Dr. Jerome Tannenbaum and Dr. Pat Maxwell are putting their heads together to sketch out a new model for providing breast and obesity surgery, offering what they describe as “coordinated care” in a multi-disciplinary center. Just what the doctor—and patient—ordered, the center is more appealing than large hospitals, where specialists work on different floors and in separate buildings, and patients travel difficult mazes between parking lot, admissions, operating room and recovery area.

In hopes of developing a remedy to the traditional model, Tannenbaum and Maxwell follow in the footsteps of many others before them when they present their proposal for the Cool Springs Institute to the state agency that will decide whether the project can go forward. At its monthly hearing in July, the board of the Tennessee Health Services and Development Agency listens as the doctors and their patients plead their case for the Williamson County facility. Dr. Subhi Ali, representing physicians on the board, says, “It would be a dream for a surgeon like me to work there.” Minutes later and despite his words of support, Ali votes to deny the doctors’ proposal, joining the 5-1 vote that stops the center dead in its tracks.

Welcome to the antiquated Certificate of Need (CON) process. Every month, physicians, hospital administrators and attorneys go before the board, hoping to walk away with a coveted certificate of need. Applicants are not asking for funding; they are asking for the state’s permission to build or expand health care facilities, services or equipment. To get the go-ahead from the state, in the form of a CON, applicants are required to prove that a need exists for their project. Each applicant also must convince the CON board that the proposed project is economically feasible and contributes to the orderly development of health care.

This “Mother, may I?” approach to health care services was established in the 1970s and borne of real need. At the time, government and commercial insurance reimbursed health care providers based on cost, not price. There was a not unreasonable fear that an increased, unregulated supply of services could lead to unnecessary duplication—at an excessive cost to the government. Today, reimbursement is largely based on a predetermined fixed amount, and the federal government no longer provides financial incentives for states to keep their CON programs. As a result, the central reason for the establishment of the program no longer exists. Yet, though its heart has been removed, the CON process lives on in Tennessee, kept alive by sluggish bureaucracy and co-opted by the existing market leaders as a tool for preventing unwanted competition.

The CON process has not had such an easy time of it in other states. Ohio, for example, began phasing out its CON program in 1995. In Georgia, the former state attorney general is challenging the constitutionality of that state’s CON program; in Florida, restrictions have been lifted on new open-heart programs, which now can start without a CON; and in Illinois, efforts are underway to do away with that state’s CON board, which reportedly is the target of a criminal investigation.

Despite nationwide indications that CON programs are not universally beneficial, Tennessee proponents of this program argue that regulating supply helps contain costs and improves health care quality by ensuring higher patient volumes per provider. The latter argument is undermined by the benefits of quality when new technology and services can more easily enter a market without facing a CON board. As for cost control measures, the Federal Trade Commission and the U.S. Department of Justice recently weighed in on the issue. After evaluating studies showing effects of CON programs, the agencies issued a joint report, saying they believe that “on balance, CON programs are not successful in containing health care costs,” and that not only do they pose serious anticompetitive risks that usually outweigh their purported economic benefits, they can actually increase prices by encouraging anticompetitive barriers to entry.

Beyond cost and quality issues, supporters of Tennessee’s CON program also say it protects community hospitals from competition that could erode their revenue. Craig Becker, president of The Tennessee Hospital Association, the state’s largest hospital lobby, says the unregulated growth of health care facilities draws the “paying patients” out of community hospitals. Patients with commercial insurance are the bread and butter of community hospitals, which rely on that income because they are required by federal law to provide emergency care even when patients cannot pay. Without the CON program—and with no way to stop money from going to other hospitals—community hospitals would no longer be able to provide charity care as they have, he says. “If this [hospital] industry needs to, it adapts to survive,” Becker says. “From a public policy standpoint, we don’t want to see that happen.”

Few would dispute hospitals’ critical role in caring for sick and injured patients who cannot afford to pay for care. But for that concern, the CON program is not a solution. It serves as a mere topical treatment for a complicated national problem of the uninsured, which currently is being addressed by other forces—massive litigation and congressional hearings to rein in hospitals’ exorbitant charges for those who pay out of pocket and the influx of more affordable consumer-driven insurance plans, which may better enable Americans to buy insurance and could help drive prices down. Furthermore, the FTC and DOJ said in their recent report that while the agencies do not have any pre-existing preference for one certain health care financing model, “such matters are best left to the impersonal workings of the marketplace.”

Those market forces are not in play in Tennessee because of the state’s CON program. Instead, the system induces market leaders to block potential competitors by regulatory means rather than superior quality and price. One health care CEO goes so far as to call Tennessee’s program a “certificate of protection”—it’s more a discussion about what threatens that provider’s position in the market than it is about any real issue of need.

Meanwhile, the case of the ill-fated Cool Springs Institute may have revealed another manner in which established hospitals can use the CON process—as a market predictor for determining future services to provide. Tannenbaum says after he filed the CON application, Vanderbilt University Medical Center and Williamson Medical Center both began offering some of the services he was proposing, even though both hospitals opposed his CON application. “Maybe competition—or the threat of competition—is not such a bad thing for this community,” Tannenbaum says. Williamson Medical Center even went so far as asking the organizers of the project to affiliate with the hospital—this just one month after Dennis Miller, chief executive of Williamson Medical Center, told the CON board that the proposed Institute was not needed because Williamson Medical already offered those services.

Dr. Gene Caldwell, chairman Health Services & Development Agency