States use CON against outpatient costs

September 16, 1993

Long thought to be dead and buried, the certificate of need (CON)process has experienced newfound popularity as state regulatorsgo back to the future to find ways to rein in health-care costs.The new generation of CON laws is more comprehensive and

Long thought to be dead and buried, the certificate of need (CON)process has experienced newfound popularity as state regulatorsgo back to the future to find ways to rein in health-care costs.The new generation of CON laws is more comprehensive and intrusivethan its antecedent, however. In some cases resurrected CON programshave led to temporary bans on purchases of high-technology devicessuch as MRI scanners.

Older CON laws usually applied only to hospitals. That loopholewas instrumental in sparking the growth of the freestanding imagingservices industry (SCAN 5/22/91).

The success of outpatient facilities in skirting state oversighthas proved to be their undoing, however. State regulators identifyoutpatient health services as major sources of rising health-carecosts, and many states have responded with regulations to stanchthe flow of health-care dollars.

"The concern in New Jersey was that the number of freestandingprivate-practice MRIs proliferated to an extent that we had more(scanners) than the country of Germany," said Robert Fogg,director of licensing and standards for the New Jersey departmentof health. "The principal need that drove (new CON regulations)was to control the number of MRIs in the state."

New Jersey's new regulations require anyone planning to acquirean MRI scanner or begin MRI service to receive approval from thestate before doing so. The provisions do not apply to CT scannersor general radiology services acquired by providers other thanhospitals, according to Fogg.

The regulations also include provisions requiring outpatientfacilities--including MRI centers--to be licensed before theycan begin operation. Imaging centers must meet state criteriagoverning staffing levels and physical layout before they canbe licensed. The regulations are roughly similar to legislationpassed in California this month (see story, this page).

"Part of the (licensing) process would be an initial inspection,a review of the physical plant in which the MRI is being operated,and then potentially an annual inspection thereafter," Foggsaid.

New Jersey's CON program has resulted in a de facto moratoriumon MRI scanner purchases in the state for the past year. Thisis a consequence of a provision in the law stating that proposalsfor MRI purchases will not be considered until the commissionerof health decrees that the state is accepting applications. Todate, the commissioner has not given the go-ahead, and no newscanners have been purchased since September 1992, Fogg said.

The state of Wisconsin also instituted a moratorium on MRIpurchases as part of its CON plan, with ironic results. Health-careproviders in the backyard of the largest medical imaging vendorin the world--Milwaukee-based GE Medical Systems--are barred frompurchasing the company's MRI scanners until the state gets itsCON act together.

THE WISCONSIN LEGISLATURE PASSED that state's CON law in April1992 after the previous CON program expired in 1987. The legislationphases in CON requirements; health providers could make acquisitionsbetween October 1992 and July 1993 without state oversight, butwere required to report expenditures to the state. Effective July1, providers must receive state approval to purchase equipmentif the device is one of those designated by the state as requiringCON review.

The legislation prompted a period of frenzied equipment acquisitionas health-care providers struggled to get their orders in beforethe CON guillotine fell. According to data compiled through themandatory reporting requirements, Wisconsin health-care providersordered 126 capital acquisition projects totaling $630 millionin the nine months before CON took effect.

"Normally, not that many projects would have been puton the books in that period of time," said Michael Corry,chairman of the Wisconsin Cost Containment Commission. "(Providers)advanced projects that they were thinking about farther down theline to get them in before they required review."

Many of those projects were MRI scanners, with a total of 21magnets purchased in nine months. This led the state to imposea temporary moratorium on MRI purchases until final rules governinghigh-tech equipment acquisition are published. Those regulations,which will apply to freestanding centers as well as hospitals,should be completed later this year, Corry said.

In Pennsylvania, the state Legislature in December 1992 extendedthe state's authority to review high-tech equipment purchasingto freestanding centers. MRI has been designated as a servicethat must receive state approval regardless of the price of thescanner being bought, according to Jack Means, director of thedivision of need review of the Pennsylvania department of health.

"One problem we've had for the past 10 or 12 years (isthat) we had no control over the non-reviewable, outpatient, freestandingMRIs that were being established," Means said. "We onlylooked at the ones that were providing services to a percentageof inpatients. Now we're going to be reviewing them regardlessof setting."

The state will look kindly on an application to purchase anMRI scanner if the potential buyer can show that it will be effectivelyutilized; i.e., if enough scans can be performed on the deviceto demonstrate that it is needed in the community. The state considers2000 scans a year a benchmark for effective utilization, Meanssaid.

Much of the new CON legislation represents one fork of a two-prongedeffort by states to regulate costs. Managed care is the otherfork, but the concept remains untested. If it proves effective,managed care could render CON unnecessary, according to Corry.

"What happens in managed care is that with the systembeing managed from the demand side, the people who overextendthemselves on capital equipment and get their fixed costs veryhigh tend to be the ones who lose whenever demand-side regulationcome in," Corry said. "High-cost producers in thosecircumstances are the ones who get into trouble first."