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PA’s certificate of need sunset

By William H. Maruca, Esq.

On December 18, 1996, Pennsylvania’s certificate of need (CON) law expired despite last-minute efforts to enact a one-year extension before the Pennsylvania General Assembly adjourned. The CON statute, which was part of the Pennsylvania Health Care Facilities Act, required facilities who proposed to operate certain reviewable health services to establish community need for such services through an often lengthy and adversarial need review process.

Many other states have allowed their CON programs to expire in light of the shifting economics of health care in the 1990’s. Pennsylvania’s CON system was enacted in 1979 and primarily affected institutional providers. The law was substantially modified in 1992 to reach physician groups and physician-owned facilities as well as hospitals. Like previous CON statutes, the 1992 law contained a “sunset,” or expiration clause under which the CON system automatically terminated after four years unless the state legislature took action. In anticipation of the sunset deadline, Governor Tom Ridge had requested a one-year extension of the statute. Unlike previous sunset deadlines, this one came and went before lawmakers could enact reauthorizing legislation.

State CON review programs were once subsidized by federal funding, which was repealed in the mid 1980’s. The Pennsylvania need review process was then assumed by the Department of Health with a significantly smaller budget. The 1992 legislation put hospitals on a “level playing field” with physician-owned ventures and helped relieve the backlog of pending applications. In recent years there has been pressure to either repeal or modify the system to bring it into line with the realities of current health care reimbursement incentives. In March, 1996, the Health Policy Board proposed to eliminate several reviewable services, combine others, and add still other services to the reviewable list.

In many ways, certificate of need review is a vestige of the old fee-for-service, cost reimbursement environment which has been largely replaced by managed care, risk-shifting and selective contracting. The underlying assumption of CON laws was “if you build it, they will come,” particularly if “they”, i.e. patients, had no financial responsibility and were subject to little or no control over health care utilization or provider choice.

Every community hospital wanted the latest state-of-the-art technology to enhance its competitive position, and entrepreneurs promoted the expansion of free-standing imaging, surgical and other services as prospective payment shifted patients to ambulatory settings. Regulators feared that the cost of building and operating such facilities would result in incentives to perform unnecessary procedures. There may have been some validity to that assumption when patients were free to select their own specialists and treatment centers, and physicians were free to refer their own patients to joint-venture facilities. Now, the tightening of self referral laws, coupled with the growth of managed care plans with gatekeeper requirements and selective provider contracting has, at least in theory, established a level of protection of private and governmental payors from such overutilization.

Under the old system, CON applicants were required to establish the financial feasibility of their proposed projects and submit a detailed analysis of the community demographics and impact on quality, availability and patient access for the proposed services. Although these goals were commendable, the CON process frequently degenerated into acrimonious turf battles among competing providers or, since the 1992 amendments, institutional providers versus physician-sponsored outpatient facilities.

In the wake of the expiration of the CON statute, the Pennsylvania Department of Health issued a policy statement on December 14, 1996 addressing its intent to strictly enforce the licensing requirements, which continue in effect under the Health Care Facilities Act. According to this statement, clinically related health services previously subject to CON review will be presumed to be subject to licensure until further action by the Department. Licensing decisions will take into account quality assurance criteria contained in the State Health Services Plan. The reviewable services include:

• Alcohol or drug rehabilitation.

• Ambulatory surgery (single and multiple specialty).

• Cardiac catheterization (diagnostic and therapeutic).

• Inpatient comprehensive medical rehabilitation.

• Emergency department.

• Intermediate care for the mentally retarded (ICF/MR).

• Lithotripsy (biliary and renal).

• MRI, inpatient medical surgical.

• Inpatient neonatal intensive care.

• Open heart surgery.

• Organ transplant (heart/lung, kidney, liver, or other).

• P.E.T. scanning.

• Inpatient psychiatric (adult, child and adolescent).

• Inpatient surgery.

• Certain new high-cost technology.

The Pennsylvania Department of Public Welfare has taken a more aggressive stance in its policy statement, also published on December 14th in the Pennsylvania Bulletin.

The Department of Public Welfare, which oversees the Pennsylvania Medicaid Program, announced that it will only continue to contract with facilities providing skilled nursing, inpatient psychiatric, inpatient rehabilitation, and intermediate care facilities for mental retardation (ICF/MR) if those facilities had obtained a certificate of need prior to December 18. The Department will terminate its contractual relationship with any such facility that expands its existing licensed bed capacity by more than ten beds or ten percent, whichever is less, over a two-year period, without having obtained a CON or a letter of non-reviewability prior to December 18, 1996.

The DPW has announced its intent to develop its own need review program as part of its contracting process with ICF/MR nursing, inpatient psychiatric, and inpatient rehabilitation facilities. It is uncertain whether DPW has sufficient statutory or regulatory authority to impose such need review criteria.

Historically, the Hospital Association of Pennsylvania (HAP) has been one of the most vocal supporters of the CON system. Changes in the market and differing opinions among member hospitals of HAP may lead to a reconsideration of that policy. In a communication dated December 12, 1996 to members, HAP raised what it deemed “more fundamental philosophic questions: Do we need a formal CON program, or should market forces prevail? If we want a structured planning process, what should it look like and how should it perform?” A HAP task force will examine these issues in early 1997.

The demise of the CON system will not result in a free-for-all for expansion of previously regulated health services. Instead, the regulatory focus will shift to the licensing arena, and the quality standards under the health services plan, which address availability, accessability and affordability of clinically related health services in the Commonwealth. As of this writing, the Ridge administration has not yet decided whether to support the introduction of new CON legislation, or to concentrate regulatory efforts on other methods of cost and quality controls. It remains to be seen whether the Departments of Health and Public Welfare will try to fill the regulatory vacuum by further expanding their authority in the licensing and contracting areas, and whether such attempts would withstand legal challenges.

William H. Maruca, Esq., is a director with the Pittsburgh law firm of Kabala & Geeseman whose practice is concentrated in health care.

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