In the present political climate, reform or elimination
of the certificate of need program is a distinct possibility.
At the national level, the deregulatory movement has led
to attacks on the program by officials in the Reagan administration,
who claim it is ineffective in containing capital
spending and impedes competition in the industry.
In the 1980-81 session of the Illinois General Assembly,
legislation was introduced that would have abolished the
program. Although unsuccessful, the proposed bill reflects
the controversy surrounding the program within
the state. As the debate continues, at both the national
and state level, it is a good time to examine the experience
of the Illinois program. This article does that by
analyzing the decisions made by the certificate of need
program on hospital proposals from 1975 through 1979
and by examining some evidence of the program's impact.
In the first section, we present an overall summary
of the program's approval rate in terms of the number and
percent of projects approved, withdrawn, denied, and
modified; in the next section, we describe the types of
projects which the program favors; and in the final section,
we discuss some evidence of the program's impact
on hospital bed supplies. The complex process by which
CON decisions are reached in the state is not addressed
in this paper so that we may focus on the results of the
process and its possible impacts.published or submitted for publicatio

Begley, Charles E.

English

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/? 3 XHXFWGPA ILLINOIS GOVERNMENT RESEARCHUNIVERSITY OF ILLINOISINSTITUTE OF GOVERNMENT AND PUBLIC AFFAIRSlKSITY O ILLIINUlbA1 UP- it ru "PAIGN JANUARY 1982 55REGULATING HOSPITAL FACILITIES CONSTRUCTION: THE ILLINOIS EXPERIENCE, 1975-79Charles E. Begley and David C. ColbyIn 1974 Illinois became the twenty-fourth state to enactlegislation requiring hospitals and other health facilitiesto acquire certificates of need (CON) before proceedingwith large capital projects or significantly changing ser-vices. This act created the Illinois Health Facilities Plan-ning Board (IHFPB) whose thirteen citizen members areappointed by the governor. The board has the authorityto review and approve all construction and modificationprojects costing in excess of $100,000, all substantialchanges in scope of services or number of beds, and alldiscontinuations of facilities or services. According tothe Illinois Revised Statutes, Illinois lawmakers hopedthat the CON program would "reverse the trends of in-creasing costs of health care resulting from unnecessaryconstruction," while at the same time "guarantee(ing) theavailability of quality health care to the general public."The rationale for government regulation of capital inthe health care industry is based on the judgment thatexisting incentives for capital spending have generatedexcessive investments in capacity. This market responseis due, in part, to the unique cost-reimbursement methodof payment for hospital and nursing home services whichguarantees that most costs accrued in the provision ofservices, including capital costs, will be recovered. Thepayment problem is compounded by pressure from physi-cians and the general public to raise the "quality" ofmedical services by the acquisition of the most advancedmedical equipment or the construction of the most mod-ern medical facilities. Patient demand for the "best careavailable" is encouraged by increasingly broad insur-ance coverage which insulates patients from the truecost of that care. The most recent coverage figures indi-cate that in 1979, 187 million people, or 85 percent ofthe civilian population, had insurance protection for hos-pital expenses. This figure had grown from 159 millionin 1970 The combination of such demand and supply-side factors had created a perverse market for medicalcare in which the availability of medical equipment andfacilities largely guarantees their utilization (a phenome-non called Roemer's Law). This situation was the mostCharles E Begley is an assistant professor in the Economics Program atSangamon State University David C Colby is an assistant professor inthe Department of Political Science at Williams College, Williamstown,Mass, during the 1980-81 academic year he was on leave at the InstituteThe authors wish to thank the Southern Illinois University School of Medi-cine and the Institute of Government and Public Affairs, University of Illi-nois, for their various forms of supportimportant reason for the development of a certificate ofneed program in Illinois and is one of the main justifica-tions given for its continuation.In the present political climate, reform or eliminationof the certificate of need program is a distinct possibility.At the national level, the deregulatory movement has ledto attacks on the program by officials in the Reagan ad-ministration, who claim it is ineffective in containing capi-tal spending and impedes competition in the industry.In the 1980-81 session of the Illinois General Assembly,legislation was introduced that would have abolished theprogram. Although unsuccessful, the proposed bill re-flects the controversy surrounding the program withinthe state. As the debate continues, at both the nationaland state level, it is a good time to examine the experi-ence of the Illinois program. This article does that byanalyzing the decisions made by the certificate of needprogram on hospital proposals from 1975 through 1979and by examining some evidence of the program's im-pact. In the first section, we present an overall summaryof the program's approval rate in terms of the number andpercent of projects approved, withdrawn, denied, andmodified; in the next section, we describe the types ofprojects which the program favors; and in the final sec-tion, we discuss some evidence of the program's impacton hospital bed supplies. The complex process by whichCON decisions are reached in the state is not addressedin this paper so that we may focus on the results of theprocess and its possible impacts.THE RATE OF PROJECT APPROVALSTable 1 presents the disposition of hospital certificate ofneed applications by year for the study period 1975-79.For the entire period, the board received 1,059 applica-tions totalling nearly $2.7 billion. This figure representsproposed capital spending on all hospital projects thatexceeded the threshold for project review ($100,000 from1975 to July 1979 or $150,000 after July 1979). The num-ber of proposed projects and their costs varied from yearto year. There is no discernible pattern in the annual fluc-tuations, but the disproportionately large amount of moneyand number of projects that appeared in the first year ofthe program probably reflects hospitals' anticipation ofmore stringent controls in future years. This anticipatoryeffect has been noted in many states as an implementa-tion problem of CON. It suggests that the program's effec-tiveness in containing capital spending will be dimin-Table 1SUMMARY OF CON DECISIONS: PROJECTS SUBMITTED 1975-79*TotalApplications Approved Withdrawn Denied Under ReviewTable 3AVERAGE CHANGE IN NUMBER OF BEDSPRE- AND POST-CONAverage Change in the Number of Beds(All Counties)TotalAverageStandard errorhospital investment plans and its negotiations with ap-plicants during the pre-review stage and the review pro-cess. Although there are no good measures of theseeffects, an examination of the types of projects approvedby the program provides some insight into its cost con-tainment potential.THE TYPES OF PROJECTS APPROVEDEvidence from previous studies suggests that decisionmaking on CON proposals has been uneven, creating aselective reward structure. For example, these studiesindicate that certificates of need are less easily obtainedfor new facilities and for bed additions to existing facili-ties than they are for equipment purchases and modern-ization. An explanation for this selectivity is that bed needstandards are more quickly developed and easily appliedto project reviews than are need standards for new equip-ment, new services, or modernization of existing services.Information about the latter— such as their optimal use,cost, and existing supply — is much more difficult to ob-tain and apply to individual proposals than is informationabout bed needs. Unfortunately, this selectivity causeshospitals to redirect investment away from capacity ex-pansion projects towards equipment and modernizationprojects which increase the capital intensity of services.Since hospitals are reimbursed on the basis of costs,this selectivity may have the perverse effect of furtherescalating the costs of health care to the consumer andthe government.Table 2 presents information on the Illinois programwhich addresses the selectivity hypothesis. The final rowfor each year shows approval rates for eight differentcategories of projects during the study period. The rela-tive rank orderings of approval rates for the various cate-gories over the years are similar with the exception ofthose for modernization which vary greatly in no patternand those for outpatient clinics which vary with changesin the law.Projects involving new beds construction (see column3, Modernization/Expansion) did receive a lower approvalrate (88.1 percent of the proposed costs and 86.9 per-cent of proposed projects) than modernization projectsand equipment projects (93.2 percent of proposed costsand 90 percent of proposed projects; and 93.6 percentof proposed costs and 92.4 percent of proposed projects,respectively), but the difference between them was notsignificant. New facilities, however, were clearly discrimi-nated against, having an approval rate (50.3 percent ofcosts) far below that of other types of projects. Hence,although the reward structure in Illinois rejects new bedproposals in new facilities it tends to approve them inexisting facilities. One possible explanation for this re-sult, given the general surplus of beds in the state, isthat the board is unwilling to halt expansion entirely butconsiders the additional beds in existing institutions tobe less excessive than their addition along with the con-struction of a new facility. Although both add beds andincrease the costs of health care, the lower relative costincrease may be the key to approval. Another possibleand less complimentary explanation is that the board'sdecisions are heavily influenced by the existing provid-ers who desire protection from new competition. Bothexplanations are consistent with the data, and there ap-pears to be no available method to objectively establishthe "true" one. Further discussion of the effects of thisapproval pattern on bed supplies in the state is providedin the next section.Among all categories of project proposals, parking fa-cilities and physicians' office buildings have the highestrate of approval. Prior to July 1979, the approval rate forthese projects was consistently higher than for otherproject categories because they were not consideredreviewable by the board and were, therefore, automati-cally approved. In July 1979, the board began reviewingsuch projects; but most hospitals managed to submittheir applications prior to July in order to avoid the reviewprocess. These two types of projects together with out-patient clinics, which also came under review in July,constituted 43 percent of all proposed expenditures in1979. Additionally, in 1979, almost 98 percent of the costsof outpatient clinics, 100 percent of the parking lots, andover 95 percent of physicians' offices were submitted priorto the July change in the regulations. Many of these projectscan be attributed to anticipatory behavior that stimulated orredirected capital spending. If capital expenditure is stimu-lated, this works against the cost containment objective. Ifcapital expenditure is redirected, then the effect on costcontainment depends upon the ratio of the capital intensityof the potential investment to that of the actual investment.We have not attempted to estimate either the proportion ofinvestments which were anticipatory or the costs of thepotential, alternative investments. However, the magnitudeof investments proposed in these areas raises the possibil-ity that the CON program has stimulated investment incertain areas while deterring investments in other areas.IMPACT ON BED SUPPLIESIn this section, we examine evidence regarding the impactof certificate of need on the growth and distribution ofhospital beds in the state. A pre-post design is adoptedto compare changes in the number of hospital beds andtheir distribution during the four years before implemen-tation of certificate of need (1971-75) to the four yearsimmediately following (1975-79). Similar methodology hasbeen used to evaluate programs in other states; (especiallyuseful is a study on New York by E. Rothenberg). It should benoted that this approach is only one way to evaluate theimpact of the program and, further, focuses on only oneaspect of the program's activities.Table 3 indicates that the overall increase in the num-ber of nonfederal, short-term general hospital beds in thestate was smaller in the four-year period after than be-fore introduction of the program. This finding confirmsthe assertion that the program has been successful inslowing the rate of expansion of bed capacity. It shouldbe noted, however, that statistically insignificant differ-ences are observed when average changes in the num-ber of beds for each county are compared between thetwo periods. This can be attributed to the large inter-county variation in the bed change figures. To eliminatesome of the variability, the counties are grouped by pop-ulation; the results are similar. The difference betweenthe average change in the number of short-term beds foreach county except Cook, DuPage, and Lake (the threemost populous counties) was smaller in the post- thanin the pre-certificate of need period, but again the dif-ference is not statistically significant. The same resultis observed when the data are applied to the three largestthe number of areas with surpluses. Meanwhile, bedshortages and bed shortage areas increased.It may be concluded from these findings that the cer-tificate of need process needs some improvements. Thestate must begin to develop positive incentives, possiblyfinancial, in order to stimulate construction in countieshaving a deficiency of beds. Furthermore, where a sur-plus exists, the program must be tougher on the expan-sion plans of existing facilities.From the beginning, the program has been plaguedwith implementation problems, such as the anticipatoryeffects that occurred in the first year of the program andagain in 1979. These problems kept the program fromreaching its full potential, but with their elimination andwith further strengthening of the program, the future im-pact should be greater.(INSTITUTE OF GOVERNMENTAND PUBLIC AFFAIRSUNIVERSITY OF ILLINOIS1201 WEST NEVADA STREET URBANA, ILLINOIS 61801k

Illinois Government Research no. 55 1982: Regulating Hospital Facilities Construction: The Illinois Experience 1975-1979

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