Bicknell, William, and Diana Walsh. "Certification of Need: The
Massachusetts Experience." New England Journal of Medicine (May 15,
1975): pp. 1054—1061. Massachusetts Department of Public Health, Boston.

This article assesses the impact of the Massachusetts certifi-
cate of need program during the first nineteen months after its
enactment on June 1, 1972. During this period, 209 determina—
tions were made, 21 involving beds in general hospitals and 107
involving beds in long-term care facilities. In the general
hospitals, the approval of 5,247 beds precluded the addition of
443 beds and reduced the number of existing beds by 25, for a
total difference of 468 beds. For long—term care facilities, an
increase of 7,948 beds was requested, but 1,885 of these were not
approved. Of the facility improvement applications, 80 percent
were approved, and 35 of 37 clinic proposals were approved.

During the period, appeals were made from fifteen CON
decisions. The appeals board confirmed the CON decision in six
cases, and in none of the remaining cases challenged the substance
of the CON determination. A preliminary analysis of the certificates
of need issue revealed a serious cost over—run problem.

The authors argue that "the determination of need program is
unlikely ever to be refined to the point where each application is
measured against a rational template or master plan, nor does this
seem a desirable end. No rigid rules will obtain in all instances.
Flexibility will have to be maintained to allow exceptions for
innovations and legitimate variations." However, most Massachusetts
decisions conformed to quantitative guidelines about patient days
per person per year (1.0 for acute care in 1978) and about occupancy
rates (90 percent for acute general hospitals).

The authors conclude that the CON process is valuable but
can have only a limited impact since it can only react to proposals
and can neither initiate nor provide positive incentives for new
programs. The CON program can function optimally only if positive
incentives are developed through the reimbursement system.

94

Bicknell, William and Diana Chapman Walsh. "Critical Experi—
ences in Organizing and Administering a State Certificate of

Need Program." Public Health Reports (January-February 1976):

pp. 29—45, Harvard School of Public Health, Boston, Massachusetts.

 

On the basis of Massachusetts' experience with its Certifi-
cate of Need law, the authors argue that at least some consumer-
provider polarization and confrontation is inevitable and prob-
ably valuable as a means of countervailing provider influence.
Providers tend to have undue influence over Certificate of Need
decisions because of their financial resources, their technical
expertise, and their skill in encasing expansion plans in a
total package designed to appeal to consumers. The State must
devise methods to ensure that consumer interests are given suf—
ficient weight while itself avoiding a purely adversary rela-
tionship with providers.

The authors contend that area-wide review should be the
pressure point at which CON can force rationalization of health
planning. The local agencies should work not only with appli—
cants already in the process but also with potential applicants
to foster the development of alternative and competitive pro—
posals. The local agencies should also have the authority to
deny applications, while final decisions on approval of projects
should be left to state agencies, which are likely to have a
less parochial purview, more technical expertise, and the essen—
tial ability to link CON with licensure and reimbursement.

Although under intense pressure to formulate quantitative
decision—making criteria, the Massachusetts Public Health
Council has determined need largely on the basis of qualitative
criteria as the staff felt it was dangerous to use misplaced or
artificial precision before the dimensions of the issues were
thoroughly understood. Nevertheless, most approvals of increas-
es in the bed capacity of hospitals providing acute care have
conformed to the suggested quantitative utilization guideline of
1.0 patient day per person per year.

Initially, the Public Health Council attached conditions to
certificates of need, but, faced with both heated controversy
and the powerlessness of some applicants to comply with the
conditions, the Council now limits its stipulations to those
directly bearing on the project.

95

Borsody, Robert P. "State Certificate of Need Laws." The Journal
of Legal Medicine (October 1975): pp. 24427.

This article is a brief introduction to the mechanics of
the CON process. Drawing extensively from New York State's
experience and reviewing the legislation of nineteen other states,
Borsody describes both the general coverage provisions of CON
legislation and when and to whom such provisions apply. Borsody
comments upon the great state—to-state variation in the appli-
cation and review processes which make litigation to upset a CON
denial difficult. Though imperfect, the author believes that CON
programs are both necessary and, at times, exasperating.

Britton, Charles R. Certificate of Need Legislation in Health

Care Delivery. Unpublished M.Sc. Thesis, Sloan School of Man-
agement, Massachusetts Institute of Technology, May 1975.

This thesis reviews the certificate of need experience of
the Commonwealth of Massachusetts from January 1973 to March
1975. Two interrelated research tasks were undertaken in order
to review the certificate of need experience in the Commonwealth.
The first task involved the review of actions taken by the cen—
tral regulatory authority in the certificate of need program,
the Public Health Council. The historical record of how the
Public Health Council "voted" on various provider applications
was reviewed in order to (1) determine if key variables con-
tained in each provider application influenced the Public Health
Council decision process, and (2) to determine the cumulative
effect of past Public Health Council actions relative to the
statewide allocation of health care resources. The second task
involved an analysis of existing decision rules employed by the
Public Health Council, such as guidelines/standards, in order to
evaluate their appropriateness relative to stated legislative
objectives.

Analysis of past Public Health Council actions reveal the
following key variables germane to each provider application as
significant "indicators" of Public Health Council action.

1) Institutional size;

2) Institutional affiliation with teaching institutions;
3) Geographic location of applicant;

4) Medical service type requested by applicant.

Also, the analysis of past Public Health Council actions
indicates that the Greater Boston area is continuing to dominate
the statewide health care system in terms of present and future
resources as approved by the Public Health Council.

96

The decision rules employed by the Public Health Council
are too general to be of meaningful use to the other participants
in the certificate of need process. De facto decision rules cre-
ated over time, however, have hindered to some extent the attain—
ment of legislative goals of the certificate of need program.

Brown, Jonathan 3., Diane Rowland and Margaret Sweetland. "Exchange
of Information Between Hospital Rate Setting and Certificate of

Need Agencies: Selected State Experiences." Working paper.
Springfield, Va.¢ U.S. Department of Commerce. National Technical
Information Service, October 1976. HRP-0014698. Harvard Center for
Community Health and Medical Care, Boston, Massachusetts.

The exchange of information between and within the organiza—
tions that share regulatory authority over medical care institutions
in New York, Arizona, and Connecticut is discussed. New York pro—
vides several examples of information sharing between certificate
of need and rate setting bodies. The most successful linkages are
said to be the financial feasibility analyses that accompany each
certificate of need review and the architectural cost monitoring
that accompanies the process of planning and construction. One
lesson that emerges from the New York experience is the impact on
information—sharing of a regulatory structure administered in one
agency led by one decisionmaker. The integration of rate review
and regulatory functions in Arizona is said to offer several
advantages: good communication between rate review and certificate
of need analysts, and between licensing and certification reviewers;
full access by analysts at the state and area levels to each others'
files; the need for only one filing package from applicants for
certificate of need and rate review for use by both state and local
agencies; and more informed decisionmaking. The Arizona system is
handicapped by the fact that rate recommendations are not enforceable
and by inadequate numbers of staff analysts. Connecticut's
Commission on Hospitals and Health Care is said to provide a vehicle
for close coordination of rate review and facility proposal review.
However, the opportunity for closely aligned information activities
has not been fully utilized due to both internal and external
constraints.

Byron, Robert. Enforcing Certificate of Need Programs. Boston:
Boston University Center for Health Planning, October 1977.

Byron's report, one of a series of reports prepared for the
State of Connecticut, identifies enforcement devices commonly
used to compel compliance with regulatory statutes, and
then it discusses the possible application of these enforcement
practices for a state CON program. If they desire, states can

97

structure their CON programs so that they exceed the minimum
Federal guidelines. Recognizing this fact, Byron proceeds to
set forth enforcement measures that would be useful for a state
seeking to meet the minimum Federal requirements, and measures
which could be employed by a state pursuing a more complex
program. Examples of different statutes are included and the
merits of each form are detailed.

In addition to the discussion of alternative enforcement
measures, there is a limited discussion of two related topics:
due process notice problems inherent in all enforcement schemes,
and possible advantages from vesting enforcement authority in
others besides the CON agency.

Cares, Barbara, and Ronda Kotelchuck. "Politics Makes Strange
Beds: New York as a Laboratory for Cost Controls." Health/PAC
Bulletin (July/August 1977): pp. lff.

This article briefly describes New York's efforts to curb
rising hospital costs. These efforts began with a certificate of
need law, passed in 1964. when the certificate of need program
failed to dampen the state's rate of health care inflation,
state lawmakers introduced prospective reimbursement schemes that
discouraged new services by permitting no inflation or adjustment
for new capital expenditures. These schemes encouraged the
closure of unused beds by a formula with an automatic penalty for
low occupancy rates. The reimbursement system failed to cut
gross expenditures because the hospitals apparently compensated
for reduced reimbursement rates by increasing their volume.

While length of stay and occupancy rates in the nation fell,
New York's occupancy rate remained constant, and its average
length of stay rose. The reimbursement system did, however,
seem to dampen the rise of per diem costs of care in New York.

Feeling the pinch of these reimbursement controls, the Health
and Hospitals Planning Council, dominated by the big voluntary
hospitals, proposed the closing of 27 hospitals, mostly either
municipal hospitals or small proprietary hospitals. The big
medical empires went untouched. Shortly after this proposal
was made, the State Health Commissioner was given power to close
down institutions deemed unnecessary. When the Commissioner
developed his list of targets for closure, it was similar to that
of the planning council except that public hospitals were emitted.
The hospitals on this smaller list were mostly small proprietary
hospitals, and they were all among the city's least expensive.
Despite the list, however, no hospitals were closed by the
Commissioner.

98

In 1975 Mayor Beame instructed the newly created HSA to
produce a hospital closing plan. In contrast to the earlier plans,
the HSA draft proposal targeted for closure several major voluntary
hospitals. The HSA argued that "closure of small voluntary and
proprietary hospitals could be counterproductive--the patients
from these institutions might well simply be redistributed among
the relatively more expensive hospitals providing a more intensive
and unnecessary level of care." The HSA draft report raised such
an outcry that a final plan was never adopted by the HSA.

In March 1977 the State Health Department ordered a review of
all hospital expansion or renovation projects that had received
a certificate of need but that were not yet actually under con—
struction. In these reviews, the Health Department demanded that
several large hospitals agree to give up some beds in exchange
for renewed approval of their projects. However, the hospitals
denounced this as blackmail, and to date no beds have been closed
in exchange for renovation approvals.

The authors conclude from this saga that serious regulation
of the health system is extremely difficult because "With the
exception of government budgeteers, little constitutency exists for
closing hospitals." Faced with this political reality, New York
has turned to reimbursement schemes as a more impersonal, less
visible means of achieving bed closing. It is reducing reimburse-
ment rates enough to push marginal institutions into bankruptcy
and inserting into reimbursement formulas penalties for low occu-
pancy. The authors worry, however, that hospital closing, whether
accomplished through CON processes or reimbursement schemes,
may result in the closure of less expensive hospitals and may
give a greater monopoly to the medical empires.

Carr, W. John. "Economic Efficiency in the Allocation of Hospital
Resources; Central Planning vs. Evolutionary Development." Edited
by Herbert Klarman. Empirical Studies in Health Economics.
Baltimore: Johns Hopkins University Press, 1970.

 

Carr seeks to determine whether central planning and con-
trol or market methods of allocation result in a more efficient
distribution of hospital resources. He constructs an economic
model of each type, one of a completely centralized planning
system and the other of a pure market system, and then uses
simulation analyses to determine the relative efficiency of
these two methods of resource allocation under conditions likely
to be found in the hospital industry.

Carr concludes that the planning method has the potential
of being more efficient in a technical sense. However, he

99

points out that "there are formidable difficulties involved in
the construction of realistic planning systems. Reliable evidence
on costs and consumer preferences must be obtained and combined
to produce resource allocation decisions by some algorithmic or
heuristic means. Furthermore, there is always the possibility
that some important variable will be overlooked completely. The
efficiency of bureaucratic planning organizations may also be
questioned. For example, it is well known that the government
regulator agencies often, if not generally, favor the interests
of producers in regulated industries over those of consumers."
For these reasons, the planning method may not in actual practice
be more efficient, and the market mechanism might be more
practical. The market mechanism also has the advantage of auto-
matic operation.

Cartaya, Oscar A. and William J. Curran. "A Model Certificate
of Need Statute," Health Care Management Review 2 (Fall 1977)
pp. 31-41.

 

The authors begin their article with a brief survey of the
major issues in health planning and a review of the findings of
an early survey of state CON program legislation. The article
continues with a discussion of the issues involved in adapting
state CON programs to the requirements of P.L. 93-641. Most
states will have to amend their CON statutes to come into com—
pliance with Federal guidelines.

Massachusetts is examined as a case study of the tensions
in the relationship between the state and local HSA interests.
Officials at the state and local HSA level were interviewed to
identify the balance of power and functions between the differ—
ent agencies. There appears to be a set of conflicting future
expectations and aims with each type of agency attempting to
secure as much power and autonomy as possible under the man—
dates of P.L. 93-641. The authors assert that the numerous
problems in program implementation could be partially eliminated
through a statutory division of the review criteria mandated in
P.L. 93-641. Duplication of effort in review would be reduced
by allocating specific review functions to local HSAs employing
local standards, while statewide issues, such as long-range
planning, financial resources, or manpower concerns, would re-
main as the state agency's prerogative.

100

Codman Research Group. Final Report Year I: The Impact of Health
Planning and Regulation on the Pattern of Hospital Utilization

in New England. Contract No. 291—76-0003. Cambridge, Massachusetts,
September 1, 1977.

 

This study reports the first year results of a prospective
description and analysis of the impact of the government's
regulatory strategy on the utilization of and expenditures for
hospital services in selected health planning areas in New England.
The study is structured to investigate the question of whether
the government's regulatory strategy achieves the dual objectives
of cost containment and equality of use of acute hospital services
among similar populations. This study combines two evaluation
methodologies, case studies and epidemiologic analysis, to
assess the impact of health planning and regulatory programs on
the expenditures and patterns of use of hospitals in five selected
health planning areas in New England. The case studies are
concerned with the context and mechanics of the decision-
making process in health planning and regulation in selected
planning areas. The case studies utilize structured interviews
and in—depth file reviews relating to specific planning and
regulatory decisions. The first year case studies of this
report concentrate on resource allocation decisions under
certificate of need and Section 1122 programs. The epidemiologic
analyses (or "Outcome Studies") describe the changes in the
patterns of acute hospital use in the selected health planning
areas. The basic methodology employed is a population based
analysis of the change in the pattern of hospital use over time
at the community level, including changes in per capita
admissions, patient days, hospital expenditures, case mix and
use of selected surgical techniques. The basic geographic
unit of analysis is the empirically defined hospital service
area.

The authors contend that by combining case studies and
epidemiologic analyses in the same health planning areas, the
influence of planning and regulation on hospital use patterns
can be assessed. Although the report is cautious in attributing
observed changes in hospital use patterns to a specific cause,
the authors are optimistic that such cause-effect linkages will
be possible, at least in some cases.

The state or planning areas within the states selected for
this study include Massachusetts, New Hampshire, Maine and Rhode
Island (case studies and outcome analyses), and Vermont (outcome
analysis only). First year findings include:

1) There exists considerable variation in the health planning
areas studied in the level of development of the planning
and regulatory aspects of P.L. 93—641;

101

2) Provider reaction to regulatory decisions, with a few
glaring exceptions, has been surprisingly moderate;

3) For facilities review, planners have invoked three
basic strategies: declaring moratoria, embracing
specific planning targets, or denying all applications
in a given class;

4) There are at least three general types of HSA consumer
behavior:
(a) Consumers support technological expansion and
capital investment based on parochial local interest;

(b) HSA consumers oppose expansion because of a history
of community-hospital antagonism; and

(c) HSA consumers resist capital expansion because
they come to the HSA already fully in support of
planning goals;

5) In general, whether for facilities review, health plan
development or the formulation of broad regulatory
policy, political and organizational dynamics are
always more decisive than the technical aspects of
planning;

6) The planning process is an enormously complex one;

7) There are great differences in the use of hospital
services among the states studied;

8) The differences in the use of acute hospital services
among the residents of the various urban areas, smaller
cities, and rural towns that lie within a given HSA or
state are much greater than the differences among the
HSAs or the states themselves.

Conen, Harris S. "Regulating Health Care Facilities: The
Certificate of Need Process Re—examined." Inquiry (September
1973) pp. 3—9. National Center for Health Services Research and
Development, Rockville, Md.

Cohen points out that a major problem with certificate of
need laws is the lack of scientific means of measuring health
facility needs. In any case, technical decisions on need as-
sessment tend to become bound to social and political issues,
brought to the fore by the panoply of different constituencies
represented in the several levels of decision-making. For ex-
ample, decisions emanating from consumer—oriented health plan—
ning agencies may run into substantial opposition when reviewed
by other health agencies that lack either heavy consumer con-
stituencies or a planning orientation. Perhaps the fundamental

102

problem, however, is the attempt to combine planning and regu-
lation in one agency. Regulation may require the various par-
ties to assume an adversary relationship, while planning ought
to be a political process with a free exchange of ideas and in-
formation. Merging planning with regulation may thwart the de-

velopment of planning and the accommodation of political reali-
ties.

Cohodes, Donald R. "Certificate of Need Controls and Hospitals:

An Outcome Assessment." Unpublished paper, Harvard School of
Public Health, May 1976.

Employing secondary data collected by the American Hospital
Association, Cohodes compared the experiences of five states with
early CON programs to seven roughly matched control states. The
pre-CON period was 1963-68, while the post-CON comparison period
was 1969-74. Four variables were examined: the percentage
change in bed supply, plant assets, plant assets/bed and payroll.

Cohodes' major findings include: (1) the rate of growth
in bed supplies, though generally decreasing, has decreased more
rapidly in those states with CON programs; (2) there is consid-
erable variation in the experience of individual CON states in
controlling the rate of increase in investment in plant assets:
Rhode Island, Maryland and Connecticut have been most successful,
New York and California the least; (3) in the aggregate, CON
controls appear to have slowed the rate of increase in the growth
of plant assets per bed, though there is significant statewide
variation; (4) CON states have much higher levels of plant assets/bed
than non—CON states; and (5) payroll increases were the same for
CON states, non-CON states, and the United States as a whole in
both the pre- and post—CON periods.

Comptroller General of the United States. Study of Health
Facilities Construction Costs, Report to the Congress of the
United States, 92nd Congress, 2d Session. Washington: Government
Printing Office, December 1972.

Chapter 9 in Enclosure C of this report describes the
results of a mail poll of 208 health planning agencies throughout
the nation. The agencies indicated that proposals are often
made to expand health facilities and services beyond the needs
of communities. The agencies cited 72 examples where they were
successful in preventing such projects from being carried out,
but described 36 instances where they were unsuccessful in
preventing unnecessary construction because of limitations in

103

the agencies' authority or control. A substantial number of
agencies had authority only over short—term non-profit hospitals
and not over other facilities; some agencies reported that their
authority extended to the various types of facilities only if
government funds (often Hill-Burton) were involved; many agencies
had no enforcement powers and had to rely on voluntary agreement.
The following reasons for the lack of authority were cited by more
than one health planning agency: lack of certificate of need
legislation; inadequate control over health services; inadequate
control over proprietary hospitals; vested interest groups;
planning suggestions which either were not heeded or were not
effective.

Less than 50 percent of the health planning agencies responding to
the survey provided data showing that they knew of 1972 needs for
various types of facilities. A major problem was that the state
of the art of estimating health facility needs by scientific
means is not too advanced, and, as a consequence, approvals or
disapprovals of proposed projects were given on the basis of the
best judgments of agency staff and board officials, who themselves
sometimes disagreed. The findings of health planning agencies
often disagreed also with those of Hill-Burton and other
agencies.

Planning agencies were sensitive to the often voiced criticism
that they place too much emphasis on regulating and not enough on
planning, but many of them were, at the time of the survey,
relatively new and/or had experienced funding and personnel problems.

Correia, Eddie. "Public Certification of Need for Health
Facilities." American Journal of Public Health (March 1975)
pp. 260-265. John F. Kennedy School of Government, Cambridge, Mass.

Correia points out that certificate of need laws are de—
signed not only to prevent the construction of facilities that
will be underutilized but also to influence treatment patterns
to be more efficient. He recommends that, for now, certificate
of need regulation should impose ceilings on future construction
based on the Hill—Burton formulas, but that ultimately formulas
might be based on the experience of prepaid group practices. He
argues that final certificate of need decisions should rest with
state rather than local planning agencies. To prevent certifi-
cate of need laws from acting as "barriers to entry" to innova-
tive health delivery systems, certifying agencies should have
some flexibility to deal with specific cases, and outpatient
facilities should probably be excluded from certificate of need
requirements.

104

Crane, Robert M. "Methods Used in Determining Health Service
and Facility Requirements." In Health Regulation--Certificate
of Need and 1122. pp. 105—134. Edited by Herbert Harvey Hyman.
Germantown, Maryland: Aspen Systems Corporation, 1977.

 

Various methods to determine demand and need for health
services and facilities are discussed in this paper. Crane
differentiates between determining facility requirements based on
demand and requirements based on need. Factors that need to be
considered when choosing a method are validity, reliability,
accuracy, and complexity. The author presents and discusses
five approaches for determining need and demand—-the formula
approach, the regression approach, the stochastic approach,
simulation, and the ratio approach.

Of the five approaches, Crane observes that no conclusions
can be reached concerning which is best for all situations.
Each approach has certain strengths and weaknesses; while none
deals explicitly with value question. Similarly, none clearly
considers the impact of changes in technology or weighs issues
of cost, acceptability, quality, accessibility or continuity.
Crane concludes that whatever method is used, it should be used
as part of a planning process considering other issues.

Cromwell, J., P. Ginsburg, and D. Hamilton. incentives and
Decisions Underlying Hospitals' Adoption and Utilization of
Major Capital Equipment. Washington,.D.C.; u,s, Department

of Commerce. National Technical Information Service PB—251 631.
September 1975.

 

The principal objective of this study was to analyze the
factors underlying the equipment decision—making process in
hospitals. Detailed case studies of the equipment decision
process were conducted in a sample of fifteen hospitals in the
Greater Boston area. While dealing with a broad array of topics,
such as an evaluation of equipment performance and the develop-
ment of a broad model of the diffusion of hospital facilities,
services and high technology, the study also describes the
impact which the Massachusetts CON program had on equipment
decisions.

Utilizing a regression analysis for a one year cross section
of 1973 data taken from the American Hospital Association Guide
Issues, the Cromwell, Ginsburg, and Hamilton study estimated the
impact of CON on investment in ten specialized services. CON was
found to decrease the adoption rates of certain pieces of equipment:
x-ray therapy equipment, cobalt therapy equipment, and radium therapy
equipment, and to have no effect on the others. The authors con—
cluded that CON laws apparently do not impede the diffusion of
technological equipment, but rather they slow down the adoption of
services which have completely diffused. The study also contains the
results of a limited mail survey of 50 hospital administrators regard-
ing their impressions and attitudes concerning the CON process.

105

Curran, William J. "A National Survey and Analysis of State
Certificate of Need Laws for Health Facilities." Regulating
Health Facilities Construction. Edited by Clark C. Havighurst.
Washington, D.C.: American Enterprise Institute for Public
Policy Research, 1974.

 

This dated, though still valuable,survey of state CON pro-
grams describes and analyses twenty state certificate of need
programs: Arizona, California, Connecticut, Florida, Kansas,
Kentucky, Maryland, Massachusetts, Michigan, Minnesota, Nevada,
New Jersey, New York, North Carolina, North Dakota, Oklahoma,
Oregon, Rhode Island, South Carolina, and Washington. The polit—
ical trend of these laws is examined in some detail. The basic
purpose of the laws would seem to be the same in all jurisdic—
tions, that is, to help to control the costs of health care and
to bring orderly planning to the development of health care
facilities and services in the future.

The remainder of the paper provides an analysis of certain
major features in the programs enacted in each of the states.
The first feature examined is the coverage of different types
of facilities. It finds that most of the laws attempt to
cover all health care facilities. Thirteen states have no
statutory minimum capital amount for required review. The other
seven states have limits ranging from $50,000 to $350,000. The
third feature examined is the process of review of individual
applications. This is found to be a very complex and often un-
clear area which will require clarification by administrative
regulations. The last aspect of the laws examined is the criter—
ia for review. The survey finds that most states do provide some
statutory standards, but many are basically passive reviews of
the applications and the evidence presented by the petitioning
facility.

106

Curran, W. J., Richard J. Steele and Ellen W. Ober. "Government
Intervention on Increase." Hespitals 49 (May 16, 1975):
pp. 57—61. 'Harvard University, Cambridge, Massachusetts.

The results of a mid-1974 on-site field investigation of
the overall impact of the laws in 23 states with certificate of
need programs are reported. The impression was gathered that a
"honeymoon period" still exists in most states between the health
planners/regulators and the health care industry, particularly
the voluntary hospital segment. Control of facilities expansion
is currently in accordance with the goals of both the planners
and the established health care institutions in most states and
communities. It is noted that as the certificate of need
programs become more aggressive, their use of various enforce-
ment methods will incur much greater resistance. Such resistance
is, at the time of writing, becoming more evident in the legal
challenges being brought in the courts in several jurisdictions.
It is observed that the primary objective of the state legislatures
in setting up certificate of need programs was related much more
to reducing patient charges than to achieving a more rational
delivery system through controlling facility development. As
legislatures realize that certification alone cannot achieve the
first goal, they impose further controls on the industry. Once
a state embarks on health industry control through comprehen-
sive planning and facilities construction regulation, it moves al-
most inevitably to further regulatory efforts. This pattern is
exemplified in several states, such as Connecticut, Massachusetts,
California, and New York. The general findings of the survey
are discussed relative to the impact of certificate of need
programs as viewed by respondents in regulatory agencies, among
providers, and among consumers. States investigated, in addition
to those above, included: Maryland, Rhode Island, Arizona,
Minnesota, New Jersey, North Dakota, Oklahoma, Oregon, South
Carolina, Washington, Florida, Colorado, Kansas, Kentucky,
Michigan, Nevada, South Dakota, Tennessee, and Virginia. No
study details, tabular data, or survey instruments are included.

107

Dolan, Thomas, Project Director. Evaluating the Effects of Missouri's
Canoellation of the 1122 Program. U. S. Department of Health,

Education, and Welafare, Bureau of Health Planning and Resources

Development, Contract 297—77—0001. Columbia, Missouri:

University of Missouri, October 1977, Available NTIS HRPP0900091 &HRP-090009:

This study delineates and evaluates the structure, processes,
and impact of Missouri's capital expenditure and service controls.
Between 1970 and 1973 these control efforts consisted of non-
binding review and comment by comprehensive health planning
agencies and of voluntary programs by health care institutions.
Neither of these efforts was judged to be effective in curbing
unnecessary capital expenditures. In 1973 an 1122 program
was started by the governor without either review or approval
by the Missouri General Assembly, but three years later the
program was terminated by the Assembly. The authors feel that
the Assembly's action was due to adverse legislative opinion
towards regulation in general and to some of the specific 1122
reviews and decisions which created conflict between the
regulators and providers.

The authors consider that the 1122 program suffered from
the following deficiencies: serious underfunding; inadequate
staffing in terms of both quantity and quality; inadequate plans,
need projections, and standards and criteria; and lack of
commitment to cost containment by health care officials and
providers, a number of whom regarded 1122 as a method of
performing other functions such as redistributing services.
However, the program was judged to be both efficient and fair,
and the percentage of projects approved and the percentage of
dollars approved was less in Missouri than the Lewin study found
elsewhere.

Analyzing changes in hospital resources, the study found the
hospital bed supply in 1970 was reasonable, but between 1970 and
1976 the bed supply grew at a rate substantially in excess Of}
the demand for services. However, although there was some un—
necessary bed construction, there was substantial necessary
upgrading of facilities and no unnecessary proliferation of
special services such as open—heart surgery units or cobalt
therapy units. The exception to this was the installation of
CAT scanners. During this six~year period, nursing home beds
increased rapidly, but capital expenditures for nursing homes
do not appear to have been inappropriate since nursing home
occupancy rates remained high.

The authors found it difficult to evaluate the impact of
the 1122 program since virtually all of the capital expenditures
during the program's three years emanated from decisions made
prior to 1122's existence in Missouri. The increased hospital

108

capital expenditure activity recorded in 1975 and 1976 may
possibly have been, at least in part, a product of preemptive
behavior on the part of the hospitals. The study did find

that, "although financial indicators increased consistently
through the study period, the rates of increase for fixed

assets and patient charges were not as great during the 1122
period as they had been during the previous three year period."
There were also changes in the decision-making processes in a
significant number of hospitals and in some of the nursing

homes. "The 1122 program may have influenced some of this change,
particularly in the procedures and the criteria used by institutions
in making capital expenditure decisions. A by—product seems to
be an increase in the amount of time and cost required to
implement a capital expenditure decision."

When this study was completed in 1977, not enough time had
elapsed to ascertain the impact of termination of the 1122
program. However, during that year there did not appear to be
any increase (or decrease) in the level of capital development
activity in‘the state. The study concluded that the 1122 program
had little impact on the economic and financial characteristics
of the health care industry or on the organization structures
and processes of health care institutions.

Unlike other studies, this essay argues against separating
planning and capital expenditure control programs, because separation
of the two functions might lead to non—productive conflict between
them.

Dorsey, Joseph L. "Certificate of Need Laws." Archives of
Surgery 106 (June 1973): pp. 765-769.

This article describes the background, purposes, and
current status of state certificate of need laws, as well as
some of the weaknesses and problems of these laws. The author
believes that projects evaluated by certificate-of-need agencies
should not be judged solely on the basis of community need, but
also whether they represent an appropriate allocation of scarce
resources. Some of the weaknesses of certificate of need laws
discussed are: criteria for determining need are difficult to
establish; planning bodies are often weak; too many bureaucratic
obstacles; the laws are only applicable to new or additional
facilities and services; the laws have difficulty dealing with
quality issues; and the laws do not deal with manpower problems.
Still, in spite of these drawbacks, the author argues that the
CON program introduces coherence and rationale to the planning
process.

109

Elsasser, Peter, and\Thomas Golinski. "Status of State Legislation."
Hospitals 16 (December 1971): pp. 54—58.

This review of state certificate of need laws as of August
1971 summarizes the most common provisions of these laws. Provisions
discussed include the scope of coverage, processes for applications
and review, the appeal processes, the time limitations on certificates,
and the means of financing the certification process.

Ensmingen, Barry. The $8 Billion Hospital Bed Overrun. Washington,
D.C.: Public Citizen's Health Research Group, 1975. Available
Health Research Group, 2000 P. St., N.W., Washington, D.C. 20036.

This monograph begins with the assertion that we now have an
excess supply of hospital beds whiCh Will cost the public $8 billion
annually to pay for excess capacity in the system and over—
utilization. This assertion establishes the tone of the report.
Ensminger's paper is a position paper, not a well reasoned
research document. It expresses a point of view and supports
that point of view with the evidence available to it. Unfor-
tunately, the evidence itself is not compelling and as a conse-
quence neither are Ensminger'S' arguments. However, this report
has not been designed for a professional research audience, it
is directed at consumers. For the consumer audience, the report
provides a perspective on many of the issues in health facility
planning that are not often heard. A step—by—step argument is
constructed cautioning the consumer to look for signs of over—
bedding in his/her community; pointing out that excessive con-
struction is linked to hospital overuse; examining the reasons
why overbuilding has occurred; and offering seven ways for con—
sumers to slow the rate of growth in hospital bed supplies in
their communities. While Ensminger' may overstate his case,
his basic point is valid: consumers have financial and health
interests in monitoring and containing the rate of growth in
hospital bed supplies.

Feldman, Penny. "Promulgating Certificate of Need Regulations
for Hospitals and Nursing Homes." Case prepared for the Execu—
tive Programs in Health Policy, Planning and Regulation, Harvard
University, 1976.

This case examines two attempts to set certificate of need
criteria in Massachusetts. For over two years, from 1974 to
1976, Massachusetts struggled to set a standard for judging ap—
plications for hospital bed construction or reconstruction.
This case describes in detail the process of developing these
regulations and the final form of the regulations adopted. A
description is also provided of the unsuccessful attempt, from
May through December 1976, to establish new criteria for long
term care beds to replace an existing set of standards.

110

Fineberg, Harvey V., Gerald S. Parker, Laurie A. Pearlman.

"CAT Scanners: Distribution and Planning Status in the United
States." ’New England Journal of Medicine 297 (July 28, 1977):

pp. 216-218. Massachusetts Department of Public Health, Boston.

This article reports a survey taken in May, 1977 of the
status of CAT scanners in the United States. Over the past two
years there has been sustained, almost linear growth in the
placement of scanners nationwide, averaging 25 new installations
per month. The ratio of applications denied to those approved as
of April, 1977, was 1:10. Nationally, as of April, 1977, the
ratio of population to scanners in place and on order was 250,000:l.
The ratio varied among states from 100,000:l to 500,000:1. The
authors observe that since the great majority of applications are
approved, the wide variation in ratios among the states is due
more to variations in decision—making than to differences in
areawide planning approaches. It is estimated that the annual
cost of operatilg a CAT scanner is $300,000—$500,000. In addition,
professional fees can add another $200,000 or more to the total
cost. The extent to which CAT scanning may produce offsetting

savings —- through decreased hospitalization, for example -— is
as yet unclear.

Frech, H.E. "Regulatory Reform: The Case of the Medical Care
Industry" Paper presented for the Conference on Regulatory Reform,
sponsored by the American Enterprise Institute and the Hoover
Institution, Washington, D.C. September, 1975.

 

In this paper, Frech discusses the choice which exists between
regulation and allowing the market to operate. He points out
from the onset that the choice is between two imperfect alterna-
tives. Frech reviews the standard arguments for why regulation
is needed for health care delivery: consumer ignorance, medical
care for the poor, and third—party payment--and he then raises a
series of arguments which suggest that these reasons are not
adequate to justify regulatory intervention. The author argues
that there are many neglected costs of regulation including:
the reduction of competition in the medical care industry,
restriction of manpower substitution, favoritism of nonprofit
insurers (who are controlled by medical providers), and the
restrictions on entry for new providers introduced by state CON
programs. Frech's recommendations for regulatory reform include:
replacing licensure with certification; legalizing advertising
for providers; eliminating all special treatment of BC-BS plans;
and abolishing or modifying state CON programs. The paper
concludes that the current form of regulation of the U.S. medical
care system is partly responsible for its poor performance.
Regulation of this industry is inherently difficult because of
the complexity of its output and because the influence of pro-
viders over regulation is quite strong. Frech believes that
regulatory reform to improve incentives, make the system more
responsive to consumer preferences, and reduce the anti—competitive
effects of existing regulation could be very beneficial.

lll

Gaus, Clifton R. and Barbara S. Cooper. "Technology and

Medicare: Alternatives for Change." Presented at the Conference
on Health Care Technology and Quality of Care, Boston University
Health Policy Center, Boston, Massachusetts. November 19-20, 1976.

This paper is directed at a series of critical questions
regarding the use of technology in medicine, its costs and efficacy,
and potential policy levers for controlling widespread prolifer-
ation. Current activities such as CON and Section 1122 are now
the primary means by which technology costs are regulated. Gaus
and Cooper raise doubts as to whether such controls are effective
or appropriate given that equipment purchases alone have been
estimated to account for only nine percent of total hospital
inflation. New personnel and supplies required by the equipment
add significant costs and are not currently covered by CON or
Section 1122 programs. Cooper and Gaus argue that there are
two aspects to the problem of technology control: (1) determining
what procedures and equipment are cost—effective, and (2) developing
the necessary administrative arrangements to control technology
adoption. With regard to their first point the authors contend
that much could be done to expand the breadth and focus of
evaluation. Assessment should not be confined to hospital-based
services, but should consider technology in physicians' offices
as well. Gaus and Cooper then describe a series of possible'
mechanisms for controlling technology adoption including:

1) Federal Capital Budget Control: hospitals would submit
capital and operating budgets for new technology to a
Federal regulatory body for prior approval for reimburse-
ment.

 

2) Federal Reimbursement Index: A cap could be placed on
allowable increases in revenues or charges per admission,
based on a cost of living increase plus an additional
"technology factor." (Similar to Phase IV of the ESP
program)

3) Reimbursable Technology Protocol: This alternative calls
for the development of a protocol for reimbursable
technologies. Only those on the list would be reimbursed
under government health programs.

 

4) Technology—Sensitive Fee Schedules: In this approach,
Federal or state physician fee schedules would be
developed whereby the participating physician would
accept the established fee per procedure as full
payment. In establishing fee schedules, the pricing
system for physician services would be geared in a
way that would make it less profitable for him to use
expensive, marginal technology.

 

5) Capital Allocation Formula: This proposal attempts to
place an overall national limit on the amount of additional

112

Medicare reimbursement each year that would go to
capital amortization, while still permitting maximum
flexibility at the state and local level for deploying
new capital.

6) Cost Commission Control: In this approach, each state
over time would establish Hospital Cost Commissions
to approve all hospital budgets or charge rates on a
prospective basis.

 

Ginsburg, Paul. "Inflation and Capital Investment." Health:
A Victim or a Cause of Inflation? Edited by Michael Zubkoff.
New York: Milbank Memorial Fund, 1976.

 

In this analysis of hospital investment, Ginsburg concludes,
"The hospital capital market does not appear to allocate funds
in accordance with the demand for services, or the marginal
efficiency of investment." Lenders require hospitals to obtain
a substantial portion of the funding for an investment project
from such equity sources as retained funds, grants, and private
donations. Since access to private donations can be of crucial
importance in determining total access to capital funds, capital
can be obtained more readily by hospitals attractive to private
donors because they are located in or near upper income communities
and specialize in pediatric, cancer, or other services favored
by donor groups. For a variety of reasons, inflation tends to
allocate hospital investment even further toward those institu-
tions possessing the most equity capital and toward those projects
which generate the most equity capital, either by attracting
gifts and grants or by increasing the flow of funds to retained
earnings.

Capital investment increases hospital costs substantially, but
most of this increase is not due to its direct impact on interest
and depreciation costs but to its indirect impact on operating
expenses. However, to ascertain if capital investment contributes
to inflation, a comparison needs to be made between the costs and
the net improvements in health from the services produced with
the costs. However, assessing benefits is often difficult, so
other mechanisms must be devised to weed out inflationary projects.

These mechanisms can take three forms. The first is health
planning and certificate of need processes, whose effectiveness
Ginsburg questions because of the absence of practical criteria
for judging the merits of projects and because of consumers'
greater interest in expanding access to health facilities than
in reducing health care costs. Another alternative is to give
consumers incentives to avoid unnecessarily costly hospital care.
Such incentives could be created either by instituting large

113

deductibles in health insurance (as Feldstein proposes) or by
Newhouse and Taylor's variable subsidy insurance plan. Ginsburg
finds this alternative attractive but politically infeasible.
He, therefore, endorses the third alternative, the institution
of prospective reimbursement mechanisms.

Glantz, Leonard H. "Legal Aspects of Health Facilities Legis-
lation." In Health Regulation--Certificate of Need and 1122,

pp. 75—103. Edited by Herbert Harvey Hyman. Germantown, Maryland:
Aspen Systems Corporation, 1977.

This paper discusses the legal implications of certificate
of need (CON) legislation and P.L. 93-641. First a brief history
of federal health planning regulation is presented, then the
author discusses the issue of the constitutionality of state CON
laws. One aspect of constitutionality involves the proper use
of the state's police power. There has been only one instance of
a state's CON law being declared unconstitutional because of an
improper exercise of police power (North Carolina - 1973). This
case is discussed in detail, as well as the reasons for it being
declared unconstitutional. Two other aspects of constitutionality,
unconstitutional delegation of power and vagueness, are also
discussed. The author also examines other legal implications,
such as due process problems, conflict of interest, and com—
peting applications under the CON review process.

Gottlieb, Symond. "Certification of Need: Potential Threat to
Planning." Hospitals (December 1971): pp. 51-53.

This 1971 article expresses the following concerns about
the certificate of need laws coming into fashion then: 1) Will
long—range planning be subordinated to regulation, with a conse—
quent loss of flexibility and constructiveness? 2) Will cooperation
be maintained between planning agencies and providers? 3) Will
regulation stem the flow of resources into the health care system
(an unfortunate result in Gottlieb's eyes)? 4) Will regulation
remain responsive to changing priorities and conditions? 5) Will
providers tailor their planning to meet CON requirements?
6) Will there be adequate staffing and financing of regulatory
bodies? 7) Will local communities maintain realistic influence
on decision-making?

114

Hanley, Edward J. "Regulation of Health Facilities and Services
Under Public Law 93—641." In Health Regulation-~Certificate

of Need and 1122, pp. 53-74. Edited by Herbert Harvey Hyman.
Germantown, Maryland: Aspen Systems Corporation, 1977.

 

The purpose of this chapter in Hyman's book is to explain
those provisions of P.L. 93—641 that pertain to certificate of
need (CON) legislation. The paper consists of three separate
sections. Section one describes Congress' intentions in passing
P.L. 93—641: and it also presents a brief overview of the law and
its provisions. Hanley asserts that Congress had two intentions
in enacting the legislation: first, to reaffirm that equal
access to quality health care is a priority of the federal
government and second, to clarify and strengthen the network of
local, state, and federal programs responsible for achieving
this priority. Section two of this paper discusses what is
likely to be required of states and of providers under the pro—
visions of P.L. 93-641, in the absence of final federal regula—
tions (which had not been issued at the time of publication).

In addition, areas with states which retain discretion in CON pro—
gram design are highlighted. The final portion of this chapter is
devoted to a discussion of a series of important implementation
issues and potential problems. The role of provider cooperation
in the implementation process is discussed, and a case is made for
the need for rate review controls linked to CON. Finally, two
concerns are raised regarding the impact which capital controls
could have on technological innovation and the potential serious-
ness of the low level of funding associated with P.L. 93-641.

Harmon, Carolyn. "The Efficiency and Effectiveness of Health
Care Capital Expenditures and Service Controls: An Interim
Assessment." In Health Regulation - Certificate of Need and
1122, pp. 27-52. Edited by Herbert Harvey Hyman. Germantown,
Maryland: Aspen Systems Corporation, 1977.

This study is a summary of a study conducted by Lewin and
Associates, Inc. from September 1974 to September 1975 to deter-
mine the efficiency and effectiveness of capital expenditures
and service controls (CBS) in the health care sector. The find-
ings of the Lewin study are summarized in the annotation for
that study.

115

Havighurst, Clark. "Regulation of Health Facilities and
Services by 'Certificate of Need'." Virginia Law Review
__________________

(October 1973): pp. 1143-1242.

This seminal analysis of the certificate of need concept
outlines the rationale for CON laws, reviews CON legislation and
administration in 23 states, and summarizes findings on regulatory
experience in other industries.

Havighurst finds two major weaknesses in the certificate of
need concept. The first is that certificate of need laws are
likely to do no more than bring about supply restrictions
roughly equivalent to those which a hospital cartel would maintain
to maximize its own welfare. Among the reasons for this are
the following:

1) The hospital industry is likely to dominate CON processes,
if not by capturing them, then by regulators' desire to
avoid "squawks." In particular, decisions may be skewed
in favor of the bigger, more influential hospitals.

2) A general belief in the value of more and better health
services is shared not only by providers and the regulators
but also by consumers involved in the regulatory process.
Havighurst points out, however, that involving consumers
is an innovation in regulation and may produce somewhat
different results than other regulation.

3) The regulators traditionally have a protective attitude
toward the regulated firms' investments and revenues.
This "sunk cost obsession" biases regulators in favor
of established providers and against innovations and market
entry by IOWer cost providers.

4) Politicized regulation is oriented to incremental change
based on consensual processes and bargaining among interest
groups rather than "real planning" for the restructuring
of the health delivery system, which Havighurst feels is
necessary.

5) Certificate of need laws involve a clear rejection of
competition as a corrective force of internal subsidiza—
tion of services. Cross—subsidization, common in regula-
ted industries and labelled "taxation by regulation" by
Richard Posner, has many disadvantages: as a result of
their low visibility, internal subsidies may support
unneeded services or may redistribute income from the
more affluent to the less affluent; and they provide an
excuse for limiting market entry to protect providers of
subsidized services.

116

The second major weakness that Havighurst finds in the certif—
icate of need concept is that such laws are unlikely to have any
significant effect on health care costs. Among the reasons for this
are the following:

1)

2)

3)

4)

5)

6)

7)

As indicated above, certificate of need laws are likely to
bring about only the types of supply restrictions that a
cartel would produce.

One of the key rationales for CON laws is the so—called
"Roemer effect." namely that increases in the supply of
health services, particularly of hospital beds, appears to
generate new demand. However, Martin Feldstein's tenta-
tive analysis indicates that only about half the impact
of new hospital beds is the creation of new demand, while
the other half of the impact appears to be a drop in
price. To the extent that this is true, supply res-
trictions cause prices to be somewhat higher.

As long as the need requirement is enforced, discrimina-
tory pricing cannot be eliminated by competition which
drives prices down to cost. The internal subsidies
permitted in regulated industries may cause an excessive
amount of society's resources to be allocated to the
regulated industry.

Cost-control benefits will be limited by the tendency
of inflationary pressures to reappear in effects on
costs which are less easily regulated.

CON laws will impose not only the administrative costs
of the regulatory program but also the costs of compliance
incurred by the applicants themselves.

The need requirement necessarily imposes some reduction

in competition, a reduction which will cause some loss

in technical (input—output)efficiency and in responsive—
ness to consumer desires, and will sacrifice significant
potential gains from technical innovation and institutional
change.

CON laws will not affect the continuance of the underlying
conditions——third-party cost reimbursement and provider
influence over demand--which produce excessive hospital
growth in the first place.

While questioning CON benefits in controlling costs, Havighurst
concedes that CON may provide benefits in the areas of assured
quality and reduced resource misallocation.

Havighurst argues that, if CON laws are not dispensed with

117

altogether, they should contain the following provisions:

1) In order to offset provider influence, certification of
need should be lodged in an agency which bears direct
political responsibility for the cost of health care
as a purchaser of care.

2) Coverage of the law should be limited to hospitals only.
Nursing homes should be excluded since here consumption
decisions are somewhat more in patients' hands than
in hospitals, and both utilization and investment decisions
are less likely to reflect doctors' judgments. All
HMO facilities, inpatient and outpatient, and all
ambulatory care facilities should also be exempt from
CON requirements, for it is in these areas that innova—
tion may most benefit the health care system.

3) Reliance on real planning should be mandatory, with
decisions based on published quotas and sound (as opposed
to historical) utilization practices.

4) The need requirement should not be used to shelter non-
cost—related pricing or to prevent entry by "cream-
skimmers" except where care of indigent patients would
unavoidably be jeopardized.

5) The CON law should have a fixed expiration date so that
it appears more as a moratorium than as a permanent
commitment to regulation.

Havighurst, Clark. "Franchising Experience from Other Industries
and its Relevance for the Health Field." Management Memorandum on
Hospital Franchising. Chicago: International Health Advisory
Council, 1973.

This article makes many of the same points as Havighurst's
more exhaustive analysis of the certificate of need concept in
the Virginia Law Review. One interesting additional point
brought out here is Havighurst's opposition to the popular view
that planners should be brought into the regulatory process.
Havighurst argues that putting planners into such a political
role would handicap their function as facilitators of better
decisionmaking in voluntary hospitals.

118

Havighurst, Clark C., ed. Regulating Health Facilities Con-
struction. Washington, D.C.: American Enterprise Institute for
Public Policy Research (AE1), 1974. Available from AEI, 1150 17th
St., N.W., Washington, D.C.

This report of a conference sponsored by the American
Enterprise Institute provides a collection of articles on health
planning, certificate of need, and market entry. A number of
the papers recount the history of health planning in the United
States and present a case for its need. Two papers in this volume
deal directly with the experience with CON programs and are sep—
arately annotated. One is a survey of programs, accompanied by
a legalistic interpretation of their statutes. The other repre-
sents a dissenting view of the need and value of CON legislation.

The remaining portions of the report contain articles on the
behavior of non-profit hospitals, the allocation of medical
resources, and the directions of future national health planning
policy. The conference findings and the comments of the parti—
cipants provide an excellent orientation background to those
wishing to become familiar with the issues of health facilities
regulation. In addition, the conference proceedings highlight
the difficulty of translating regulatory programs from theory
into operation.

Following is a list of the articles in this publication:

Gottlieb, Symond. "A Brief History of Health Planning in the
United States."

After outlining the history of health planning since the
1920's, Gottlieb concludes that some progress is gradually
being made toward piecing together the fragments of the
planning process.

Grosse, Robert. "The Need for Health Planning."
May, Joel. "The Planning and Licensing Agencies."

May summarizes the results of Palmiere's twenty-year (1948—
1968) study, which found that trends in bed/population ratios
and most other characteristics did not show consistent or
extensive changes in direction which could be associated
with creation of health planning agencies. A few trends,
however, showed a modest impact. May's own earlier (1952-
1963) study found that planning activities have a very slight,
positive effect upon the number of hospitals and hospital
beds in an area. May concludes that we as a nation are
unlikely to realize anything like a dollar in savings or in
reduced costs for each dollar spent on health planning. It
should be pointed out however, that both the May and the

119

Palmiere studies were made before CON laws could have any
impact.

Curran, William. "A National Survey and Analysis of State Cer-
tificate—of-Need Laws for Health Facilities."

This is annotated separately.

Posner, Richard. "Certificates of Need for Health Care Facilities:
A Dissenting View."

This is annotated separately.

Pauly, Mark. "The Behavior of Nonprofit Hospital Monopolies:
Alternative Models of the Hospital."

Pauly asserts that restricting entry in the hospital industry
is a round-about way of dealing with the demand side
inefficiences resulting from lack of consumer information
and the presence of insurance. While monopolization may

not be the goal of capital controls, it is likely to be the
unintended effect. For this reason, Pauly advocates limita-
tions on the expansion of existing hospitals but none on the
number of hospitals. Pauly also argues that efforts to
control medical costs must focus not only on hospitals and
their rates but also on physicians.

Lave, Judith, and Lester Lave. "The Supply and Allocation of
Medical Resources: Alternative Control Mechanisms."

The Laves feel that the effect of certificate of need
processes may be to endorse officially many current practices
and to shut off innovation and new entry by "outsiders."
While recognizing that some centralization of control over
the health care system is inevitable, the authors stress

the advantages of decentralization, of choice, and of
competition. A properly designed incentive reimbursement
system would encourage hospitals to increase their efficiency
without imposing cumbersome controls.

Newhouse, Joseph, and Jan Acton. "Compulsory Health Planning
Laws and National Health Insurance."

Newhouse and Acton contend that, unless facilities disapproved
under CON processes are strictly unproductive, restrictions

on capital outlays cause increased prices or non—price
rationing. Capital restrictions also diminish flexibility

at a time when changing demand conditions—-particularly

those likely to be created by national health insurance-—
dictate the need for increased flexibility. The authors

argue that "cream-skimming" is not a valid justification

120

for certificate of need laws and quote the May study (see
above) as an indication that CON processes will not reduce
"unnecessary" capital expenditures.

Neuhauser, Duncan. "The Future of Proprietaries in American
Health Services."

Havighurst, Clark. "Speculations on the Market's Future in
Health Care."

This essay outlines two arguments in favor of restricting
entry into the health care system: cream—skimming and
facilities duplication. The "cream-skimming" argument
postulates that, without entry restrictions, new institu-
tions will skim off profitable services from established
institutions using their profitable services to subsi-
dize unprofitable ones. Havighurst contends that the
"cream-skimming" argument is valid only for entry re-
strictions which enable monopolistic institutions to
internally subsidize unprofitable care for the poor.
Therefore, if national health insurance or some other de—
vice greatly increases financial support for health care
for the poor, certificate of need laws should no longer apply.

As for the argument that CON laws are necessary to prevent
facilities duplication, Havighurst counters that if a suf-
ficient amount of competition could be brought to bear,
possibly in the form of HMOs, capital restrictions would
not be needed.

O'Donoghue, Patrick and Rick Carlson. "Health Maintenance
Organizations and Comprehensive Health Planning Agencies:
Actual and Possible Relationships."

This 1972 survey of HMOs found that most had had very
little contact with Comprehensive Health Planning (CHP)
agencies. Where there were contacts, the vast majority
were not prejudicial to the HMOs. This would seem to
contradict the hypothesis that capital regulatory agencies
will harass HMOs. -

Havighurst, Clark C. "Federal Regulation of the Health.Care
Delivery System: A Foreword in the Nature of a 'Package Insert'".
The University of Toledo Law Review 6 (Spring 1975): pp. 577—590.

Havighurst restates and amplifies many of the arguments he

has raised in previous writings (See: Havighurst, Regulating
Health Facilities Construction or Regulation of Health Facilities

121

and Services by CON) regarding the effects of regulation on
health care delivery. Havighurst describes the political
environment surrounding the formation and implementation of
regulatory policy. He details a number of reasons why regulation
‘may not achieve its stated objectives including: the relative-
ly greater resources and organization of providers; limited
statutory power for the regulatory agency; the increased politi-
cal sophistication and lobbying effectiveness of health sector
interest groups; the practical impossibility of controlling all
of the inputs and outputs of the regulated firm, and that because
of their political environment, regulators will usually attach
higher priority to apparent harms than to those which are not
visible to the public eye. Havighurst contends that perhaps the
most destructive regulatory inclination is the one which leads
to protection of regulated interests against outside competition.
This protectionism leads to a regulatory encouragement of exces-
sive investment. Havighurst concludes with a warning to policy—
makers that prescribing more and more restrictive'regulation is
not a cure for our present ills. Havighurst's alternative for
the health care system is for the infusion of a large component
of independent HMOs as a competitive tonic.

Havighurst, Clark. "Controlling Health Care Costs." Journal
of Health Politics, Policy and Law 1 No. 4 (1977): pp. 471—498.

 

Havighurst argues that private sector efforts to contain
health care costs are likely to be more effective than govern-
ment—sponsored controls. Therefore, government efforts should
be confined, at least initially, to untying and strengthening
the private sector's hands.

According to Havighurst, a major reason for the escalation
in health care costs is excessive growth of the wrong kinds of
financial protection against medical costs. This excessive
growth is due to (1) the tax law's treatment of health insurance
premiums and (2) prdvider dictation of the type of insurance
plans available to consumers. The tax law has long encouraged
employers and employees to buy group insurance with low deducti-
bles in order that even routine medical bills could be paid with
untaxed rather than after-tax dollars. Therefore, Havighurst's
first recommendation is for changes in the tax treatment of
health insurance premiums to encourage the purchase of more
catastrophic insurance and less purchase of coverage for routine
care .

Secondly, through changes in state laws and enforcement of

antitrust laws, health insurers need to be freed from undue legal
restrictions and from the threat of organized resistance by the

122

medical profession to cost control efforts. Health insurers
could offer consumers the following options with lower premiums:

1) High deductible "major risk" insurance plans, which
would require consumers to pay for (and make cost-
conscious decisions about) routine medical care.

2) Insurance plans which exclude (or single out for
heavier cost sharing) certain specific procedures on
the ground that they are discretionary or easily
budgetable.

3) Insurance plans which exclude coverage of a number
of extremely expensive measures whose value is less
than clear and in some measure dependent on the
patient's preferences and circumstances.

4) Insurance plans which limited themselves to paying,
not incurred costs, but a fixed indemnity based on
estimated minimum or average cost, leaving the
patient free to spend more for additional increments
of perceived quality.

5) Insurance requiring utilization review.

Health Policy Analysis Program. Certificate of Need: An
Assessment of Current Programs and Policy Issues. University
of Washington (March 1978): 72 pages.

 

 

This report, which reviews the experience with CON, is
divided into four major sections. The introductory section
provides an overview of the CON program, its history and objec—
tives. The second section is devoted to a discussion of the
minimum federal requirements for state CON programs. Section
three is concerned with the impact of CON on cost, quality and
access. Section four is a discussion of the situation in
Washington state, where a CON bill has been introduced which
exceeds the minimum federal requirements. The report also con-
tains four appendices on: (a) minimum federal requirements,

(b) CAT scanners standards, (c) a copy of the January 20, 1978,
National Guidelines for Health Planning, and (d) a listing of
CON provisions which include coverage of physicians' offices.

123

The conclusions drawn from the report may be summarized as

follows:

1)

2)

3)

4)

5)

6)

Certificate of Need (CON) will be a permanent element
in future health resource allocation decisions, and its
scope will be largely determined by the federal govern-
ment. It will be for the states to go beyond any mini—
mum federal requirements as they judge necessary.

The significance of CON as a tool for effective planning
is perhaps as great as, if not greater than, its role in
moderating increases in health expenditures.

Empirical investigation will not be able to provide clear
and definitive conclusions on the impact of CON or how
this regulatory device can be modified. Policymakers
will continually have to temper the findings of research
with their own good judgment.

With respect to cost containment, it is probably un-
reasonable to expect a level of precision that will allow
us to attribute a certain level of reduced (or increased)
expenditures solely as to the presence of CON efforts.
CON is only one of many strategies currently being
directed toward this goal. Moreover, it is directed only
at "new" investment, leaving untouched questions of cost
inefficiencies in the existing health delivery system
which accounts for the greatest proportion of health
expenditure.

The present inability of CON programs generally to regu-
late the placement of expensive medical equipment in
non—institutional settings is limiting whatever potential
these programs may have for exerting a positive influence
on the planning process and on the costs of health care.
Increasingly, federal and state governments, third-party
payers, provider groups and others are taking steps to
remedy this shortcoming in the focus of CON regulatory
activities.

Should this state wish to expand the scope of its CON
program to include the acquisition of costly medical
equipment by all providers of care, careful consideration
should be given to the capacity of the present regulatory
structure (state and BSA) to handle the increased work-
load, the dollar threshold limit, the specification of
equipment to be regulated (including the question of
replacements), and the suitability of the current applica—
tion process to non—institutional providers.

124

Health Resources Administration. Health Resources Studies.

An Analysis of State and Regional Health. Rockville, Maryland:

DHEW, Health Resources Administration, HRP—0002527, 1975. Available
from the Superintendent of Documents, U.S. Government Printing Office,
Washington, D.C. 20402.

 

 

The results of this 50—state survey indicate: (1) how
states are attempting to control cost increases in the rates
of institutional health care, (2) how states are using their
regulatory power to control the expansion of health care
facilities and services, and (3) what states are doing to
strengthen their regulation of health insurance companies.
Twenty—six states have attempted to regulate the rising cost
of health care by instituting prospective reimbursement systems
which establish either government or private rate setting agencies.
Three overlapping methodologies have been developed. These in-
clude systems basis, determination of reasonableness, and unit of
payment. In the area of facilities, Capital Expenditure and
Services (CES) controls exist to discourage creation of facilities
in excess of community need in all but one state. Direct, indir—
ect (the most widespread) and voluntary methods used by CES are
described. These include Certificate of Need (CON) laws, Section
1122 programs, Blue Cross plans, State/Local Construction Financ-
ing and voluntary CHP reviews. The study finds a high degree of
coordination between rate review and CBS control processes.
State health insurance programs and policies are analyzed from a
consumer's point of View, all data on individual state programs,
control regulations, reimbursement methods and organizational
relationships are shown in tabular form.

125

Hellinger, Fred J. "The Effect of Certificate of Need Legislation
on Hospital Investment." Inguiry 13 (June 1976): pp. 187—193.
Available from Social Security Administration, D.C. Office of
Research and Statistics.

The point of departure of this study is an investigation
of the impact of CON legislation on hospital investment.
Hellinger utilizes a simple partial adjustment model of invest-
ment as his empirical model for this analysis. He employs a one
year cross section of statewide aggregated data to estimate a
series of plant investment equations. The dependent variable
included: patient days, average weekly earnings, population per
square mile, wage rate of the hospitals and presence or absence
of CON. Hellinger's findings support the hypotheses that CON has
not significantly lowered hospital investment, and that hospitals
anticipated the effects of CON legislation by increasing invest—
ment in the period preceding the enactment of the legislation.
Caution should be used in fully accepting Hellinger's conclusions
in that the choice of ordinary least squares as an estimating
procedure is inappropriate (given that the lagged dependent
variable is utilized as an independent variable) and may lead to
biased estimates due to autocorrelation.

Hospital Association of New York. The Article 28 Story.
New York: Hospital Association of New York, 1971.

This essay seeks to show the extent to which New York's
mandatory health facility planning laws have been successful in
impacting upon the supply and utilization of medical facilities
in New York State. Data are provided on facilities, bed avail—
ability, and utilization in the state by region, control and type
for the years 1966 and 1971. The statistics show that hospital
beds per 100,000 population rose from 406 to 426 during those
five years, a 4.9 percent increase. 'Qccupancy rates nevertheleSs rose,
but so too did the average length of stay in both general hospitals
and in long-term care facilities.

The Hospital Association attributes to the New York health
planning law more success than can justifiably be concluded
from these figures. Furthermore, no attempt is made to estimate
how the 1971 figures differ from what might have been observed
in the absence of mandatory planning.

Howell, Julianne R. "The Impact of Capital Expenditure Regula-
tion on Hospitals: A Review of Current Evidence." Unpublished
paper, Harvard University, January 20, 1976.

Howell's paper is an excellent analysis of the various
evaluations and studies of capital expenditure control programs.

126

Two classifications for the studies are developed for this lit—
erature review: state—specific studies, and studies based upon
nationwide data. Four state-specific analyses are detailed in
depth: Bicknell and Walsh, Britton, Rothenberg, and Lewin and
Associates. Four studies, based upon nationwide data are also
reviewed: two by Salkever and Bice, and one each by Hellinger
and Cohodes. Howell draws a number of conclusions from her
literature review including (1) capital expenditure regulation
has reduced the rate of growth in the number of hospital beds;
(2) the impact of CON and Section 1122 regulation on the level
of total investment is unclear and may vary by state; (3) one
could expect considerable variability in the capacity of differ-
ent States to control non-bed investment; and (4) the evidence
on the effects of capital expenditure controls on different
types of hospitals is only suggestive at this point.

Hyman, Herbert H. Health Planning: A Systematic Approach.
Germantown, Maryland: Aspen Systems Corporation, 1975.

Planning methods, principles, theory and practices of
comprehensive health planning (CHP) "B" agencies, as well as
constraints and problems they have encountered, are analyzed in
this textbook initially intended for graduate students and CHP
agency practitioners, but expanded in scope to include legislative
decision-makers, health analysts and administrators. The first
chapters describe the historical role of health planning and the
need for comprehensive health planning, and set forth the con-
ceptual framework of the remainder of the book. Planning methods
ologiesandthe functions and goals and authority of the CHP "B"
agencies follow. The experiences gained from the practices of
the "B" agencies have value to future practitioners involved in
health planning, whether or not it was undertaken by the "B"
agencies or some successor. Two chapters focus on the decision
steps in program implementation, especially certificate-of—need
and "1122" processes as practiced in New York State, and the basic
issues of the "B" agency's capacity to do planning. The issue of
consumer participation in health planning and the gradual
emergence of meaningful planning involving both consumers and
providers is discussed. Training of the board and of the staff
of CHP is stressed as extremely important in comprehensive health
planning. The financing of "B" agencies is highlighted through
discussion of four health planning models. The enactment of
P.L. 93—641, which abolishes the "B" agencies,is discussed, and
the influence of this legislation is analyzed, with the conclusion
that the "B" agencies are not really going out of business, but
are acquiring a new name (Health Systems Agency) and new res-
ponsibilities. The pros and cons of National Health Insurance
also are explored.

127

Hyman, Herbert Harvey. "Introduction to Key Issues in Regula—
tion of Health Facilities and Services." In Health Regulation-
Certificate of Need and 1122, pp. 1—26. Edited by Herbert
Harvey Hyman. Germantown, Maryland: Aspen Systems Corporation,
1977.

 

This chapter of a book on certificate of need (CON) and
1122 presents an overview of the major issues pertaining to
these subjects.

Some of the issues raised by Hyman are:

1) Standards against which a facility or service can be
evaluated are yet to be developed. Furthermore,
although good general aggregated data is available,
relevant data to shed light on specific proposals is
either poor or nonexistent.

2) CON decisions are essentially normative ones, based
on the values of the review committee, and these com-
mittees are directly or indirectly controlled by
providers.

3) CON laws perpetuate the status guo. They tend to
stifle competition and, by inference, innovation.

4) In the competition between planning and regulation in
the comprehensive health planning agencies, regulation
receives more emphasis, staff, and status than do
planning activities.

5) Although the Massachusetts experience indicates that
a court's overruling of a CON decision is unlikely,
sponsors' threats to take a decision to court can
seriously interfere with the positive relationships
that frequently develop between review committees and
the various sponsors and thereby negatively affect the
orderly CON process.

Hyman concludes that, although it is too early for conclu-
sive evidence of CON's impact on cost containment, CON laws are
unlikely to result in any great reduction in medical costs as
there is no incentive for the physician to alter his way of
working with patients or his use of medical facilities and ser-
Vices.

128

Hyman, Herbert Harvey. "Implications and Actions." In
Health Regulations—~Certificate of Need and 1122, pp. 169-185.
Edited by Herbert Harvey Hyman. Germantown, Maryland: Aspen
Systems Corporation, 1977.

 

The final chapter of a collection of articles on the
experience with CON programs, this discussion details the
implications of that experience for health planning. Two
perspectives are reflected, that of health planners and pro—
viders. Hyman's observations include:

1) Clear goals are needed for planning;
2) There is no accepted standard for defining "need";

3) The issue of cost containment will intensify rather
than disappear in the future;

4) Regulation is a limited tool to deal with the cost
containment issue;

5) The role of the federal government in health planning
needs to be clarified;

6) The openness of the CON review process and the
public's right to review proposals can be expected
to generate more competiton and conflict than in
the past;

7) HSAs will be under pressure to develop precise
definitions of standards and criteria;

8) The CON review decision must somehow or other be
related to the Health Systems Plan and/or the
Annual Implementation Plan.

In conclusion, the author discusses the need for providers
and planners to effectively work together, and he offers some
approaches to encourage this working relationship.

Institute of Medicine. A Policy Statement: Controlling the
Supply of Hospital Beds. Washington, D.C.: National Academy
of Sciences, October 1976.

 

This study concludes that 1) significant surpluses of
short-term general hospital beds exist or are developing in
many areas of the United States, and 2) decision-making pro—
cesses in the health care industry virtually guarantee the wide-
spread development of excess hospital bed capacity.

The study, therefore, recommends:

1) A national health planning goal should be established
to reduce the national average of non-federal short—

129

term general hospital beds per 1,000 population
from the current 4.4 to 4.0 in five years and well
below that in the years to come. The national goal,
however, should be applied flexibly to meet the
varying conditions and circumstances in each state.

2) Health care facilities operated by both federal and
state governments should be included in national
planning.

3) Health planning should be improved by federal develop-
ment of both improved methods for determining hospital
bed needs and of comparable health data systems; by
states' exercising independent judgments on the cost
implications of health delivery plans within their
boundaries; and by including on boards of planning
agencies strong representation of interests for cost
containment: employers, labor unions, and other major
purchasers of health care.

4) The elimination of existing excess hospital beds should
be fostered by government financial assistance when
required to meet fixed or special costs of closure and
by changes in third—party reimbursement policies to
support closures.

5) Incentives for the private sector to control bed supply
should be developed by the use of prospective rate—
setting systems, by a public policy of supporting HMOs
and adequate insurance coverage of out-of-hospital
health services; and by encouraging private health
insurers to experiment with new approaches.

Jensen, Judy. Certificate of Need Study. Kansas City, Missouri:
Department of Health, Education and Welfare. Health Planning
Branch, Region VII, 1976.

This study analyzes the Kansas certificate of need law,
passed July 1, 1976; the Iowa draft certificate of need bill,
October 1976; and the Missouri draft certificate of need bill,
October 1976. The paper compares these three pieces of CON
legislation with respect to what they cover, the criteria used for
review, the decision-making authority, and other pertinent
elements. A summary is included relating the coverage by each
state to Federal minimum requirements as set forth in the March

19, 1976 draft regulations by the Department of Health, Education
and Welfare.

130

Katz, Arthur S. "Capital'Financing and Capital Expenditure
Controls in Not—ForeProfit Hospitals." Unpublished Undergraduate
Honors Thesis, Department of Economics, Harvard University,
March 1977.

The purpose of this study was to examine the impact of
Certificate of Need (CON) programs on investment in hospitals
and to investigate the effects of a CON presence on other
determinants of investment. The specific hypothesis tested
was that CON controls would have an effect on the availability
of capital in determining different types of investment. Employing
a step-wise multiple regression procedure on a one year cross
section of 3,000 nongovernmental nonprofit, short term general
hospitals (1973—74), this study estimates hospital investment
as a function of five categories of variables labelled by the
author as: preference function variables (e.g. net revenues,
insurance coverage, etc.), capital constraint variables (e.g.
philanthropy), demand variables (e.g. occupancy rate) and
capacity utilization variables. Katz's analysis utilizes a
model first developed by Paul Ginsburg which postulates an out-
put maximizing hospital behavioral function, subject to bud—
getary, capital and demand constraints.

One of Katz's major findings is that on average in 1973—74,
States with CON have a greater number of hospitals, more beds
per hospital, more teaching hospitals, higher plant assets per
)ed, wealthier population, greater plant assets and more urban
1ospitals than states without CON programs. In most cases, CON
has been successful in reducing (or keeping down) the growth
rate in plant assets per bed. There are a few states with CON
whose growth rate in plant assets per bed is very much above
that of other CON states and even above that of uncontrolled
states. In some states, CON has had a moderate—to—small neg—
ative impact on new bed investment per bed. Katz's general
conclusion is that CON is reducing both bed and non—bed invest—
ment in most states; but in states where it is not, the growth
rate of at least one type of investment appears to have actually
accelerated, or at least is now well above the average for all
states.

Kinzer, David M. Health Controls Out of Control. Chicago:
Teach 'em, Inc., 625 North Michigan Avenue, Chicago, Illinios 60611,
1977.

 

Utilizing the Massachusetts regulation of the health'care
system as a case study, Kinzer, President of the Massachusetts
Hospital Association, levels a critical eye at the nature and
substance of government intervention in the health care system.
Kinzer's criticism of the Massachusetts system, often looked to

131

as a model for other states to emulate, is particularly telling.
Kinzer points out the multiple problems of inadequate coordination,
unexpected cost consequences, conflicting program incentives,

the mounting difficulty of obtaining enforcement, the political
vulnerability of the state CON program, the lack of incentives

for system reform and development, and the lack of incentives

to control costs, improve efficiency, and improve the quality of
care.

Kinzer discusses the numerous difficulties inherent in
regulating and monitoring a system as complex as the health
delivery system. He observes that the elaborate health regulatory
system which has been developed is simply not equipped to cope with
difficult resource allocation questions. In fact, Kinzer contends
that the regulatory system itself has been a major contributor
to the increase in hospital costs. In Massachusetts alone,
compliance with regulations costs hospitals an estimated $80 million
annually. In Kinzer's judgment, most governmental health regula-
tion is inherently cost provocative, even when it is designed to
be cost suppressive or cost preventive. As supporting evidence
for this assertion Kinzer cites the case of Massachusetts, an
early entry in the government health cost containment effort,
which has experienced a rate of growth in hospital expenditures
greater than that in the nation as a whole or in any neighboring
New England state.

Kinzer concludes with a section on what might be done to
help improve the system. He offers 28 potential system changes
including: federalizing Medicaid, centralization of state regu-
latory activities, the need finafinancial incentives for change,
the need for hospital discretion under budget review, and the
need to limit additional regulation of medical practice.

Krause, Elliott. "The Political Context of Health Service
Regulation." International JOurnal of Health Services 5 no. 4
(1975): pp. 593-607.

 

Krause argues that given the present political context,
regulation cannot work in health services. "Interest-group
activity in regulatory processes in the health area plays such
an extensive role that here, as elsewhere, regulation becomes a
form of interest-group arbitration, with regulatory bodies
arbitrating between strong and well organized health provider
groups on the one hand and weak, disorganized consumers on the
other." Attempts to remedy deficiencies in the health care
system either by "tinkering" with current regulatory programs
or by strong "central regulation" will be ineffective because

132

such efforts will not change existing power relationships. A
nationalized health service with nationalized supply sectors
offers the possibility for a changed set of dynamics, but
complete nationalization of all the key sectors of the economy
would create even more fundamental changes in basic power and
leverage over the way the system operates.

Kushman, J.E., and Carole F. Nuckton. "Further Evidence on the
Relative Performance of Proprietary and Nonprofithospitals."
Medical'Care 15 (March 1977): pp. 189—204.

This study discusses the empirical evidence on the relative
dynamic efficiency of proprietary and nonprofit hospitals in
responding to changes in the economic environment. An empirical
model is employed and four six—year cross sections of data (1954—
1971) are analyzed. Some of the conclusions reached are that
proprietary bed stocks are proportionally more responsive than
nonprofit stocks to population changes; that the nonprofit bed
stocks show a larger absolute response; and that income growth is
not strongly associated with conversion to nonprofit status.

The paper argues that HSAs will have a tendenCy.to discriminate
against proprietary hospitals. The conclusion of the paper is
that proprietary hospitals have a significant role in an efficient
hospital system. Discrimination against them in the CON process
may, therefore, be inappropriate and unnecessary.

Lave, Judith and Lester Lave. The Hospital Construction Act:
An Evaluation of the Hill—Burton Brogram 1948-1973. Washington,
D.C.: American Enterprise Institute for Public Policy Research,
1150 17th Street, N.W., Washington, D.C. 20036, May 1974.

This analysis of the Hill—Burton program concludes that the
program increased the number of hospital beds, especially in
small cities, so that beds are no longer concentrated in the
richer states. Since it had an effect on the distribution of
hospital beds, it also had an effect on the distribution of
physicians. The program also was influential in the development
of state and regional planning for hospital care.

The Laves argue that the Hill-Burton program does not seem
to have contributed to a general excess in hospital capacity,
at least in the sense that occupancy rates do not seem to have
fallen. Low occupancy rates in supported hospitals result from
small hospital size (a bias built into the program initially)
rather than from too many hospital beds.

The Laves conclude, however, that the Hill-Burton program
should be terminated, and no more grants or loan guarantees for

133

construction or modernization should be made. They oppose
centralizing control of hospitals through certificate of need
requirements, budget reviews, or denial of reimbursement, all
measures which would only worsen inefficiency without solving
the problem of rising costs. The Laves advocate instead an
incentive-reimbursement system to promote hospital efficiency
and rationalize capital expenditures. Hospitals would be
reimbursed on a case basis, taking account of the case mix of
the hospital and its teaching programs.

Lefkowitz, Bonnie. Health Planning and Certificate of Need
Legislation in Maryland. Boston, Mass.: Executive Programs in

 

Health Policy and Management, Harvard University, June 1975.

This 1975 study of Maryland's certificate of need program
describes the legislation, the key implementors, and the decision-
making structure and then goes on to analyze Maryland's most
controversial certificate of need case, the three-way competition
for permission to build an acute general hospital in Howard

County.

The study concludes with the following major recommendations:

1)

2y

3)

4)

5)

A highly specific state plan and even more specific area—
wide plans should be prepared as rapidly as possible. The
state should establish a clear priority for planning as
opposed to other tasks, and planning capability should

be improved in both state and areawide agencies.

Specific preset criteria should be required for certifi-
cation decisions. There should be statutory provision for
adversary proceedings adequate to reveal to competing
applicants the reasons for selection,.and definition of
the kinds of changed circumstances by which certification
decisions can be reversed.

It should be recognized that the decision-making process
is basically political and requires political, but also
substantive and legal expertise,in both staff and
decision—making bodies.

Legislation should be passed requiring all providers to
report to the state patient information by service and
diagnosis on an ongoing basis. Population surveys should
be used as a basic instrument of data gathering.

Measures should be developed to use as planning goals

and also for the state to use to evaluate the performance
of areawide agencies.

134

Health planning, certification, and facility licensing
should be combined in a single regulatory unit. Rate—
setting should be coordinated with planning and cer-
tification.

Lewin and Associates, Inc. An Analysis of State and Regional
Health Regulation. Part I: Report of the Study. Available
NTIS HRP-lOOOlOO. Part II: Annotated Bibliography. Available
NTIS HRP—1000099. Part III: State Reports. Available NTIS
HEP-1000098. Executive Summary. Available NTIS HRP—lOOOlOl.
Springfield, Virginia: U.S. Department of Commerce. National
Technical Information Service, February 1975.

This study analyzes state and local health regulatory activities
in the areas of prospective rate setting or rate review, capital
expenditures and services, and health insurance. Findings are
drawn from observations cf regulatory programs in 14 states as of 1974.

This study reaches the following major conclusions:

1) The effectiveness of rate review programs is not yet
conclusively demonstrated, but there is sufficient
evidence to suggest that the federal government should
promote the adoption of even non-binding rate review
in every state. One reason for this is that capital
expenditure controls benefit from the presence of rate
review.

2) Capital expenditure controls and rate reviews will be cost—
effective only if decision-making bodies have a stake in
containing total expenditures for hospital and institu-
tional health care services. Capital expenditure and
rate review decision processes must be effectively
linked.

3) Providers must be afforded a role in key decisions, but
this role must be limited to a minority position, and
consumers or the public at large must be dominant.

4) A major weakness of existing capital expenditure controls
and rate review systems is unresolved methodological

issues.

5) Both capital expenditure controls and rate reviews are
relatively inexpensive to administer.

135

Lewin and Associates, Inc. Evaluation of the Efficiency and
Effectiveness of the Section 1122 Review Process. Springfield, Va.:
U.S. Department of Commerce. National Technical Information
Service, September 1975. Available NTIS HRP—0005357.

 

 

In this 1974 study of certificate of need and Section 1122
review processes in 20 states containing 36 health planning areas,
it was found that capital expenditure controls, as presently ad-
ministered, do not prevent unnecessary capital investment in health
facilities and services. Thus, they are not an effective means of
containing health care costs. States approved more than 93 percent
of all projects submitted, with particularly high approval rates for
hospital expansions and for proposals to purchase equipment and add
new hospital services, and much lower approval rates for nursing
homes and other types of health care institutions. Nearly 75
percent of the sample states and areas approved hospital beds in
excess of 105 percent of the published need projections for five
years hence.

Among the reasons for the lack of effectiveness of these
controls are:

1) Fewer than half the state and area agencies share the
federal government's commitment to contain health care
costs; they place a much higher priority on improving
the quality and distribution of health care resources.

2) Few agencies have well developed need projections, re-
view criteria, and data resources. However, nearly all
types of need projections and criteria have been developed
by at least some agencies, so there are no technological
obstacles to developing such criteria.

3) Most agencies lack the data and staff expertise to deter-
mine the relative efficiency of alternative health care
providers. Need projections are based on current levels
of efficiency and place a ceiling on capacity, not costs.

4) Agencies tend to discriminate against new entries into the
local health service market. There is no hard evidence
that they block innovations such as HMOs, but other factors
prevent innovative proposals from being developed.

5) Medical centers with highly specialized services appear to
be virtually exempt from effective review and control,
although this may be changing. On the other hand, pro—
prietaries are discriminated against in the review process.

6) There are social and political barriers to effective control
of capital expenditures. One suggested solution to this
problem is combining capital expenditure controls with rate
review systems.

136

Although this study found that capital expenditure controls
had generally been unsuccessful in preventing unnecessary capital
investment, a few states and areas had achieved at least relative
success. These states (New York, Ohio, Indiana, Connecticut,
Michigan, and Georgia) tended to have: 1) well—developed need pro-
jections, review criteria, and data resources; 2) somewhat greater
expressed commitment to cost containment; 3) some form of prospec—
tive reimbursement; 4) comparatively high salaries and low turn-
over among state agency directors, and 5) assignment of CON or
1122 control functions, not to a comprehensive planning agency,
but to a Hill-Burton agency or a special unit created to administer
these controls.

Lewin and Associates, Inc. Evaluation of the Efficiency and
Effectiveness of the Section 1122 Process. Part II Technical
Appendix. Available NTIS HRP—0005358. Part III Executive Summaries.
Available NTIS HRP—0005359. Springfield, Va.: U.S. Department of
Commerce. National Technical Information Service, September 1975.

Exhibits relevant to the evaluation of the Section 1122 review
process and state certificate of need (CON) programs are contained
in the second volume of a three-part report on the efficiency and
effectiveness of respondent attitudes. Experiences are presented
along with a discussion of construction measures and a review of
all analyses performed. Data sheets to be filled out by agency
personnel and a guide for flow charting the Section 1122 process
are included. Portions of this document are not fully legible.
Part three of this report is an executive summary of the evaluation
of the efficiency and effectiveness of the Section 1122 review
process.

Lewin and Associates, Inc. Evaluation of New York State's
Certificate of Need Program. Phase I: Management Assessment.
Phase II: Recommendations for Change. Washington, D.C.

September 1977 (Phase I), Dec. 1977 (Phase II). Discussion Draft.

 

This report represents an assessment of the structure and
management of the three major certificate of need (CON) programs
operated by the State of New York: (1) physical health facilities
and services covered by Article 28; (2) mental health facilities
covered by Article 13 and drug abuse titles of the public health
law; and (3) domiciliary care facilities eligible for state re—
imbursement for services to clients of state income maintenance
and social services programs, covered by Executive Laws 757 and 758.

This assessment is the first part of a three phase study
undertaken at the behest of the New York State Health Planning
Commission (HPC) pursuant to its role as the State Health Planning
and Development Agency (SHPDA) and its specific responsibility for

137

overall direction and control of the state's separate CON programs
covering physical health facilities and services, mental hygiene
facilities and services, and domiciliary care for adults.

The primary purpose of the Phase I assessment was to identify
the major problems that stood or may stand in the way of a more
effective and efficient CON effort in New York State. The authors
contend that whether judged on its own merits or compared to the
efforts of other states, the New York CON program is strong enough
to overcome its problems. Nevertheless, the problems that are
identified are significant and, if allowed to persist, will subse-
quently weaken CON regulation in New York as well as the ability of
CON to contribute to the state's cost containment goals. This re—
port discusses in detail the problems in each of the major CON

programs: Article 28 (physical health), Article 13 (mental hygiene),

Public Health Laws 757 and 758 (domiciliary care). The major
systematic problems that confront New York State's CON programs
are as follows:

1) The state does not have a credible, fully articulated
health regulatory policy and lacks a visible, coherent
process for formulating such policy.

2) State and area health planning and regulatory activities
in New York have been conducted as two separate and
contending systems.

3) Part I of the Article 28 process and application is
conceptually obsolete in that it is designed to screen
out only clearly unworthy proposals; as a result, many
marginal proposals have reached the Part II stage of
the certification process and insufficient information
is available in many cases to conduct a thorough review
of program appropriateness and economic impact.

4) New York's CON programs suffer from a lack of formal
process management and control; review processes and poli—
cies are essentially reactive and, as a consequence, tend
to be inefficient and unresponsive to state fiscal and
program goals.

5) There is a need for a more formal, carefully thought
out relationship between CON regulation and the adminis—
tration of state controls on provider reimbursement.

In addition, there are two major substantive problem areas
that should be mentioned because they require immediate and con-
certed attention and because they serve to illustrate the systematic
problems listed above. These are:

138

1) Nearly a year after having obtained authority under
Chapter 76 to decertify health facilities and services,
the state has yet to spell out its intentions regarding
the use of this significant expansion of its regulatory
powers. When this occurs, a visible coherent process
for formulating such policy will be required to build
credibility in the eyes of those most concerned —- the
providers and HSAS.

2) The impending deinstitutionalization of mental health
and mental retardation patients is expected to require
a significant reallocation and possibly an increase in
institutional health resources; as yet the state has not
formulated a regulatory policy that takes this into
account.

The findings and conclusions about each of these problem areas
are discussed in the text. In addition, the report examines the
implications of placing a cap on expenditures for health capital
assets and/or services. While not a "problem" in the same sense
as the other areas discussed, the issue of capping health expendi-
tures has enormous implications for CON regulation that must
eventually be faced by the New York CON programs.

The Phase II report notes that there are improvements that
should be made to increase the effectiveness of existing CON
programs in the short run, but that the overall effectiveness of
CON as a regulatory strategy depends on two major considerations:
first that CON be closely linked to the state's reimbursement
system, and second, that the CON program itself move away from the
present practice of relying on absolute need as a basis for project
. review and instead adopt the concept of relative need. Chapter
Three of the Phase II report addresses the need for more effective
policy coordination in the area of health care systems regulation
and in particular discusses the role the Health Planning Commission
(HPC) might play in this regard and what steps must be taken to
make the HPC more effective in this role than it has been to date.

Whether or not a cap on capital expenditures is-to be imposed
in the near future, there are steps that can be taken to move
toward relative need determinations and to bring about other sub-
stantive and procedural improvements in the state's various CON
programs. Chapter Four discusses a number of concrete steps that
can be taken immediately to strengthen the responsiveness and
efficiency of the state's CON program in the short term.

The Governor's policy of coordinating CON programs across
the full spectrum of health and health-related programs has raised
both organizational and substantive issues regarding CON controls
over the various mental hygiene facilities and services and adult
home care institutions. Chapter Five proposes steps to improve
coordinated planning efforts and to bring about efficient, well—
focused project review activities that meet the needs of the state's

139

clientele and are responsive to state fiscal and program policies.

Lewin and Associates, Inc. Nationwide Survey of State Health
Regulations. Springfield, Va-z U.S. Department of Commerce.
National Technical Information Service, September 1975. Available NTIS HRP—lOOO

 

The report provides an array of descriptive data on the
current status of state regulation of reimbursements for health
care costs. Selected regulatory activities emphasized are those
most relevant to proposed forms of national health insurance and
future health planning at the federal level. These include state
regulations currently existing to contain costs in reimbursement
for health services, for capital expenditures and service charges,
and for health insurance. The survey enumerates cost containment
activities in the light of negative and positive sanctions, direct
and indirect controls, prospective and retrospective reimbursement
systems, certificate of need laws and Section 1122 programs,
relationships between state regulatory bodies, Blue Cross-Blue
Shield insurance organizations and the Comprehensive Health
Planning agencies.

Lewin, Lawrence 5., Anne R. Somers and Herman H. Somers. "State
Health Cost Regulation: Structure and Administration." Toledo
Law Review 6 (Spring 1975): pp. 647—676.

The article, based upon the work of Lewin and Associates, Inc.,
(annotated separately in this bibliography), begins with the ex-
pectation that future health care regulatory activities will evolve
primarily from existing and developing state programs, coordinated
and probably increasingly homogenized through federal funding and
its accompanying requirements. The second section of the article
is devoted to a discussion of the rationale(s) for health care
regulation. The reasons offered range from the traditional desire
to insure that services are of adequate quality to the twin concerns
of price inflation and over—utilization of health care services
resulting from a system which due to the mode of reimbursement,
lack of consumer information, and the role of the physician serves
to create a set of "perverse" incentives.

Part III of this article describes the various approaches to
cost containment which the government and the private sector
engage in. Three generic approaches to cost containment are
detailed: rate review, capital expenditures and services (CES)
controls, and utilization controls. The authors' discussion is
focused on CBS and rate review controls.

140

Both CES and rate review programs exhibit considerable
variation across states. CES regulation consists of planning
and review components encompassing the CON program, Section 1122
program, and the privately—sponsored Blue Cross conformance
contracts. As a cost containment strategy, rate review is
thought to be a three step process. First, health care institu—
tions estimate their utilization and financial requirements for
a future period and develop a set of changes or reimbursement
rates based on these estimates. Second, an independent public
or private agency reviews these estimates and rates, and either
advises, negotiates with, or imposes on the institution the
results of its review. Finally, the institution then operates
"at risk" with the rates resulting from outside review.

The fourth portion of this article is devoted to a discussion
of the structural and administrative issues in designing cost
containment agencies. The topics raised include:

1) State Rate Review by Executive Agency vs. Independent
Commission;

2) The role of providers in CES and Rate Review decisions;
3) The role of consumers and the publiCsat—large;
4) The relationship between Rate Review and CES regulation;

5) Organizational structure: Administrative Centralization
vs. Procedural Coordination.

The authors conclude that inevitably, regulation impinges upon
some individual and institutional freedom of action and will
always be an area of controversy, even assuming common goals.
For this reason regulation must be, at least in the health field,
largely a process of negotiation, bargaining, and accomodation
to resolve inescapable differences among affected parties. The
organizational structures for such resolutions are themselves
essential aspects of such negotiation and bargaining. They too
must accommodate new circumstances .

141

Macro Systems, Inc. The Certificate of Need Experiences: An

Early Assessment. Volume I: Summary Report. Available NTIS
HRP-1000190. Volume II: State Reports. Available NTIS HRP—1000189.
Volume III: Flow Charts. Available NTIS HRP-1000188. Volume IV:
Application Forms.

The first volume presents findings on the current operation
of twenty—three state certificate of need programs studied
beginning in June 1973. The second volume describes certificate
of need activities on a state by state basis. Supplemental
material on state programs is in the last two volumes.

This study had the following findings:

1) Most programs have difficulty in balancing planning and
regulatory functions. Although planning is essential
for all programs regulating resource allocation, it
has been subordinated to regulation by most of the
programs.

2) Review criteria frequently lack specificity and coherence.
Certain statements in the criteria are directed to the
project sponsor, and others relate to the community in
which that sponsor operates. There is some feeling that
the CON programs have favored the more powerful,
established health care institutions.

3) Many of the CON programs show considerable administrative
capability. The problems arise not because of lack of
administrative capability but because of the unmanage-
ability of the task as presently structured and funded.
In the programs, rules are clearly distinguished in
complex organizational structures. Final decisions are
customarily reserved to the state level.

142

4) Due process is usually recognized in provisions for
appeal, public hearings, and public records.

The study concludes that three roles should be differentiated
in CON programs:

1) Specification of a desirable health care system, based on
a precise and unequivocal definition of need, as a
criterion of CON decisions.

2) Review of applications to determine the compatibility of
a proposal with the plan.

3) Review of applications to assess the suitability of the
sponsor to provide services in the desired system.

For each of these roles, specific time—bound objectives should
be established, and resources should be allocated discreetly.

Mandel, Mark D., Ann K. Tousignant, Francis I. Wheat, Judy Fox,
Karol B. Joseph. Report 4: Analysis of Alternative Approaches to
Developing Complying State AgenCy Certificate of Need Programs.
Three Volumes: Volume 1: Review of Provisions Relating to
Minimum Federal Requirements. Volume 2: Review of Additional
Features Beyond Minimum Federal Requirements. Volume 3: Index to
State Agency CON Provisions. Boston: Boston University Center
for Health Planning, November 1, 1977. Available NTIS HEP—0900063.

 

This report serves as a compilation of selected references
of selected states'certificate of need statutes, regulations and
procedures. The objective of this report was to assist the
Connecticut Commission on Hospitals and Health Care, and the
Connecticut Bureau of Planning and Development and the five
Connecticut Health Systems Agencies in developing a revised
certificate of need program to comply with the minimum federal
requirements as published in the January 21, 1971 Federal
Register. The report provides a variety of options for corrective
action, and presents alternatives beyond the minimum federal
requirements which might be incorporated into a revised or expanded
certificate of need program.

The report is organized into three parts. Volume I serves
as a reference document of selected state approaches to the
minimum federal requirements, and includes a variety of options
for dealing with procedural requirements, definitions, enabling
authority, scope of the program and enforcement provisions.
Volume II contains provisions of state CON programs which go beyond
the minimum Federal requirements. Volume III serves as a detailed
index of all references cited in Volumes I and II.

143

The contents of the report are the result of an indepth
analysis of certificate of need statutes, regulations and
manuals from twenty-one states responding to requests for
information. For several states, such as Maine, Rhode Island,
Michigan, New Hampshire and Vermont, proposed CON legislation
and existing laws are examined. The states reviewed for the
report are:

Arizona Minnesota
California New Hampshire
Colorado New Jersey
Florida New York
Kansas Oklahoma
Kentucky Oregon
Maine Rhode Island
Maryland South Carolina
Massachusetts Vermont
Michigan Washington
Wisconsin

In selecting the specific references included in this
report, state CON statutes, regulations, procedure manual and
proposed legislation were examined for:

1) their approach to the minimum federal regulations;

2) provisions in areas where Connecticut may be out of
compliance;

3) provisions of special interest beyond these minimum
federal requirements.

It should be noted that the citations presented in this
report have not yet been reviewed for compliance by Federal
officials. -Many provisions cited are partially non—complying,
but merit consideration because of a unique approach.

The report allows state agencies and HSAs to review an array
of options to the Federal minimum requirements, and provides
such agencies an opportunity to design the most effective com—
bination of approaches for their own certificate of need programs.

Mandel, Mark, and Saul Spivack. Directory of Standards and
Criteria for Project Review: National Review of the State of
the Art. Connecticut Certificate of Need Compliance Workbook
Series, Report 6. Boston: Boston University, Center for
Health Planning, October 4, 1977. Available NTIS HRP—0900064.

 

This directory provides a distillation of the state of the
art in quantitative standards and criteria for the following
nine health services: ambulatory care; ambulatory surgery;

144

burn care centers; CAT scanners; home health services; inpatient
psychiatric facilities; institution-based clinical laboratory
services; institutional long-term care; and renal dialysis
facilities and end stage renal disease programs. For each
service, there is a discussion of such things as the population
base for service area determination; service availability and
accessibility (e.g., travel time and waiting time tolerance);
capacity considerations; resource utilization (e.g., use rate,
productivity norms, etc.); demand estimation and projection
methodology; resource need projection; and financing.

Marmor, Theodore, Donald Wittman, and Thomas Heagy. "Politics,
Public Policy, and Medical Inflation." Edited by Michael Zubkoff.
Health: A Victim or Cause of Inflation. New York: Milbank
Memorial Fund, 1976.

 

This analysis of the political "market“ and the political
attributes of the remedies proposed for health care inflation
concludes that "the politics of medical inflation produces
persistent expressions of concern about inflation rates, but
actions which at worst exacerbate the problem or at best are
weak." In the political "market," greater power is wielded by
those who have concentrated rather than diffuse interests, that is,
by those on whom a policy will have a significant impact. Policies
to combat medical care inflation have a major impact on providers,
but any expected benefits or costs of such policies would be
diffused among millions of health care purchasers and are there—
fore relatively unimportant to the consumer. For this reason,
political leaders have little incentive to take effective action
against health care inflation when such action is likely to arouse
the ire of politically potent providers.

The main incentive for effective government action occurs
when the government pays a substantial portion of health care costs.
This incentive tends to be greater when these costs are paid out of
general revenues rather than payroll deductions. This, according to
the authors, is one reason for stronger government action against
Medicaid costs (paid for out of general revenues) than against Medi-
care costs (paid out of payroll deductions). Government incentives
to act against medical care inflation are also increased the more
any particular level of government pays for medical care. As evi-
dence to support this contention, the authors point out that
"Great Britain, with a centralized public finance payment structure,
has a significantly lower inflation rate and level of expenditure
than the United States, Canada, and Sweden, which vary in their
private versus public support mix..., but all being financed at
various levels."

145

Consistent with this analysis is the fact that the most
decisive governmental reactions to medical care inflation have
taken the form of reducing benefits in publicly financed programs
such as Medicare and Medicaid rather than actions to reduce
medical inflation generally.

One proposed remedy for medical cost inflation is to make
the market for medical care more efficient by increasing patient
financial participation through substantial co—insurance and
deductibles in health insurance. However, such a policy is
unlikely ever to be enacted because it would evoke concentrated
resistence from providers and provide consumers widely diffuse
benefits in terms of lower insurance premiums and lower medical
prices.

Public utility type regulation to combat medical inflation
is politically feasible because it is unlikely to be effective.
Certificate of need laws actually protect existing hospitals, and,
according to the authors, may even exacerbate relative price
inflation. Rate review efforts are likely to be weak because
of separation of the payors (Medicare and Medicaid) from the rate—
setters. (The authors here do not point out the low level at
which Medicaid reimbursements are set in some states.)

The authors conclude that the most effective method of
controlling health care costs is centralizing expenditures
via national health insurance. Concentration of governmental
responsibility for health expenditures is likely to promote
serious interest by the government in anti-inflationary policy
though it will also mobilize the resistance of concentrated pro-
vider interests. The authors suggest that national health insur—
ance need not have a strong inflation control mechanism built
into it, but it will increase the effective pressure for con-
trolling medical inflation in the future by increasing the por-
tion of medical expenditures that flows through the federal
budget.

McClure, Walter. Reducing Excess Hospital Capacity. Minneapolis,
Minnesota: Interstudy, 1976. Available NTIS HRP-0015199.

 

This interesting and thought—provoking study is directed
to the question: Should hospital capacity in the United States
be reduced and, if so how? The study touches upon a wide range
of issues including: the costs, benefits, and side effects of
excess capacity reductions; causes of and past experience with
excess hospital capacity; the identification of excess hospital
capacity and alternative strategies to reduce it; and the
administration and financing of excess capacity reduction.

146

This report is in essence a re-synthesis of existing
research, assessing its implications for government policy
directed at reducing excess hospital capacity. Some of the
many interesting assertions and conclusions reached in this
analysis include:

1)

2y

3)

4)

5)

6)

7)

8)

9)

10)

ll)

12)

Beyond some irreducible minimum, the quantity and use
of acute hospital beds are a matter of policy, not
health;

Current levels of hospital use and capacity represent a
wasteful diversion of limited national resources from
other pressing health needs;

If effort is concentrated in areas of high per capita

use and capacity, and reason and common sense are

exercised, there appears to be no health reasons why per
capita use could not be safely reduced by at least 10 percent
and per capita hospital capacity by up to 20 percent from
their current national levels;

A policy to reduce excess hospital capacity, if successful,
would of itself also reduce excessive use;

The savings and costs of excess hospital capacity reduction
will vary greatly from community to community;

Crude estimates suggest that a lO-percent reduction in the
bed rate.per 1,000 persons might produce average annual
savings in per capita hospital expenditures of roughly 8
percent if whole hospitals are retired, roughly 2 percent to
4 percent if service departments are retired, and roughly 0.5
percent to 2.5 percent if individual beds are retired;

Significant direct reduction of excess hospital capacity
will tend to drive the nation towards a public utility
approach to containing health care costs;

Demand-based planning is self—fulfilling and inflationary.
Planning should shift more toward a population based
approach;

Methods to identify excess capacity are crude, but
adequate to begin;

Excess hospital capacity reduction is far more a socio-
political problem than a technical problem;

A great variety of carrots and sticks exist to bring
varying degrees of pressure on excess hospital capacity
commensurate with the degree and sources of socio-
political support;

Because funds to purchase or assist reduction of excess
hospital capacity will probably be limited, purchase
and grant assistance should be concentrated on targets
with high pay-off: the permanent retirement of whole
hospitals and service departments;

147

13) A policy of excess hospital capacity reduction must
be accompanied by strong controls on capital formation
by hospitals;

14) A private sector approach to excess capacity reduction
would operate best at the local level. A regulatory
approach would best be directed at the state level; and

15) In the design of regulatory systems to reduce excess
hospital capacity attention must be given to designing
the structure and incentives on regulators to avoid
regulatory defects as serious as the market defects
they were supposed to correct.

Medeiros, Clayton. "Planning and Public Accountability."

In Health Regulation-—Certificate of Need and 1122, pp. 135-167.
Edited by Herbert Harvey Hyman. Germantown, Maryland: Aspen
Systems Corporation, 1977.

The issues of health planning and public accountability
are discussed in the context of P.L. 93-641. The author dis—
cusses the environment of planning and accountability in the
health system, and expresses the view that both are needed
less the community suffer. He examines the methods by which
P.L. 93—641 does or does not provide for accountability. A
case study is presented of an application for review in New
York, citing examples of openness and accountability. Medeiros
concludes by stating accountability is best achieved in
situations with defined boundaries, easily predicted outcomes,
and straight-forward issues——none of which apply to the
health care system.

Melum, Mara Minerva. Assessing the Need for Hospital Beds: A
Review of Current Criteria. Minneapolis: Interstudy, December
1975.

 

The study examines the bed need criteria used by 40 state
Comprehensive Health Planning (CHP) Agencies, 10 areawide CHPs,
and 9 HMOs. It found that Hill—Burton criteria and standards are
the methodologies most often used by state CHPs, but 25 percent
of the responding state CHPs used substantially different criteria
and standards. Planning criteria are beginning to use statistical
estimation techniques to account for random fluctuations in a
hospital's daily census. They also are beginning to take into
account appropriateness and efficiency of care, rather than just
the amount of care currently demanded, and to consider such
variables as the demographic composition of the target population,

148

the type of medical service, the size of hospital or
service, and the extent to which a setting is urban or
rural. Some methodologies adjust bed—need projections for
special circumstances, such as a predominately older popu—
lation or the fact that a hospital serves a substantial
population outside of the planning area.

The author emphasizes, however, that there is still a long
way to go in developing optimal bed—need criteria and standards.
Future research should aim to develop criteria which consider
many other factors that affect the need/demand for hospital
facilities. To deal with existing hospital facilities found
unnecessary, the author recommends "bed banking," the orderly
retirement of unnecessary or underutilized hospital beds, services
or equipment on either a temporary or permanent basis.

Miller and Bryne, Inc. and JRB Associates, Inc. Final Report:

Evaluation of the Impact of PHS Programs on State Health Goals

and Activities. Washington, D.C.: DHEW, DHS, Health Resources
Administration, HRA 230-7A-1064, 1977.

This is the report of a pilot study, commissioned by the
Office of Planning, Evaluation and Legislation of the Health
Resources Administration (HRA). The study was conducted in order
to provide HRA with insights on the impact of selected federal
health programs upon the health goals of states. Six states
(Colorado, Maryland, Michigan, Oregon, South Carolina and Texas)
were selected for study and the impact of four PHS programs;
Health Planning and Resource Development (P.L. 93-641), The
Cooperative Health Statistics System (CHSS), Nurse Training, and
Community Mental Health Centers (CMHC), were analyzed to deter-
mine their impact on state health goals. The findings of this
study are based upon data collected from examinations of relevant
documents including budgets, legislation (federal and state),
regulations, plans, and upon conversations held with key actors
in the health arena. A total of 193 discussants distributed
between state political officials, state administrative officials,
state advocacy group officials and HEW Regional Office officials
were interviewed. The key study findings include:

1) For the most part states do not have well—formulated
goals that predate a federal program initiative;

2) Often the federal government is not supporting one set
of state actors definitively-—instead it reflects
national uncertainties and tensions by supporting two
or more sides of the issue simultaneously, which means
it is supporting no single side effectively. In short,
national goals may reflect the same widespread tensions
that make it difficult to clarify state goals;

149

3) Federal programs often have their biggest impact in
terms of placing an issue on a state's active agenda;

4) Federal impact upon state health activities differs
according to the presence or absence of a state goal;

5) PHS grant programs do not necessarily force states to
shift their goals or activities in any fundamental way;

6) PHS programs are supportive of states only insofar
as states are “strong enough" to use the programs for
their own ends—-and these ends need not be identical
to the ends intended by the federal statutes and regulations;

7) The life—cycle status of a federal program's goals
in a state is a major influence on that state's
satisfaction/dissatisfaction with the federal program
and on the uses made of program assistance; and

8) PHS programs that are perceived as bypassing state
officials engender opposition on that basis—-and such
opposition may be critical in determining whether a
state perceives the program to be supportive or non—
supportive, regardless of substantive issues.

Noll, Roger. "The Consequences of Public Utility Regulation of
Hospitals." Controls of Health Care—-Papers of the Conference
on Regulation on the Health Industry, January 7—9, 1974, pp. 25-
48. Washington: National Academy of Sciences, 1975.

N011 describes the theoretical models and some empirical
results of regulation and argues that public utility regulation
will exacerbate the problems it seeks to alleviate in the health
care industry.

The traditional View is that regulation serves to protect
society from abuses of market power likely to occur in industries
where competition cannot be relied on as a means for obtaining
optimal price, output and quality. However, this traditional
View is questioned by two theories: (1) capture theories, which
conclude that regulation is an institution proposed and supported
by regulated industries as a mechanism for supplanting competition
with a legal cartel; and (2) political-economic theories, which
assume that regulators try to serve some concept of the general
public interest but have difficulty identifying this interest
because the society contains numerous groups with conflicting
interests, some of whom are in a better position than others to
provide information to regulators, to influence legislators, and
to get regulators' decisions overturned in court.

150

Empirical observations of regulated industries indicate that
regulation has no depressing effect on prices. Despite this,
regulated firms do not generally earn exorbitant profits because
they are required by regulators to cross-subsidize certain con-
sumers and/or certain producers. Regulation often slows tech-
nological change and damages the efficiency of regulated firms.
Regulators feel compelled to control entry into an industry to
protect inefficient operations and cross-subsidies.

Noll concludes that, if the pattern extends to hospital
regulation, there will be the following results: "(1) Resistance
by regulators to innovations in medical care delivery...regard—
less of their merits; (2) substantial consumer cross-subsidiza-
tion and producer protectionism in the price structure; and
(3) persistent upward drift in prices toward monopolistic levels
in order to finance subsidies and inefficiencies created by
regulation." "Imposing public utility regulation upon the
existing system is probably the only step that could be taken
to make the industry even more insulated from incentives to be
efficient." However, "generally speaking,regulation to impose
minimum performance standards is more successful than public
utility regulation.... Society does relatively better by centralizing
quality decisions while relying upon individual, decentralized
decisions, based upon market incentives, for achieving cost
efficiency."

O'Donoghue, Patrick. Evidence About the Effects of Health Care
Regulation. Denver, Colorado: Spectrum Research, Inc., 1974.Available
WOMM.

This book is a condensation of a series of studies funded by
the National Science Foundation. It represents an assessment of
the relevant research literature in the following health care
regulatory areas:

 

1) Cost and price regulation;

2) Regulation of capital expenditures;

3) Regulation of professional performance;

4) Regulation of institutional quality:

5) Personnel licensure;

6) Regulation of health professions education and

7) Regulation of private health insurers.

151

While the whole study is of value, Chapter IV is of particular
interest as it concentrates on the regulation of capital expen-
ditures through the CON programs, the CHP, the 1122 Review, and
the planning aspects of the Hill—Burton Program. O'Donoghue's
major conclusion is that there is no evidence supporting the
effectiveness or efficiency of capital expenditure regulation.
O'Donoghue's review represents a concise summation of the studies
of capital expenditure controls and their policy implications through
1974. A significant amount of research has been undertaken since

that time, and, while useful, O'Donoghue's work is now somewhat
dated.

O'Leary, John F. "Certificate of Need Legislation: The Case For
and Against." Regulating the Hospital, A Report of the 1972
National Forum on Hospital and Health Affairs. Durham, N.C.:

Duke University, Graduate Program in Hospital Administration,
1973.

O'Leary here presents a theoretical look at the certificate
of need process and outlines arguments on either side of various
CON issues. He asserts that CON legislation must strike a balance
between inflexibility and excessive vagueness. An unduly vague
mandate will give too little guidance to the administering agency,
while an inflexible system will be unable to respond to changing
needs and conditions. CON legislation should provide positive as
well as negative powers to administering agencies, for without
positive powers the agencies can have only an incremental
impact on the distribution of facilities.

Although control of capital expenditures is more easily
achieved, there is some support for including operating and
maintenance costs as well to prevent inefficient substitution
of variable factors for capital equipment. A range of sanctions
must be available, and sanctions that involve refusal of reim—
bursement for costs of unapproved facilities must not be limited
just to government reimbursement. Finally, O'Leary emphasizes

the importance of coordinating the work of all health related
agencies.

Posner, Richard A. "Certificates of Need for Health Care Facilities:
A Dissenting View." Edited by Clark Havighurst. Regulating Health

Facilities Construction. Washington, D.C.: American Enterprise
Institute for Public Policy Research, 1974.

Posner addresses the appropriateness of importing one feature
of public utility regulation, control over new construction, into

152

the health care field. The experience with construction controls
in public utility industries is chronicled. Posner notes that
construction controls in regulated industries serve to reinforce
cartelization, create distortions in the incentive structure of
firms, and increase the costs of entry to the market. He fears
that the same may occur for construction controls for the hospital
sector. The arguments that health facilities require construction
controls because of the third—party reimbursement mechanism and

the nonprofit nature of hospitals are questioned. Posner concludes
that, "Even if it were unquestioned that there was a serious
problem of excess capacity in the hospital industry, it would

not follow that construction controls are the answer." In Posner's
opinion, construction controls should be Viewed as a last resort
after all other avenues have been exhausted. As an example,

Posner proposes and briefly discusses one alternative: a change

in the methods of pricing health care services that foster excess
capacity.

Priest, A.J.G. "Possible Adaptation of Public Utility Concepts in
the Health Care Field." Law and Contemporary Problems (Duke
University School of Law) Autumn 1970! pp. 841-848.

 

Priest argues that "because the business of health care is
deeply...affected with a public interest, because hospitals and
the like have the power of exploitation in some measure..., and
because such instrumentalities carry on what is in some respects
a natural monopoly...", regulation of our health care system is
required to protect the public interest.

The government can, therefore, legitimately regulate
hospital rates, can enact legislation to prevent discrimination
in the delivery of health care, and can require an appropriate
"certificate of public convenience and necessity" before
hospitals construct major facilities or enter new service areas.
Regulation has worked in other industries, and it should be
attempted for our health care system.

Reider, Alan, John Mason, and Leonard Glantz. "Certificate of
Need: The Massachusetts Experience." American Journal of Law,
& Medicine 1 (March 1975): pp. 1340.

 

This article describes the Massachusetts certificate of need law ——
both the technicalities of the law and the problems that have
arisen in administering it. Controversies have been sparked by
the Department of Public Health's practice of granting some
certificates on the condition that the applicant discontinue
existing services unrelated to the certificate of need application.

153

As an example of this, the Somerville Hospital case is described
in some detail, and the authors in general defend the Department
of Public Health. A second source of controversy has been the
fact that both the hospitals and the Department have been forced
to deal with a continuously developing set of criteria. The

law does not specify the criteria to be used, and little agreement
exists on what are optimal criteria for health facilities. The
Department has sought to base its decisions on a set of general
principles which allow for both consistency and flexibility, but
the hospitals feel that many decisions are arbitrary because of
the lack of explicit criteria. A third source of controversy

is the review of certificate of need decisions by a non-judicial
body. The non—judicial review process is, however, judged to be
reasonably successful since all the review decisions either
affirmed the Department of Public Health or introduced new
procedural safeguards into the certificate of need process.

Roark, Charles. "Certification of Need in Texas: A Brief History
and Cost Analysis." Texas Hospitals (August, 1977); pp. 11—15.

In this article, Roark examines the issue of the cost of the
CON application process for hospitals in Texas. Through the Texas
Hospital Association, Roark conducted a survey of 539 member
hospitals. The response rate to this September, 1976 survey and
follow-up was 66 percent, Information was gathered for a variety of
cost categories: project costs, commission fees, attorney fees,
travel expenses, salary expenses, consultant fees, and other
expenses associated with the application process. Roark found
that the total costs of the CON decision process for hospitals
was less than 2 percent of the cost of the project. These costs
varied by type of project: for projects over $1,000,000 the
cost was approximately .5 percent; for projects under $1,000,000 the
cost was approximately 1.8 percent of the cost of the project. The
author concludes with a brief summary of the record of the Texas
Health Facilities Commission (the CON agency). Of the appli-
cations for beds which were within the discretion of the Commission
to approve or deny, 250 of the 649 beds considered were denied,
and 2 percent of the total proposed (16 of 722) were withdrawn from
consideration by the applicant.

Roemer, Milton I. "The Expanding Scope of Governmental
Regulation of Health Care Delivery" The University of Toledo Law
Review 6 (Spring 1975): pp. 591-616.

This article traces the history of governmental regulation

of health care delivery. Four categories of regulation and
their respective components are described:

154

1) Resource Production
a) Professional licensure
b) Educational institutions and their control
c) Preparation of medical specialists
d) Health facilities production and standards
e) Control of drugs and supplies

2) Economic Support
a) Tax—financed health programs and their control
b) Regulation of private health insurance
0) Social insurance and its control (PSROs)

3) Physical Accessibility
a) Location of health facilities
b) Organized ambulatory health services
c) Regionalization and distribution of manpower

 

4) Other Controls of Quality and Costs
a) Organized prevention of diSease
b) Encouragement of self—regulation (HMOs)

 

Within this review, Roemer argues for the need for government
regulation of health care delivery. In essence, Roemer believes
that the lack of information about and understanding of the
intricacies of medical science and technology necessitate that
the government provide assistance to the consumer. Roemer does
caution that though regulation is needed, it must become sensi-
tive to the needs and feelings of the consumer public.

Rothenberg, Eleanore. Regulation and Expansion of Health Facilities:

 

The Certificate of Need Experience in New York State. New York:
Praeger Publishers, 1976. Available from Holt, Rinehart & Winston,
383 Madison Ave., New York, New York 10017.

 

Rothenberg's study is basically a descriptive analysis of
New York State's experience with CON controls, augmented by a
limited regression and correlation analysis. The study is
designed as an interrupted test series evaluation with a five
year aggregate of data: the 1960-65 pre—CON period and the
1965—70 post—CON period. Counties were used as the basic unit of
analysis. The measures used to reflect program success were:
the change in the number of short-term beds, percent of need
met for short-term beds, change in the number of nonconforming
short-term beds.

Rothenberg's findings include: the rate of growth in short-
term hospital beds was slower in the post-CON period than in
the pre—CON period; on the average, fewer short—term general
beds were added in the 25 study counties during the five years
after the implementation of CON than during the five years before;
the increase in short—term beds after 1965 was associated with
counties with a greater need for beds (as measured by the number
7 of nonconforming beds in 1965), and beds appear to have been

155

added in areas where either the population change was negative
or where it was relatively stable.

Rothenberg's results must be viewed with caution as they
reflect New York State's early experience with CON, when New
York was the only state with such a program. Much has changed
since 1970 and the effects witnessed then may no longer prevail.

Salkever, David S. and Thomas W. Bice. Impact of State Certificate

of Need Laws on Health Care Costs and Utilization. Washington,

D.C.: DHEW. National Center for Health Services Research, HRA
106—74-57, January 31, 1976. (Chapter One may be found separately

in "The Impact of Certificate of Need Laws on Hospital Investment."
Health and Society 54 (1976): pp. 185-214.) Available NTIS HRP—1002506.

 

 

This study is the first and most comprehensive published
quantitative assessment of the CON program. The study has received
wide attention for this reason and for the conclusions it draws.
Briefly, these conclusions are:

1) CON controls did not reduce the total dollar amount
of hospital investment;

2) CON controls appear to have restricted the growth of new
bed supplies;

3) CON appears to have altered the composition of
investment by reducing growth in beds and increasing
other types of investment; and

4) CON did not substantially lower per capita hospital
costs and may have increased them slightly; and CON
lowered the utilization of inpatient services.

The study consisted of three separate, though related,
analyses. Analysis one was an investigation of hospital investment
behavior during the 1968-1972 period. The dependent variables
were percentage changes in total plant assets, beds and plant
assets per bed. Analysis one employed a cross-sectional
multiple regression estimation procedure. Investment was con-
sidered to be a function of demand factors, availability of
funds, other factors and a CON variable. The CON variable was
a dummy variable which represented the percent of time CON
was in effect in a state in the 1/1/69 to 12/31/72 time period.

Analysis two was an investigation of the impact of CON on
new beds and the expansion of services. Thirty-five CHP regions
in eight states were examined during the 1971-1973 time period.
Multiple regression analysis was again employed. Interestingly,
one of the findings from this analysis —— no change in the growth
of bed supplies —- is contrary to the findings of analysis one.

156

The third analysis in this study estimates hospital costs as
a function of demand factors, factor prices, existing capital
stock and a CON variable. Pooled aggregate state data for the
1967-1972 time period is utilized. This analysis was directed
at estimating the impact of CON on hospital costs and the volume
of inpatient services.

Accompanying these three empirical analyses is a political
analysis of the effectiveness of regulation in general and CON
in particular. A close inspection of Salkever and Bice's
analyses indicate that there is a great deal of interstate variation
in CON programs. The rather pessimistic conclusion that the sole
reliance on CON is not an effective remedy for cost inflation has
not been unequivocally demonstrated. It may be that in some
settings CON programs work quite well, while in others they do not.
Salkever and Bice's observations then, should be viewed as sugges-
tive but not conclusive.

Sanders, Charles A. "A Need for Determination." New England
Journal of Medicine 297 (December 15, 1977): pp. 1348-1349.

In this brief editorial Dr. Sanders, the director of the
Massachusetts General Hospital, describes and discusses the ongoing
disagreement between providers and the Commonwealth over the ex—
tension of the determination of need program to all hospital
based research and education projects. The state has taken the
stance that such projects have the potential to add to patient
care costs and thus, they are appropriate projects for review by
the program. The providers argue that the CON program has exceeded
its authority and moreover, the Commonwealth has implicitly and
inappropriately assumed the right to determine the research and
educational policies of teaching hospitals. Sanders goes on
to argue that while one can sympathize with the government's
concern about bearing the cost of research and education; it
is also incumbent upon government to recognize that education
programs provide an essential service to patient-care. Thus,
he argues, there has been and should continue to be, an allowable
charge for these programs. Research, however, should stand on
its own. Sanders concludes that at some point the well meaning
extension of government regulatory activity into inappropriate
areas must be stopped. He urges the scientific and educational
community to take note of the happenings in Massachusetts and
act accordingly.

157

Sapolsky, Harvey M. "Interjurisdictional Relations in Health:
Some Alternative Arrangements." Prepared for delivery at the
Annual Meeting of the American Political Science Association,
Washington, D.C., September 1-4, 1977.

Although HSAs are local agencies being asked to restrain
local services that are paid for in large part by broader
jurisdictions, HSAs appear to be more effective than antici-
pated. Sapolsky lists three reasons for this: 1) consumers
on HSA boards are influenced by HSA staff, who are generally
public health school graduates, imbued with the planning ethic;
2) the fact that HSAs are selected by the federal government
and must have their "license" renewed forces HSAs to adhere to
as yet unlegislated federal standards; 3) the rising cost of
Medicaid encourages state governments to support serious planning
efforts.

Sapolsky concludes that health care costs are best controlled
when, as in England, they are made visible and placed in compe-
tition with the costs for providing other services. Central
administrations are the most articulate advocates for controls
on health care costs. On the other hand, equity goals are better
served by a decentralized planning system. Local participation
in planning works against the concentration of resources either
geographically or by type of medical specialization.

Sattler, Frederic and Max Bennett. A Statistical Profile of
Short—Term Hospitals in the United States as of 1973. Minneapolis,
Minnesota: Interstudy, January 1975. Available NTIS HRP—0005624.

 

 

This study analyzes American Hospital Association statistics
on the number and distribution of short-term hospitals, the number
of beds in these hospitals, their occupancy rates, and their
average daily census. Projections of hospital bed needs in 1975
and 1980 are made, adjusting for population and age distribution,
using 1972 statistics on hospital utilization as a percent of
population, calculating (from G. A. Popov's formula) optimal
occupancy rates for different size hospitals, and assuming that no
new hospital beds were built after 1974. These projections
indicated that in 1975 there would be 68,887 excess hospital
beds, but by 1980 the number of excess beds would fall to 10,552
and in some regions there would be a deficit of beds—~assuming,
it must be emphasized, a moratorium on bed construction after
1974. The authors point out that the annual average cost of
carrying an excess bed is $18,250, so the national cost of
excess bed capacity is substantial.

158

Schlenker, Robert and Paul Ellwood. "Medical Inflation: Causes
and Policy Options for Control." Unpublished paper. Minneapolis,
Minnesota: Interstudy, March 1973. Available NTIS HRP—0018484.

The authors assert that public utility type regulation of
the health care system will not be very effective in containing
costs and may impede the development of market—oriented delivery
systems, which in the long run will be more effective. In the
short run, however, some form of public utility type control
may be necessary, although it should be used sparingly.

Of the two main types of controls, capital controls and current
operations controls, capital controls appear to promise little in
the way of effective cost containment. Capital controls have
these disadvantages: 1) they may be captured by providers;

2) there are few objective criteria on which to base planning
decisions; 3) allocating the allowed investment among available
institutions would entail endless dilemmas; 4) any savings
resulting from curtailment of capital growth would probably

be partly offset by an increase in the utilization of other forms
of care. Because of the problems inherent in capital controls,
the authors recommend that the Hill—Burton program be ended, that
the Comprehensive Health Planning program be phased out, and that
no federal initiative in the capital control and planning area

be undertaken until the effects of the first two actions and of
state certificate of need legislation are assessed.

Of the two types of current operations controls, utilization
controls and price controls, utilization controls appear to be
more difficult to implement and to possess the greater potential
for causing detrimental side effects, such as denying needed
care and prescribing excessively costly procedures as "standards"
of care. Therefore, the authors recommend that utilization
controls not be expanded at this time and that substantial
experimentation be carried out first. The authors consider that
the most effective controls are likely to be price controls
or rate regulation.

In order to further advance the long run objective of system
reform, however, the authors argue that organizations such as
HMOs should be exempt from public utility type entry, investment,
price, and utilization controls.

159

 

 

 

Schlenker, Robert, Jean Quale, Rhona Wetherille, and Richard
McNeil, Jr. HMO's in 1973: A National Survey. Minneapolis,
Minnesota: Interstudy, February 1974. Available NTIS HRP—0009948.

This essay summarizes the results of a 1973 survey of 77
Health Maintenance Organizations (HMOs). (HMOs provide compre-
hensive care on a prepaid basis.) The HMOs were divided into
three groups: one composed of HMOs in states other than
California that began delivering prepaid care prior to July 1,
1973; one composed of HMOs in states other than California
that began delivering prepaid care after July 1, 1973; and
one composed of all responding HMOs in California.

Only a small percentage of the HMOs surveyed considered
certificate of need laws even a moderate barrier to HMO
formation, but the brand new HMOs outside California were more
likely than the older ones to be concerned about CON impediments
to HMO formation. A substantially higher percentage of the HMOs
surveyed considered CON processes to be a moderate or severe
barrier to HMO growth. The greatest concern about CON impact
on HMO growth was expressed by pre—197O HMOs outside of California.

The differences in the responses may be due to the fact
that certificate of need laws may have come into being after
some of the HMOs surveyed became operational. Or they may
reflect the fact that laws requiring CONS probably do not
apply to most forming HMOs, since they form around existing
practices and institutions. Thus only when expansion requires
new facilities or services do certificates of need come into
play.

Sieverts, Steve. "Franchising from the Viewpoint of Areawide
Planning Agencies." Management Memorandum on Hospital Franchising.
Chicago: International Health Advisory Council, 1973.

After a brief history of Allegheny County's Hospital Planning
Association, of which he is Executive Director, Sieverts argues
against reliance on state governments for health care planning.
State health agencies are "marked by weak managment and unprofes-
sional approaches", and state level decision-making is corrupt
and politicized. As for the areawide health planning agencies,
Sieverts charges that they are unable to give much practical help
to anybody since, with an average of two professional staff
people and "scarcely more than enough money to pay their salaries,"
they are without the resources to accomplish a great deal. Further-
more, federal authorities "have tended to push 314(b) agencies
toward time-consuming development called a comprehensive health
p1an--a marvelous extreme never sufficiently defined and, in my
mind, impossible to achieve even with a large staff and coherent
governance".

160

Snoke, Parnie S. and Albert W. Snoke. "The State Role in the
Regulation of the Health Delivery System." Toledo Law Review
6 (Spring 1975): pp. 617-646.

The authors of this article provide a strong case for an
enlarged state role in the regulation of the health delivery
system. They discuss the problems which are inherent in many
state systems, but they point out that the states are not alone
in this regard. The federal government is equally burdened
with difficulties resulting from fragmented responsibilities and
enforcement requirements. The formulation of a state health
policy, or even the development of a strategy by which such a
policy can be established, remains a difficult and challenging
task. This article presents observations and comments on current
trends and developments in the health field in the context of
which state health policies and programs are based. These
observations include:

1) There exists a need for clearly defined and integrated
national and state health and welfare policies;

2) Federal health planning, regulatory and administrative
activities need to be coordinated;

3) Regional health planning agencies within a state
should be responsible for all actions in their area
and attempt to avoid the type of fragmentation which
now exists between HSAs and PSROS; and

4) Cost containment has become a major determinant of
both state and federal health delivery policies.

The authors offer a broad set of recommendations regarding the
reorganization and administration of a state's governmental health
and welfare policies. Recommendations are presented regarding:
the philosophy and policy of the state, the organization and
administration of the state for Health and Social Affairs, region-
alization, planning, and regulation. Lastly, the Snokes call

for a vigorous state role in regulation. The regulatory body
which the Snokes envision would have enormous power and influence.
However, it is pointed out that the stakes in dollars, services
and quality are equally high necessitating an active and signifi-
cant state role.

Somers, Anne. "State Regulation of Hospitals and Health Care:
The New Jersey Story." Blue Cross Reports (July 1973): pp. l-23.

This report reviews efforts to regulate health care in New
Jersey, a state which, as of 1971, had lower than average
ratios of health care facilities, utilization, and hospital
costs to population. The state's certificate of need law

161

was passed in May 1971, despite major opposition to the concept
from the nursing homes and opposition to the details of the

law from the hospitals. In the succeeding two years the CON
process resulted in 206 approvals for a total of $216 million,
and 81 denials for a total of $91 million. These denials led
to about 70 formal hearings and three court cases, but the
Commissioner of Public Health's decisions as of 1973 had been
reversed only once. Despite the CON law, however, it is quite
possible that the state will be more overbedded in 1975 than

it was in 1971 when the law was passed. Somers nevertheless
concludes that, "it is quite likely that the situation would
have been worse without the law. It does raise questions,
however, as to the appropriateness of the current ratio of
approvals to denials...It also clearly indicates that the mere
presence of a certificate of need law does not assure more
responsible construction or reallocation of resources. On

the contrary, it could provide a sort of fig leaf for continued
inefficiency."

Somers reviews some of the issues raised by New Jersey's
initial experience with CON: 1) What types of health facilities
and level of expenditures should be covered? 2) Should coverage
of the various types of facilities be phased in gradually?

3) How can an "effective date" be designed which gives adequate
time for tooling up but does not permit providers to take
advantage of the interval? 4) How many levels of review are
necessary to provide adequate due process without undue delay?
5) Should the planning and review process move farther into
positive as well as negative requirements? 6) How can the
regulatory process overcome the obstacles implicit in compara-
tively low government salaries, rigid civil service regulations,
etc.?

Somers, Anne. Hospital Regulation: The Dilemma of Public
Policy. Princeton: Princeton University, Industrial Relations
Section, 1969.

Chapter VII of this book analyzes the historical development
of hospital construction regulation from the earliest planning
agencies through Comprehensive Health Planning agencies, and
describes the New York regulatory structure in more detail.
Though a good book in its time, this is now too out-of-date to
be useful to any but historians.

162

State of New York, Legislative Commission on Expenditure Review.
Program Audit Health Planning in New York State. Albany, N.Y.,

 

January

3, 1977.

This legislative audit of New York State's health planning

efforts
1)

2)

3)

4)

5)

6)

found the following deficiencies in the program:

New York's health care planning has been implemented
primarily through a certificate of need procedure, which
simply reacts when an application is submitted. The
Department of Health has seldom taken the initiative in
exploring the possibility of less costly alternatives

or the use of shared services.

The Department of Health has been unable to effectively
communicate the state's need for health facilities to
regional planners and providers. This is one reason
for the adversary rather than cooperative relationship
between the Department of Health and both regional
planners and providers of care.

The review process is unnecessarily complex and time-
consuming. Although three independent assessments are
made of projects, the Department of Health staff
recommendations are followed in 95% of the cases.

Decisions reached on CON applications are not always in
line with the State Health Plan.

The planning process does not take into account the
availability of health manpower, domiciliary care
facilities and home health care, or the impact of
preventive health programs in its need determination.

The methodology for determining health facility needs
is based on demand for services rather than actual
medical requirements.

The legislative audit concluded that the state's mandatory
health planning program has had the following impact on the
health care system:

1)

2)

The state has been successful in its goal of promoting
larger facilities. This trend began before the planning
program but appears to have been accelerated by it.
However, the legislators point out that larger facilities
are inherently more costly because they provide more
comprehensive services.

The health planning program has been effective in

raising the occupancy rates in both hospitals and

nursing homes. At the same time lengths of stays have

been shortened for hospitals, although rising for

nursing homes. Efforts to promote ambulatory, out—

patient, and home health care programs have been successful,

163

but this has not reduced the use of institutional care.

3) The planning program has not held down the cost of
health care since the major factors increasing patient
day costs are not controlled. Increases in New York
have been higher than in the nation as a whole.

4) The planning program has not been able to retool the
existing health care system into one which is uniformly
accessible. Variations in accessiblity to various
types of health care were even greater in 1974 than in

1966.
Stiles, Samuel V. and Katherine A. Johnson. "Regulatory and
Review Functions of Agencies Created by the Act." Public Health

Reports 791 (January-February 1976): pp. 24-28.

This article discusses some of the tools the National Health
Planning and Resources Development Act of 1974 (P.L. 93—641) gives
planning agencies to implement Viable health plans. These tools
are of four kinds: (1) review of new institutional health services,
(2) review of existing institutional health services, (3)regu1a-
tion of rates for provision of health care, and (4) review of
proposed uses of Federal funds for health resources.

Struehler, George. "Certification of Need—-A Systems Analysis of
Maryland's Experience and Plans." American Journal of Public
Health 63 (November 1973): pp. 966-972.

The author presents a systems analysis of the Maryland
CON program, one of the first CON programs in operation. The
program is analyzed within a framework which considers program
constraints, inputs, the development process (program design),
program outputs and the ultimate impacts. The system presented
is a dynamic one with feedback from the impacted facilities
constantly employed as input in the ongoing development and
program refinement process. The author also discusses a number
of issues regarding Maryland's CON development process including:
the difference between a certificate of need and certification of
conformance to a comprehensive health plan; the appropriateness
of combining planning and regulatory activities in the CON process;
the nature of the relationship between the state and substate
health planning agencies; and the job of "selling" a CON program.
The author's short run assessment of program performance is
optimistic, as he concludes that Maryland's experience with the
CON process has been a successful one.

164

Technical Work Group on Health Care Costs. Rising Medical Costs
in Michigan. Lansing: State of Michigan, Department of Social
Services, 1973.

 

Chapter 11 of this monograph reviews the impact in Michigan
of the certificate of need law but also Hill—Burton, Comprehensive
Health Planning, and the Regional Medical Program. The authors
conclude that the Hill-Burton program was unsuccessful in pro—
moting health planning in any major way because its control was
limited to only the 40 percent of the health facility construction that
was financed under Hill-Burton. The Comprehensive Health
Planning Agencies and the Regional Medical Program Agencies often
worked in competition with each other, and both programs were
required not to interfere with existing modes of health delivery.
CHP agencies were further handicapped by the broad task they were
given to perform and the limited tools with which they were equipped.

The authors conclude that certificate of need laws cannot
hope to be effective unless the range of capital resources
encompassed is complete, and the relationships of the pertinent
agencies are clearly defined. In any case, with the less than
advanced state of the art in assessing health care needs, the
prospect for effective cost containment through capital res-
trictions becomes highly doubtful.

Tennessee State Legislative Council Committee. Study on the

Health Planning Agencies and 'Certificate of Need' Legislation
Concerning Health Facilities 1973. Final Report. 1973. Available
NTIS,HRPw0002203.

A legislative subcommittee was formed to study a bill pro—
viding for a 'certificate of need‘ process for Tennessee.
A certificate of need is a mechanism used to insure that health
care facilities are expanded only in accordance with carefully
formulated plans to provide an orderly accessibility, utilization,
and availability of health care to the closest number of people.
No construction of new health care facilities or expansion of
existing installations is allowed without evidence from an
appropriate state authority that a true need exists for it.
This report includes recommendations for certain amendments
to the proposed certificate of need legislation and its adoption
as amended. It also provides recommendations for improvements
in the areawide planning agencies. Appendices contain 1971
Lhospital occupancy rates, the text of the Senate and House Bill,
features of the certificate of need legislation in other states,
and regulations of DHEW. The study of the certificate of need
legislation includes an analysis of the initiation of the
certification process, scope of coverage, application and review
process, appeal process, time limitation on certification, and
the financing of the certification process. Recommendations
emphasize that the certification process must be expeditious
and that financial disclosure provisions should be equitable
and reasonable.

165

Texas Governor's Office of Comprehensive Health Planning.
"State Certificate of Need Legislation, A Study." 1974.
Available NTIS HEP—0003728.

The advantages and disadvantages offered by state certifi-
cate of need legislation in Texas were assessed by the State
Office of Comprehensive Health Planning. The advantages include:
regulation of the duplication of equipment and health care ser—
vices with respect to consumer accountability; control of escalating
medical care costs; logical development of services and facilities
to match local needs and resources; definition of the regulatory
role of the certificate of need decision agency; increase in
public awareness of health problems; and participation by
Texas in new Federal health legislation assuring Federal reimburse-
ments for capital expenditures and services under Federal health
and welfare programs. The disadvantages include: conflict
with the free enterprise system of open competition; possible
discouragement of new health care providers, leaving the way
open for cartels; possibility of the decision agency becoming
bureaucratic if not properly established; and possible adverse
effects of political pressures. It is noted that 22 of the 24
States which have passed certificate of need legislation have
retained the final decision authority at the state level.
Guidelines to the development of state certificate of need
legislation are provided, including comments on the scope of

program review, standards and criteria for program review, and
review organization and mechanisms.

Van Nostrand, Lyman G. "Capital Financing for Health Facilities."
Public Health Reports 92 (Nov.-Dec. 1977): pp. 499—507.

As the costs of medical care in the United States have
continued to rise at a rate twice that of the consumer price
index, serious questions have been raised about the contribution
of hospital beds to this rise and as to whether there are too
many beds. In recent years the number of short-term general
hospital beds has continued to increase at a rate of about 1.8
percent per year. Between 1967 and 1975, the beds per 1,000
population rose from 4.18 to 4.58.

This article briefly reviews some of the major trends in
the supply of hospitals and beds, in investment, and in the
changing sources of funds for construction. The author contends
that capital investment in health resources has often been
excessive and wasteful. Some aspects have been overcapitalized,
such as acute care inpatient beds and much specialized
equipment, while other aspects, such as organized ambulatory care
programs and prepaid group practices, have been undercapitalized.

166

Van Nostrand discusses a number of potential approaches to cost
containment including the establishment of a reduction in excess
hospital capacity as a national health planning goal; use of the
state medical facilities plan and of a strengthened certificate
of need program to control capital investment; decreased Federal
financial support for hospital construction and increased support
for ambulatory care facilities; and enactment of a dollar limit
on capital expenditures for health facilities, as Well as the
possible pooling of depreciation payments.

Watts, Cindy, and Gail Updegraff. Regulation of Capital Expen-
ditures: Background Discussion and Annotated Bibliography. Denver,
Colorado: Spectrum Research, 1975. Available NTIS HEP-1001467.

 

Much of the text of this publication and its findings are
summarized in the O'Donoghue book annotated elsewhere. Watts and
Updegraff also summarize the various state certificate of need
laws as of April 1974 and list questions that should be investi-
gated in regard to the impact of CON laws. The final section
of the book is a fairly extensive annotated bibliography of
the literature on capital expenditure controls as of 1974.

Webber, James and Mark Mandel. "The Institutional Planning
Experience in New Jersey: A Preliminary View." Report prepared
for the six Massachusetts HSAs and the Massachusetts State Office
of Health Planning under DHEW Contract 203-76-0078, Task Order
MM/Masc-l. Boston: Boston University, Center for Health
Planning, March 15, 1977.

On July 9, 1975, New Jersey instituted a regulation requiring
health institutions to submit long-range plans, and the first
plan submissions were made in January 1977. This report analyzes
these first plan submissions, pointing out their weaknesses and
strengths, and suggesting ways they might be improved in the
future. The plans include a section outlining certificate
of need applications the institution is likely to make to
carry out its plan. The State Department of Public Health then
tabulated the certificate of need forecasts and is examining
project requests in light of the forecast. The planning
requirement is thus designed to improve CON decisions, although
it is too early to determine the actual impact of long-range hos-
pital plans on the CON process. This report deals solely with
the planning requirement and does not discuss certificate of
need processes or results.

167

Webber, James and Mark Mandel. "Institutional Planning in

Rhode Island: A Preliminary View." Report prepared for the six
Massachusetts HSAs and the Massachusetts State Office of Health
Planning under DHEW Contract HRA 203—76—0078. Boston: Center
for Health Planning, Boston University, April 15, 1977.

This essay provides a brief history of hospital planning
in Rhode Island, including the regulatory philosophy of the
Rhode Island Department of Health, state planning requirements,
the evolution of hospital planning in the state, and the outcome
of state reviews of hospital planning efforts. The study found
that "although $153 million in estimated expenditures were
proposed in the long and short—range plans over the five year
period, only approximately $55 million worth of expenditures
finally received certificate of need approval during the same
period. It seems apparent that a great number of proposed
projects are never finalized and submitted as certificate of
need proposals." The report also found that hospital plans have
improved in quality since the initial submissions.

 

Willemain, Thomas R. "A Model for Certification of Need for
Long-term—care Beds." Health Services Research 12 (Winter 1977):
pp. 396-406.

This article presents a model relating bed supply and
utilization in the context of the match between need and
service, which is controlled by the screening process that
allows or denies access to beds. The conventional cost—
minimization approach to certification of need, that of seeking
to reduce inappropriate use, is contrasted with a service—
delivery approach that seeks to promote appropriate use of
facilities. The model expresses the quality of the screening
process and the sensitivity and specificity of utilization in
terms of bed supply, utilization, and need for service, which
allows it to be used for needs assessment. The model is
applied to data on supply and use of beds in Massachusetts
skilled nursing facilities, with screening quality estimated by
Monte Carlo methods; the results suggest that need and bed supply
are positively associated and that the regional variation in
skilled-nursing beds in Massachusetts may reflect real variations
in need.

168

Zellner, Bruce. "Inflationary Impact of Certificate of Need
Laws." Discussion paper. Minneapolis, Minnesota: Interstudy,
January 1973.

In this early investigation of the cost implications of CON
legislation, Zellner examined the premise that the rate of growth
in hospital costs could be slowed by the introduction of capital
expenditure controls on the supply of beds. Zellner begins by
assuming that there is a direct relationship between the supply
of beds and the demand for inpatient care. He examines data on
hospital expenditures between 1950 and 1969 by applying the 1950
bed to population ratio to the 1969 expenditure data. Zellner
concludes that if the 1950 bed to population ratio had prevailed in
1969, total expenditures in 1969 could have been 19 percent lower
(assuming no change in price and occupancy levels). The rise in
expenditures between 1950 and 1969 would have been even lower
(50 percent less) if the assumption of no effect on price is
dropped. Utilizing an alternative model, based upon Feldstein's
1971 "Hospital Cost Inflation" article in the American Economic
Review, Zellner found that total hospital costs would be 6 percent
to 12 percent less, utilization would be 19 percent lower, and the
hospital price per patient day would be 9 percent to 16 percent
higher. when adjustments are made for substitutions between in-
patient and outpatient care, the reduction in hospital costs would
be lower than the estimated 6 percent to 12 percent; it would be
approximately 3 percent. Zellner concludes that if CON programs
are successful in restricting capital investment, they may have
the perverse effect of increasing expenditures for inpatient and
outpatient care. This conclusion derives from Zellner's assumptions
regarding the substitutability of capital for labor and outpatient
care for inpatient. These assumptions may, however, be too strong.
While there is substitution of capital for labor, labor cannot be
substituted for all capital. In addition, given the time frame of
the inquiry and the few CON programs in operation, it would be
unlikely that their effects would be witnessed in 1969. A later
time comparison might yield different and perhaps contradictory
results.

169

 

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