New provision puts different spin on Virginia certificate of need law

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by Robert Burke and Marjolijn Bijlefeld

After twice failing to win state permission to build a new hospital in Williamsburg, David Tate and Riverside Health Systems are back for a third try. This time they’re bringing a crowd. Tate — Riverside’s senior vice president of development — and other executives have spent the summer drumming up support for the proposed Doctors Hospital of Williamsburg. They’ve been showing up at community centers and churches to explain the project and encourage people to write letters. “We absolutely believe the degree of community support we’re receiving will make a difference,” says Tate. 

Opposing the Riverside project is Norfolk-based Sentara Healthcare. It opened a 145-bed hospital, Sentara Williamsburg Regional Medical Center in 2006, replacing the community hospital it had operated a few miles away. Since Riverside’s first effort in 2005, Sentara executives have argued that a new Riverside hospital in Williamsburg would actually hurt health care in the region. With the Sentara hospital only at about 60 percent capacity, they say, adding another hospital would create too much repetition of medical services. “When you siphon off or dilute the amount of services and patients you have between two small hospitals, that’s not economically efficient,” says Robert Graves, vice president and administrator of Sentara Williamsburg. The state health commissioner agreed, turning down Riverside’s requests for a certificate of public need (COPN).

Things are different this time around.  For one thing, the current proposal is slightly smaller than the 43-bed, $76 million hospital proposed last year. Plus, Tate says, a law passed this year adds new criteria to the COPN process that will help his cause.

Namely, it requires the health commissioner to look favorably on proposed projects that have wide community support and would promote institutional competition. “Having two hospitals in the Williamsburg area is going to raise the game of everybody,” says Tate.

Whether his interpretation of the new law is right remains to be seen with a decision on the hospital not expected until sometime next year. But Riverside’s determined push for a COPN underscores how the health-care sector is unlike other markets. Typically, competitors are free to succeed or fail. That’s not the case under Virginia’s COPN law. It covers 22 types of facilities and services and determines everything from the number of acute-care hospital beds allowed in a region to who can provide substance-abuse treatment programs. As of mid-2008, 36 states had similar laws, according to the National Conference of State Legislatures.

Does the law work?
In general, the law is designed to promote access to high-quality health care and control costs, and it does that in part by limiting the number of providers. But does it work? Without COPN restrictions, supporters say, competing hospitals would create an oversupply of facilities and services, leading to inflated costs. Or, they contend, hospitals would attempt to steal the most lucrative service lines from each other. Without that income, hospitals would be unable to pay for essential health services, such as emergency rooms and OB-GYN services, which are especially essential in rural areas that may have only a few hundred births a year. In addition, hospitals have to absorb the costs of caring for the uninsured and the underinsured. “We have to make money on something,” says Katharine Webb, senior vice president at the Virginia Hospital and Healthcare Association (VHHA).

Critics, though, say the financial rationale that existed in the 1970s when many certificate of need laws were adopted is gone. Today, they see the process as just a way for incumbent health providers to control market share. “It provides a protective shield against the really hard decisions that come when you have to face a real competitor in the market and deliver better care at a better price,” says Louis F. Rossiter, secretary of health and human services in 2001-2002 under Gov. Jim Gilmore. Rossiter is now a senior research fellow with the Thomas Jefferson Program in Public Policy at The College of William & Mary.
About 20 years ago the federal government repealed a mandate for certificate of need laws. Over time, 14 states dropped all or part of their own certificate of need requirements, according to the National Conference of State Legislatures. According to Rossiter, states that ditched their laws haven’t suffered. “Most often nothing happens,” he says. In some states, surgeons build their own surgery centers to compete with hospitals, he adds.  “Is there some divine right of hospitals to provide freestanding ambulatory surgery services? If it’s more efficient for doctors to be providing that in facilities they own, and if they can give patients a better price, the patient benefits.”

States wrestling with issue
Other states are wrestling with the certificate of need approach. Earlier this year, Florida Gov. Charlie Crist proposed dropping the state’s certificate of need law. Meanwhile, Pennsylvania — which dropped its law in 1996 — is debating whether to reinstate it. Virginia had its own brush with deregulation in 2000, when the General Assembly approved a proposal to phase out the COPN law over three years. The plan died, though, when the legislature didn’t put up money to cover hospitals’ costs during the transition, mostly for indigent care, says Del. Phillip Hamilton, R-Newport News.
It was Hamilton who sponsored the new law — requiring that the impact of competition be considered in the case of health services or facilities — that Riverside executives are counting on. In the upcoming General Assembly session, he plans to push for reducing the current 21 COPN criteria to just six, addressing issues such as public access to health care, cost, competition and indigent care. Hamilton would like to do away with the COPN law completely but says the votes are not there. “But I think it needs to be significantly reformed,” he says. “Managed care does a lot of what COPN was intended to do … place some type of control over health costs.”
Which begs the question: Have COPN laws accomplished their goals?  It’s hard to draw a clear picture. Eric Bodin, director of the COPN program for the Virginia Department of Health, says there’s no mechanism in the law that lets the department study the impact of COPN decisions. It’s not a problem unique to Virginia; Bodin says gauging the effectiveness of such laws nationwide is difficult because states that have dropped them “did not do any kind of follow-up study to see what impact it had.”

Battle in Loudoun County
HCA Virginia, which operates 10 hospitals in the state and has two more on the way, won a COPN in 2004 for its 164-bed Broadlands Regional Medical Center in Loudoun County. Fairfax-based Inova Health System, which has a hospital just a few miles away from HCA’s proposed site, has fought the COPN decision in the courts, so far without success. Inova officials didn’t respond to an interview request, but a statement on the company’s Web site says it opposes the new HCA hospital because it would be located too far from the underserved southern and west parts of the county. Inova says that if the HCA project were moved there, it wouldn’t oppose it. (Inova lost another fight this year as well. This spring, it dropped plans to merge with Prince William Hospital after the Federal Trade Commission and Virginia Attorney General Robert F. McDonnell objected to the merger, saying it would violate federal antitrust laws.)
HCA Virginia spokesman Mark Foust says competition can help control costs and foster innovation. “It’s simply a more healthy environment when you have more than one provider in any region,” he says. But Foust agrees that doing away with COPN could create more problems if not done the right way. “If you’re going to deregulate, you need to do so in a responsible way that looks at the impact on cost, on quality, on access,” Foust says. Rural hospitals in particular could suffer, he notes, if a competitor started stealing lucrative service lines. “To try to remove COPN without dealing with those issues would be a grave mistake.”
VHHA’s Webb agrees. For hospitals, holding a COPN is essentially a franchise. “As with any franchise system it’s an imperfect one … but [hospitals] are open 24 hours a day, seven days a week. If they don’t have a service line that makes money, they can’t stay open. I just don’t know what the alternative is.”
Still, there are other ways to look at the problem of health-care costs. Elizabeth Teisberg is a professor at the University of Virginia’s Darden Graduate School of Business Administration and the co-author of “Redefining Health Care: Creating Value-Based Competition on Results.”  She says the incentives that drive the health-care industry are so skewed that when it comes to improving care and cutting costs, the current structure is doomed to fail. COPN laws, she adds, are just one more attempt to patch a broken system that drives hospitals to compete over the wrong things.
“So much of what goes on now is a bargaining power game,” she says. “The health plans and hospitals develop as much muscle as they can for their negotiations. The health plans will say, ‘We’re only going to contract with you if you have a full line of services.’ So the hospitals go out and make sure that nobody has a fuller line. That does not create value for patients; it’s dysfunctional competition.”
Teisberg works with health plans and employers who are trying to reform their approach. “Value in health care is created or destroyed at the medical-condition level, not at the level of a hospital system or health plan,” she says. “Structure health-care teams around patients and full solutions for them, not just around procedures and medical specialties. We need well-coordinated teams around the full cycle of care for common medical conditions, such as diabetes or breast cancer.”

Addressing the wrong question
Teams create value by improving health and care for patients. Today, the focus is on how to cut costs and waste for procedures, but that’s the wrong question, she says. “We need to ask how to improve results for patients and use quality improvement to reduce costs. For example, the question is not how many images are taken, but whether the results — outcomes and efficiency — are improved by the use of imaging. Sometimes better diagnosis drives costs down dramatically over time.”
Health care today is treated like a commodity, and it’s not, she argues. “If it is a commodity, then the only issue is price,” and that approach forces providers to play a zero-sum game. “If you put limits on what can be done, then things get billed as something else, or get done in a different way,” she says. “Costs don’t go down, they just shift.”
Meanwhile, Riverside administrators are deep into their fight for a COPN. Persuading the state’s health commissioner to approve a project that has been twice rejected is a tough task. If Riverside succeeds, its Williamsburg hospital could open in 2012.
Graves of Sentara Williamsburg calls the Riverside application “a sentinel case. If it’s approved, it sort of calls into question the ability to do good health planning. Because I don’t think you could find a health planner that would say there’s a need for another small hospital.”
Tate of Riverside, though, argues that creating competition is reason enough. “We’re not trying to say that those who oppose us are bad; they’re just wrong,” Tate says. “Two hospitals can co-exist. It will improve access and give people a choice. A competitive environment we firmly believe is a good thing.” 

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