Legislature(2017 - 2018)BELTZ 105 (TSBldg)

04/06/2017 09:00 AM LABOR & COMMERCE

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09:08:54 AM Start
09:09:15 AM SB62
10:27:59 AM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
Heard & Held
-- Testimony <Invitation Only> --
+ Bills Previously Heard/Scheduled TELECONFERENCED
                     ALASKA STATE LEGISLATURE                                                                                 
           SENATE LABOR AND COMMERCE STANDING COMMITTEE                                                                       
                          April 6, 2017                                                                                         
                            9:08 a.m.                                                                                           
MEMBERS PRESENT                                                                                                               
Senator Mia Costello, Chair                                                                                                     
Senator Kevin Meyer                                                                                                             
Senator Gary Stevens                                                                                                            
Senator Berta Gardner                                                                                                           
MEMBERS ABSENT                                                                                                                
Senator Shelley Hughes, Vice Chair                                                                                              
COMMITTEE CALENDAR                                                                                                            
SENATE BILL NO. 62                                                                                                              
"An Act repealing the certificate of need program for health                                                                    
care facilities; making conforming amendments; and providing for                                                                
an effective date."                                                                                                             
     - HEARD & HELD                                                                                                             
PREVIOUS COMMITTEE ACTION                                                                                                     
BILL: SB  62                                                                                                                  
SHORT TITLE: REPEAL CERTIFICATE OF NEED PROGRAM                                                                                 
SPONSOR(s): SENATOR(s) WILSON                                                                                                   
02/17/17       (S)       READ THE FIRST TIME - REFERRALS                                                                        
02/17/17       (S)       L&C, FIN                                                                                               
04/06/17       (S)       L&C AT 9:00 AM BELTZ 105 (TSBldg)                                                                      
WITNESS REGISTER                                                                                                              
SENATOR DAVID WILSON                                                                                                            
Alaska State Legislature                                                                                                        
Juneau, Alaska                                                                                                                  
POSITION STATEMENT:  Sponsor of SB 62.                                                                                        
GARY ZEPP, Staff                                                                                                                
Senator David Wilson                                                                                                            
Alaska State Legislature                                                                                                        
Juneau, Alaska                                                                                                                  
POSITION STATEMENT: Provided supporting information on SB 62.                                                                 
JON SHERWOOD, Deputy Commissioner                                                                                               
Department of Health and Social Services (DHSS)                                                                                 
Juneau, Alaska                                                                                                                  
POSITION STATEMENT:  Provided an overview of  Certificate of Need                                                             
THOMAS STRATMANN, Professor of Economics and Law                                                                                
Senior Research Fellow                                                                                                          
Mercatus Center                                                                                                                 
George Mason University                                                                                                         
Arlington, Virginia                                                                                                             
POSITION STATEMENT: Testified in support of SB 62.                                                                            
ACTION NARRATIVE                                                                                                              
9:08:54 AM                                                                                                                    
CHAIR MIA COSTELLO called the  Senate Labor and Commerce Standing                                                             
Committee meeting  to order at 9:08  a.m. Present at the  call to                                                               
order were Senators Stevens, Meyer, Gardner, and Chair Costello.                                                                
            SB  62-REPEAL CERTIFICATE OF NEED PROGRAM                                                                       
9:09:15 AM                                                                                                                    
CHAIR COSTELLO announced  the consideration of SB  62. She stated                                                               
that  the intention  is  to hear  an  introduction, take  invited                                                               
testimony  and  hold  the bill  for  further  consideration.  She                                                               
explained that  this bill  would repeal  the Certificate  of Need                                                               
9:10:06 AM                                                                                                                    
SENATOR DAVID WILSON, Alaska State  Legislature, sponsor of SB 62                                                               
said he  has an  MBA in  health care  administration and  thus is                                                               
familiar with  this complicated topic.  He reported that  when he                                                               
and his  staff were doing research  on the bill, they  heard from                                                               
many individuals  who are unwilling  to come forward  and discuss                                                               
the  issue  out of  fear  that  they  would lose  their  hospital                                                               
SENATOR WILSON  paraphrased the  following sponsor  statement for                                                               
SB 62:                                                                                                                          
     Senate  Bill 62  repeals Alaska's  certificate of  need                                                                    
     (CON)  program  and  provides  for  a  two-year  window                                                                    
     before the repeal becomes effective.                                                                                       
     The certificate  of need  programs were  first mandated                                                                    
     nationally  by the  federal  government  in 1974,  then                                                                    
     subsequently   repealed   in   1987  by   the   federal                                                                    
     government. Thirteen  states have since  repealed their                                                                    
     certificate  of   need  programs  across   the  nation;                                                                    
     thirty-four have CON  laws, and three don't  have a CON                                                                    
     program,  but require  approval for  certain facilities                                                                    
     and services.                                                                                                              
     Certificate of  need programs were  originally intended                                                                    
     to  reduce healthcare  costs, improve  access to  care,                                                                    
     and regulate and limit the  entry and supply of medical                                                                    
     services and  facilities. CON programs  create internal                                                                    
     subsidies  and  encourage  the   use  of  the  economic                                                                    
     profits to cross-subsidize indigent care.                                                                                  
     However, the healthcare system has  evolved from a fee-                                                                    
     for-service  system, which  lacked incentives  to lower                                                                    
     prices, to a prospective  payment system. CON laws over                                                                    
     the last forty years  have stifled competition, created                                                                    
     a barrier  to new  medical facilities and  services for                                                                    
     healthcare  consumers, and  prevented  the free  market                                                                    
     forces which  improve the quality  and lower  the costs                                                                    
     of healthcare services.                                                                                                    
     Alaska's   certificate   of   need  program   poses   a                                                                    
     substantial  threat   to  the  proper   performance  of                                                                    
     healthcare markets and services.                                                                                           
9:12:47 AM                                                                                                                    
SENATOR WILSON paraphrased the following PowerPoint on the                                                                      
Certificate of Need program:                                                                                                    
              What is a Certificate of Need Program?                                                                          
     Certificate  of  Need   (CON)  programs  originated  to                                                                    
     regulate the  number of beds  in hospitals  and nursing                                                                    
     homes  and to  prevent purchasing  more equipment  than                                                                    
     necessary.  The   intent  was  that  new   or  improved                                                                    
     facilities  or   equipment  would  be   approved  based                                                                    
     primarily  on  a  community's genuine  need.  Statutory                                                                    
     criteria often  were created to help  planning agencies                                                                    
     decide  what was  necessary for  a  given location.  By                                                                    
     reviewing  the activities  and resources  of hospitals,                                                                    
     the  agencies made  judgments about  what needed  to be                                                                    
     improved.  Once  need  was established,  the  applicant                                                                    
     organization   was  granted   permission  to   begin  a                                                                    
     project.  These   approvals  generally  are   known  as                                                                    
     Certificates of Need.                                                                                                      
          Alaska's Certificate of Need Program Overview                                                                       
     ·    Alaska's  Certificate of  Need  (CON) program  was                                                                    
     enacted  in 1976  in response  to  the National  Health                                                                    
     Planning  and  Resources  Development  Act  which  tied                                                                    
     federal  funding to  the enactment  of CON  laws. These                                                                    
     laws  restrict the  addition  of healthcare  facilities                                                                    
     (including expansion) by  requiring that persons obtain                                                                    
     state  approval for  certain projects,  which is  given                                                                    
     based  on  calculated  need.   The  rationale  is  that                                                                    
     controlling  supply  will  help   to  reduce  costs  of                                                                    
     healthcare  services.  Healthcare  services are  not  a                                                                    
     typical   economic   product  because   consumers   are                                                                    
     generally  more restrained  in their  choices. However,                                                                    
     the federal  government repealed  its mandate  in 1987.                                                                    
     14  states have  since  repealed  their Certificate  of                                                                    
     Need laws, despite their controversial nature.                                                                             
     ·    Persons  in  favor  of Certificate  of  Need  laws                                                                    
     argue that they  do limit healthcare costs,  and are in                                                                    
     favor   of   a   transparent   process   allowing   for                                                                    
     stakeholder   input    before   large    projects   are                                                                    
     undertaken. Those  in favor  of amending  or abolishing                                                                    
     Certificate  of  Need laws  argue  that  they have  the                                                                    
     opposite effect on  health care costs-increasing rather                                                                    
     than  decreasing  them  by limiting  competition;  that                                                                    
     they  are  difficult  to   administer  and  not  always                                                                    
     addressed consistently;  and that these laws  give more                                                                    
     control  to  bigger  businesses  and  those  with  more                                                                    
     political clout.                                                                                                           
     ·    Current  Alaska Certificate  of Need  laws require                                                                    
     persons  expending more  than $1,500,000  to construct,                                                                    
     remodel, or  purchase equipment  for a  health facility                                                                    
     to  obtain  a  Certificate   of  Need.  The  office  is                                                                    
     currently staffed by one  (busy) individual. The office                                                                    
     is represented  by the Department  of Law in  two civil                                                                    
     lawsuits    and   two    appeals   (one    before   the                                                                    
     administrative  appeals office;  the  other before  the                                                                    
     superior  court). Staff  recommends  that the  statutes                                                                    
     and  regulations  be  updated to  reflect  the  current                                                                    
     status  of   the  healthcare  industry,   including  an                                                                    
     evaluation of  the monetary  threshold and  the current                                                                    
     methodologies. The  statutes could  also be  amended to                                                                    
     limit the applicability of Certificate  of Need laws to                                                                    
     those  services, such  as  skilled nursing  facilities,                                                                    
     that  are most  likely  to have  a  direct increase  or                                                                    
     burden on the state budget.                                                                                                
            Purpose of Certificate of Need Programs                                                                           
     Certificate   of  Need   laws  are   state-level  regulatory                                                               
     initiatives  that  require  individuals  in  the  healthcare                                                               
     industry to  obtain permission  to make  significant capital                                                               
     expenditures  or  to  construct  or  expand  facilities  and                                                               
     services, based  on the theory  that controlling  the supply                                                               
     of facilities,  equipment, and services  is the  best method                                                               
     to restrain rising healthcare costs.                                                                                       
     The  Certificate of  Need  laws  are state-level  regulatory                                                               
     initiatives  that  require  individuals  in  the  healthcare                                                               
     industry to  obtain permission  to make  significant capital                                                               
     expenditures  or  to  construct  or  expand  facilities  and                                                               
     services, based  on the theory  that controlling  the supply                                                               
     of facilities,  equipment, and services  is the  best method                                                               
     to restrain rising healthcare costs.                                                                                       
     The Certificate of  Need laws were created to  set up health                                                               
     planning  agencies to  control  future healthcare  expansion                                                               
     based on need.                                                                                                             
     Certificate  of  Need  laws are  to  regulate  and  evaluate                                                               
     healthcare   facilities   and   services  to   prevent   the                                                               
     overbuilding of healthcare facilities  and services beyond a                                                               
     community's capacity.                                                                                                      
9:17:05 AM                                                                                                                    
             National History of Certificate of Need                                                                          
     1974:  National Health  Planning Resources  Development                                                                    
     Act  (NHPRDA), required  states to  establish oversight                                                                    
     agencies for the submission of  proposals for any major                                                                    
     capital  spending on  health  care  reprices (e.g.  new                                                                    
     construction,  building  expansions,  new  technology).                                                                    
     This required  all states  seeking federal  funding for                                                                    
     health  programs   implement  a  Certificate   of  Need                                                                    
     1974-1982:   Health  care   costs   continue  to   rise                                                                    
     nationwide despite  100 percent state  participation in                                                                    
     1982: Congress initiates review  of Certificate of Need                                                                    
     programs  and  the  Congressional Budget  Office  study                                                                    
     doesn't  offer   a  recommendation  but   reports  that                                                                    
     problems with NHPRDA has  limited the program's success                                                                    
     in achieving cost savings.                                                                                                 
     1983-1985:  Seven states  abandon  Certificate of  Need                                                                    
     despite NHPRDA is still in effect.                                                                                         
     1987:  Congress repealed  the National  Health Planning                                                                    
     Resources  Development Act,  which  required states  to                                                                    
     implement a Certificate of  Need program. Following the                                                                    
     repeal, 14 states terminated  their Certificate of Need                                                                    
             Alaska's History of Certificate of Need                                                                          
     Alaska's  participation   in  a  certificate   of  need                                                                    
     program   started  in   1976   and   seven  pieces   of                                                                    
     legislation have been enacted since then.                                                                                  
     1976: HB  665 (Ch. 275,  SLA 1976), which  repealed and                                                                    
     replaced all  of AS 18.07 to  establish the certificate                                                                    
     of   need   program   and  regulation   of   healthcare                                                                    
     1982:  HB  591  (Ch.  59,  SLA  1982),  covers  only  a                                                                    
     temporary but not an emergency  certificate of need for                                                                    
     a  health  care  facility  and added  a  definition  of                                                                    
     certificate  of  need  dealing  with  the  issuance  of                                                                    
     1983: HB  85 (Ch. 95,  SLA 1983), added a  $1.0 million                                                                    
     floor for requiring a certificate of need.                                                                                 
     1990: HB 85 (Ch.  85, SLA 1990), provided authorization                                                                    
     to Department  of Health and Social  Services to charge                                                                    
     a fee for the certificate of need.                                                                                         
     1991: SB 86 (Ch. 21,  SLA 1991), placed a moratorium on                                                                    
     nursing  home   beds  and  established   a  legislative                                                                    
     working group on long-term care.                                                                                           
     2004:  HB 511  (Ch. 48,  SLA 04),  included Residential                                                                    
     Psychiatric Treatment Centers.                                                                                             
9:32:38 AM                                                                                                                    
GARY ZEPP, Staff, Senator David Wilson, Alaska State                                                                            
Legislature, continued the PowerPoint:                                                                                          
      U.S. Department of Justice/Antitrust Division and the                                                                   
      Federal Trade Commission's Analysis on Certificate of                                                                   
                          Need Programs                                                                                       
     ·    The U.S. Department  of Justice Antitrust Division                                                                    
     and the  Federal Trade Commission have  jointly studied                                                                    
     the  effects of  Certificate  of Need  laws across  the                                                                    
     country,  hearing  from   250  panelists,  elicited  62                                                                    
     written submissions,  and generated almost  6,000 pages                                                                    
     of transcripts over two years.  The group also included                                                                    
     attorneys  and economists  that  focused on  healthcare                                                                    
     markets.  Antitrust  economists holding  doctorates  on                                                                    
     the  study of  markets  and their  performance, with  a                                                                    
     specialization in healthcare markets.                                                                                      
     ·    This group has studied  markets across the country                                                                    
     involving  hospitals,  physicians,  ambulatory  surgery                                                                    
     centers,   stand-alone   radiology  programs,   medical                                                                    
     equipment,   pharmaceuticals   and   other   healthcare                                                                    
     ·    Through  this  work,  the  group  understands  the                                                                    
     competitive  forces   that  drive  innovation   in  and                                                                    
     contain the cost  of healthcare. The goal  is to ensure                                                                    
     a competitive marketplace in  which consumers will have                                                                    
     the benefit of  high quality, cost-effective healthcare                                                                    
     and  a  wide  range  of  choices.  The  mission  is  to                                                                    
     preserve and promote  competition, rather than preserve                                                                    
     any particular marketplace rival or group of rivals.                                                                       
     ·    The  nine antitrust  principals were  derived from                                                                    
     their  work over  many years  including: Importance  of                                                                    
     Competition and the Harm  Caused by Regulatory Barriers                                                                    
     to Entry.                                                                                                                  
     ·    Healthcare  services  are   different  than  other                                                                    
     sectors of the  economy but the basic  truth should not                                                                    
     be  lost-market forces  improve the  quality and  lower                                                                    
     costs of healthcare services. Increased competition in                                                                     
     healthcare does not require us to choose between the                                                                       
     benefits of competition or the delivery of high-                                                                           
     quality healthcare.                                                                                                        
     ·    Certificate of Need Laws Create Barriers to                                                                           
     Beneficial Competition:                                                                                                    
          ·    Certificate  of  Need   laws  are  a  classic                                                                    
          government-erected   barrier.  When   the  federal                                                                    
          government  enacted  Certificate   of  Need  laws,                                                                    
          private  insurance reimbursed  healthcare expenses                                                                    
          predominantly on a  "cost-plus basis." The desired                                                                    
          effect   of   the   "cost-plus   basis"   was   to                                                                    
          incentivize over  investment. Certificate  of Need                                                                    
          laws  were   adopted  because   excessive  capital                                                                    
          investments,  spurred  by the  then-current  cost-                                                                    
          plus-basis method  of reimbursement,  were driving                                                                    
          up healthcare costs.                                                                                                  
    ·    Protecting Revenues of Incumbents Does Not Justify                                                                     
     Certificate of Need Laws.                                                                                                  
          ·    The rational  for keeping the Certificate  of Need                                                               
          laws is  that incumbent  hospitals should  be protected                                                               
          against competition so that they  can use their profits                                                               
          to  cross-subsidize care  for the  uninsured or  under-                                                               
          insured patients. If new competitors  were to enter the                                                               
          market,  community  hospitals  could  not  continue  to                                                               
          exploit  their existing  market  power over  consumers.                                                               
          There are  other methods to explore  for legislators so                                                               
          they  won't   have  to  choose  between   covering  the                                                               
          healthcare  for  the   indigent  without  impeding  the                                                               
          proper function of the healthcare markets.                                                                            
          ·    MedPAC (a clinical  research organization based in                                                               
          Cincinnati,  Ohio)   found  that   community  hospitals                                                               
          responded    to    the   competition    by    improving                                                               
          efficiencies,  adjusting  their prices,  and  expanding                                                               
          profitable lines of business.                                                                                         
     ·    Certificate of Need laws Impose Other Costs and                                                                       
     May Facilitate Anti-Competitive Behavior:                                                                                  
          ·    Competitors  at times  go  farther and  enter                                                                    
          into  agreements not  required  by Certificate  of                                                                    
          Need laws but nonetheless facilitated by them.                                                                        
          ·    West  Virginia hospital  used the  threat of  objection                                                          
          during  a  Certificate  of Need  process,  and  delayed  and                                                          
          increased costs, to induce a  hospital seeking a Certificate                                                          
          of Need not to apply for  the Certificate of Need that would                                                          
          have   well   served   Charleston   and   provided   greater                                                          
          competition for business.                                                                                             
          ·    Vermont home  health agencies entered  into territorial                                                          
          market allocations,  using the protection of  Certificate of                                                          
          Need laws,  to gain  exclusive geographic markets.  The U.S.                                                          
          Department  of Justice-Antitrust  Division  and the  Federal                                                          
          Trade Commission  found that  Vermont consumers  were paying                                                          
          higher  prices than  consumers  where  home health  agencies                                                          
          competed against each other.                                                                                          
     The  American  free  market  system  is  built  on  the                                                                    
     premise  that  open  competition  and  consumer  choice                                                                    
     maximize consumer welfare -  even when complex products                                                                    
     and  services  such  as healthcare  are  involved.  The                                                                    
     Federal Trade Commission and  the Department of Justice                                                                    
     play an important role  in safeguarding the free-market                                                                    
     system   from  anticompetitive   conduct  by   bringing                                                                    
     enforcement  actions   against  parties   that  violate                                                                    
     antitrust and consumer protection laws.                                                                                    
9:38:28 AM                                                                                                                    
       How is Alaska's Certificate of Need program working                                                                    
     ·    Is  Alaska's Certificate  of Need  program working                                                                    
     effectively  to reduce  healthcare  costs to  consumers                                                                    
     within  the state?  Why are  healthcare costs  still on                                                                    
     the rise?                                                                                                                  
     ·    Alaska's  Certificate   of  Need  laws   have  led                                                                    
     healthcare providers  to sell state of  the art medical                                                                    
     equipment  and   buy  lessor,  lessor   quality  priced                                                                    
     medical equipment  to remain  under the  Certificate of                                                                    
     Need  $1.5 million  threshold.  Wouldn't those  dollars                                                                    
     better  serve   Alaskans  if  they  were   invested  in                                                                    
     healthcare facilities and services?                                                                                        
     ·    Alaska's  Certificate  of   Need  laws  result  in                                                                    
     territorial   disputes   and    legal   costs   between                                                                    
     healthcare  providers because  one healthcare  provider                                                                    
     objects to  another healthcare provider's plans  to add                                                                    
     healthcare  services.  Does  this  improve  or  provide                                                                    
     better quality healthcare to Alaskans?                                                                                     
9:39:18 AM                                                                                                                  
        Pennsylvania Healthcare Entities Support Repealing                                                                    
                  Virginia's Certificate of Need                                                                              
     ·    Pennsylvania  repealed their  Certificate of  Need                                                                  
     laws   and   the  Pennsylvania   Hospital   Association                                                                    
     testified  at  a  Virginia  Legislative  hearing  where                                                                    
     Virginia is trying to repeal  their Certificate of Need                                                                    
     ·    Pennsylvania    Hospital    Association    stated,                                                                    
     "Reinstating an administratively  cumbersome and costly                                                                    
     process   will  result   in  unintended   consequences,                                                                    
     including stifling  innovation in health  care delivery                                                                    
     in  hospital settings  and  potentially preventing  the                                                                    
     appropriate    availability    of    services    within                                                                    
     ·    Also opposed  to Certificate of  Need laws  is the                                                                    
     Pennsylvania Medical Society.  They opposed Certificate                                                                    
     of  Need  laws  because,   "Certificate  of  Need  laws                                                                    
     politicize the healthcare approval  process and are not                                                                    
     effective   at  holding   down  costs.   Pennsylvania's                                                                    
     experience how a  free market has done a  better job of                                                                    
     ensuring  that  citizens  have  access  to  care.  They                                                                    
     repealed their  Certificate of Need program  many years                                                                    
9:40:27 AM                                                                                                                    
SENATOR WILSON displayed the following articles on repealing                                                                    
certificate of need:                                                                                                            
            Articles on Repealing Certificate of Need                                                                         
     Federal  Trade  Commission   (FTC)  and  Department  of                                                                    
     Justice (DOJ) Joint report                                                                                                 
     Consumers  want  high-quality,  affordable,  accessible                                                                    
     health   care,   vigorous  competition   promotes   the                                                                    
     delivery of high-quality, cost-effective health care.                                                                      
     US Department  of Justice, Antitrust Division  (Vol. 30                                                                    
     No.  1 Fall  2015): Original  Certificate of  Need laws                                                                    
     cost-savings rationale  fails to deliver  - Certificate                                                                    
     of Need  laws are  simply output  restrictions mandated                                                                    
     by  government.  Normally, if  you  want  the price  to                                                                    
     decline, creating  an artificial  shortage of  it isn't                                                                    
     the way  to achieve that. Output  restrictions restrain                                                                    
     the social benefits of free market competition.                                                                            
     Certificate   of  Need   laws  inhibit   competition  -                                                                    
     Certificate  of Need  laws help  to insulate  incumbent                                                                    
     providers from  competition. Powerful  economic reasons                                                                    
     drive incumbents to oppose  an applicant from providing                                                                    
     similar healthcare  services. Certificate of  Need laws                                                                    
     insulate  politically powerful  incumbents from  market                                                                    
     forces. Limited  exemption from  competition in  a non-                                                                    
     transparent way  to achieve indigent  care is  not good                                                                    
     public policy, because the cost  of Certificate of Need                                                                    
     laws is never disclosed or even evaluated.                                                                                 
     Certificate  of  Need  laws  and  indigent  care:  Some                                                                    
     providers do  a poor job  of indigent care  and benefit                                                                    
     from  Certificate  of Need  laws,  while  others do  an                                                                    
     excellent job and gain little to nothing.                                                                                  
     National  Conference of  State Legislators:  Unintended                                                                    
     Consequences:  Decrease competition;  reduce access  to                                                                    
     healthcare; barriers  to new competition,  may increase                                                                    
     healthcare costs.                                                                                                          
     Mercatus Center -  George Mason University: Certificate                                                                    
     of Need states have 13  percent fewer beds; decrease of                                                                    
     4.7 hospital  beds per 100,000;  decreases in  CT scan,                                                                    
     MRI  services,  and  optical  and  virtual  colonoscopy                                                                    
     National Institute  for Healthcare Care  Reform (2011):                                                                    
     Certificate  of   Need  applicants   experience  "being                                                                    
     caught in  the competitive crossfire during  review and                                                                    
     process  (appeals,  public  hearings,  court  battles);                                                                    
     existing  competitors   are  more  often   involved  in                                                                    
     contesting   approval   of  competitors'   applications                                                                    
     causing  delays   and  costing  money;   hospitals  use                                                                    
     Certificate of Need process  to protect existing market                                                                    
     share   and   block  competitors;   smaller   community                                                                    
     hospitals tend  to view Certificate of  Need process as                                                                    
     uneven due  to the  lack of  financial resources  to go                                                                    
     through  lengthy court  battles with  larger hospitals;                                                                    
     physicians  support  repeal   due  to  market  barrier;                                                                    
     Certificate  of  Need laws  can  be  a barrier  to  new                                                                    
     technologies and innovation due  to lengthy process and                                                                    
     Despite  hospitals  love-hate  view of  Certificate  of                                                                    
     Need   regulations,   a   consultant   concluded   that                                                                    
     hospitals believe they are  better off with regulations                                                                    
     in  place   than  without  them.  One   state  hospital                                                                    
     association respondent said  member hospitals initially                                                                    
     had mixed  views about the  benefits of  Certificate of                                                                    
     Need but  banded together to support  the process after                                                                    
     realizing  it   was  a  valuable  tool   to  block  new                                                                    
     physician owned facilities.                                                                                                
9:40:35 AM                                                                                                                    
SENATOR WILSON  summarized that relaxing the  Certificate of Need                                                               
regulation  will   increase  provider  competition,   help  force                                                               
downward pressure  on costs,  and, importantly,  increase patient                                                               
choice. He said  that most major medical  insurers have developed                                                               
a travel agency within their  insurance pool because patients are                                                               
opting for healthcare tourism. He  related his preference to keep                                                               
those healthcare dollars in Alaska.                                                                                             
He  said  Certificate of  Need  ultimately  chooses who  gets  to                                                               
compete  in  the  healthcare  sector.  Reforming  the  law  won't                                                               
untangle  the  entire healthcare  issue,  but  lawmakers in  this                                                               
state ought to capitalize on  the opportunity to make this highly                                                               
regulated industry a little more patient friendly, he said.                                                                     
SENATOR WILSON offered to go through a sectional analysis.                                                                      
9:42:36 AM                                                                                                                    
SENATOR MEYER  asked if  healthcare costs have  gone down  in the                                                               
states that have repealed their CON programs.                                                                                   
SENATOR WILSON  said it's mixed.  Some states that  have repealed                                                               
the laws have higher costs and  some have lower costs. He offered                                                               
to follow up with a better analysis.                                                                                            
SENATOR MEYER  asked if  Alaska's CON program  has helped  to get                                                               
more rehab beds in Anchorage and other communities.                                                                             
SENATOR WILSON  replied it depends  on the type of  facility, its                                                               
size,  the  equipment involved  and  whether  it meets  the  $1.5                                                               
million threshold.                                                                                                              
9:43:54 AM                                                                                                                    
SENATOR  GARDNER said  she is  interested in  getting information                                                               
on: 1)  the lawsuits that  have been  filed in Alaska  related to                                                               
the CON program; 2) data on  cost savings or increases in Alaska;                                                               
and  3) impacts  on  access  to new  equipment  and technology  -                                                               
selling high-quality equipment and  buying a less expensive model                                                               
to keep from exceeding the $1.5 million threshold.                                                                              
SENATOR WILSON  said his office  has had difficulty  getting data                                                               
from the Department  of Health and Social  Services and disagrees                                                               
with some of  the information in the fiscal note.  He hopes to be                                                               
able to address some of the  financial costs by the time the bill                                                               
reaches the Finance Committee.                                                                                                  
SENATOR GARDNER said  it's important to have  that information in                                                               
this committee as  well because it's a policy  question that will                                                               
be informed  by the  costs. She  stated that  notwithstanding the                                                               
cover letter  stamped "Confidential,"  the testimony  from Health                                                               
Capital Consultants  is not confidential  once the  committee has                                                               
it and it's distributed to the public.                                                                                          
SENATOR WILSON agreed.                                                                                                          
9:46:29 AM                                                                                                                    
SENATOR STEVENS asked  him to address the  concern that repealing                                                               
CON  would put  hospitals at  a competitive  disadvantage because                                                               
small practices  and clinics can  cherry pick, but  hospitals are                                                               
required to accept  everyone who comes in  for treatment, whether                                                               
they can pay or not.                                                                                                            
SENATOR WILSON said there will always  be folks who will target a                                                               
market because  it is more  profitable. He reported that  in 2008                                                               
Alaska was one of four states  that had higher rates for Medicaid                                                               
than   Medicare.  The   industry  is   booming  because   of  the                                                               
reimbursement system,  he said.  He also  pointed out  that there                                                               
are always people  who have procedures done out  of state because                                                               
of  the cost,  and that  tribal entities  do not  need to  have a                                                               
certificate of need process to open a surgery center.                                                                           
9:49:39 AM                                                                                                                    
At ease                                                                                                                         
9:53:30 AM                                                                                                                    
CHAIR COSTELLO  reconvened the meeting and  welcomed Mr. Sherwood                                                               
to offer testimony.                                                                                                             
9:53:46 AM                                                                                                                    
JON  SHERWOOD,  Deputy  Commissioner, Department  of  Health  and                                                               
Social  Services (DHSS),  explained  that a  Certificate of  Need                                                               
program  is a  state review  process for  health facilities  that                                                               
requires providers to  get the certificate before  they can build                                                               
certain  kinds of  facilities. It  is intended  to help  ensure a                                                               
consistent application of resources  in the development of health                                                               
care. It involves a significant  role for public participation in                                                               
the decisions.                                                                                                                  
A requirement  for a Certificate  of Need is  triggered depending                                                               
on the  type of  health care  facility. These  include hospitals,                                                               
nursing   homes,   ambulatory    surgical   centers,   diagnostic                                                               
facilities,  residential   psychiatric  treatment   centers,  and                                                               
kidney  dialysis   facilities.  The  monetary  trigger   is  that                                                               
projects must be  equal to or above the  $1.5 million Certificate                                                               
of Need  threshold. All nursing  facility conversions  must apply                                                               
regardless of the cost.                                                                                                         
9:55:41 AM                                                                                                                    
MR. SHERWOOD  said that providers  can engage in  the Certificate                                                               
of Need  process by:  submitting a  request for  determination of                                                               
whether  a  CON  is  needed; submitting  an  application  if  the                                                               
provider  knows a  CON is  required;  or submitting  a letter  of                                                               
intent for concurrent review if an  entity wants to compete for a                                                               
CON with  an existing applicant.  For the latter, the  window for                                                               
submitting the application is 30  days after which the concurrent                                                               
process  starts.  Basically, DHSS  looks  at  both (or  multiple)                                                               
applications at  the same time.  He noted that  Providence Alaska                                                               
Medical Center  and Alaska  Regional Hospital  recently submitted                                                               
concurrent applications  for emergency services in  the Anchorage                                                               
The fee for  the Certificate of Need process  for activities that                                                               
are  less  than  $2.5  million  is $2,500.  The  fee  for  larger                                                               
projects is  one-tenth of  one percent of  the estimated  cost of                                                               
the project, up  to a maximum of $75,000. Once  DHSS receives the                                                               
applications,  staff reviews  the answers  to questions  that are                                                               
part of  the application process.  They look at both  the general                                                               
standards  for all  applications and  the specific  standards for                                                               
the type of facility. A determination  of need is made using step                                                               
methodologies and public comments.  Staff then prepares a written                                                               
analysis  for a  recommendation  to the  commissioner. The  three                                                               
choices the  commissioner can make  are: approve  the Certificate                                                               
of  Need; not  approve the  Certificate of  Need; or  approve the                                                               
Certificate of Need with specific conditions.                                                                                   
9:59:10 AM                                                                                                                    
MR.  SHERWOOD  said  the  general  review  standard  of  the  CON                                                               
application includes: documented  need, relationship to community                                                               
and  statewide health  plans, stakeholder  participation, looking                                                               
at different alternatives  for meeting the needs,  impacts to the                                                               
existing  system, and  patient access.  He  highlighted that  the                                                               
hurtle that  must always be  met is the documented  need. Earlier                                                               
comments  about stakeholder  participation  and consideration  of                                                               
alternatives depending  on the  type of facility  may be  more or                                                               
less involved based on the particular situation.                                                                                
10:00:04 AM                                                                                                                   
He  displayed  slide 9  that  lists  the service-specific  review                                                               
standards  for  different  services.  He described  the  list  as                                                               
"comment  sense" with  review of  specific criteria  depending on                                                               
the  type  of  provider.  For   example,  certain  standards  for                                                               
hospital  labs or  emergency departments  would not  be used  for                                                               
long-term nursing care or diagnostic  imaging. He reiterated that                                                               
there  is  public  participation   in  the  Certificate  of  Need                                                               
Once the  application is determined  complete, the public  has 30                                                               
days to  comment and  a meeting  is scheduled  no sooner  than 15                                                               
days and no  later than 30 days after the  notice. He highlighted                                                               
that in some instances, this may  be the only opportunity for the                                                               
public to comment on  a project it will use and  pay for. He said                                                               
the foregoing is  to align the decision-making  process to ensure                                                               
that relevant  applications are  considered at  the same  time on                                                               
the same  schedule. This  provides a certain  level of  equity to                                                               
10:01:59 AM                                                                                                                   
MR. SHERWOOD  displayed slide 11  and opined that  Senator Wilson                                                               
did  a fine  job  when he  gave  an overview  of  the history  of                                                               
Certificate of Need. He noted  that states without Certificate of                                                               
Need laws  typically use other  mechanisms such as  moratoria and                                                               
strict   licensing  standards   to  regulate   costs  and   avoid                                                               
duplication of services.                                                                                                        
10:02:47 AM                                                                                                                   
He stated that  the last major change to  Alaska's Certificate of                                                               
Need standards was  in 2005. The public  notice requirements were                                                               
expanded;  methods and  standards were  revised; the  application                                                               
fee  was implemented;  there  was  clarification that  ambulatory                                                               
surgical centers did not require  a Certificate of Need to change                                                               
locations within  a service area  if services were  not expanded;                                                               
and  residential  psychiatric   treatment  centers  (largely  for                                                               
children) were added.                                                                                                           
10:03:38 AM                                                                                                                   
He  said  that slide  13  shows  that  most Certificate  of  Need                                                               
activity in the last three  years relates to the determination of                                                               
whether a  Certificate of  Need is needed.  He reported  that the                                                               
number  of   Certificate  of  Need  applications   each  year  is                                                               
relatively small.  There were two  applications in each  2014 and                                                               
2016 and one in 2015. There was an appeal each of those years.                                                                  
10:04:22 AM                                                                                                                   
MR.  SHERWOOD reported  that Alaska  Medicaid accounts  for about                                                               
one-quarter of hospital  use and over 80 percent  of nursing home                                                               
use. Recent  statistics indicate  that Medicaid  is used  in half                                                               
the nursing  homes in the state  at a 90 percent  or higher rate.                                                               
He explained  that the Medicaid  program is  statutorily required                                                               
to reimburse  hospitals and  nursing homes  on a  reasonable cost                                                               
basis. Because  newer facilities cost  more and thus  charge more                                                               
for  services, DHSS  looks  at  that aspect  when  it reviews  an                                                               
10:05:43 AM                                                                                                                   
He directed  attention to slide  15 that shows the  fiscal impact                                                               
of some denied  or partially denied applications in  the last few                                                               
years. He noted that the  Alaska Regional free-standing emergency                                                               
room was denied, and applications  were recently partially denied                                                               
for two  proposed nursing facilities  in the MatSu area.  He said                                                               
it's difficult  to say what  DHSS would  spend if there  wasn't a                                                               
Certificate of Need program. We  don't know how many applications                                                               
would still  get proposed in  that environment and we  don't know                                                               
the  kind  of  applications  that   aren't  submitted  because  a                                                               
prospective  applicant may  think  the need  is  already met,  he                                                               
10:07:23 AM                                                                                                                   
MR. SHERWOOD  said that  some of  the general  considerations for                                                               
policymakers  include: whether  the Certificate  of Need  program                                                               
reflects current  healthcare science and technology;  whether the                                                               
program looks at the right  things; whether the dollar thresholds                                                               
are  still  working;  and  whether  the  health  care  facilities                                                               
subject to Certificate of Need are  the most likely to impact the                                                               
state budget.                                                                                                                   
He displayed slide  17 that lists Certificate  of Need resources;                                                               
statutory and regulatory citations;  the DHSS Certificate of Need                                                               
website;  and  the  National  Conference  of  State  Legislatures                                                               
website that has information about Certificate of Need laws.                                                                    
10:09:03 AM                                                                                                                   
SENATOR STEVENS directed attention to  slide 3 and asked why DHSS                                                               
isn't  policing potential  scams  that  keep the  cost  of a  new                                                               
healthcare center  under the $1.5  million threshold so  it's not                                                               
necessary to apply for a Certificate of Need.                                                                                   
MR. SHERWOOD  said it's challenging  but the department  tries to                                                               
police  that  by  staying  abreast  of  fair  market  prices  for                                                               
equipment  that an  entity might  list. Other  safeguards include                                                               
policing by  industry competitors  and the  fact that  Alaska has                                                               
relatively  few  applications.  He  cited an  example  where  the                                                               
department  disallowed the  cost of  a transaction  that was  not                                                               
arm's   length,  which   resulted  in   the  entity   losing  its                                                               
Certificate of Need.                                                                                                            
SENATOR  STEVENS  observed  that   there  is  no  punishment  for                                                               
something that he views as illegal.                                                                                             
MR. SHERWOOD  advised that when  the department becomes  aware of                                                               
false   information  the   punishment  is   the  denial   of  the                                                               
Certificate of Need.                                                                                                            
10:13:42 AM                                                                                                                   
THOMAS  STRATMANN, Professor  of  Economics and  Law, and  Senior                                                               
Research  Fellow,  Mercatus   Center,  George  Mason  University,                                                               
Arlington, Virginia,  stated that in four  data-driven studies he                                                               
and his co-authors  used economic and health  measures to examine                                                               
the  impact of  Certificate  of Need  laws.  These measures  were                                                               
compared  between the  35 states  that have  Certificate of  Need                                                               
laws and those states that do  not have these laws. He noted that                                                               
he  included these  four peer-reviewed  studies with  his written                                                               
testimony.  He   said  the  findings  are   consistent,  although                                                               
unfortunate. "Across the board, CON laws have failed."                                                                          
The first finding is that  Certificate of Need laws harm patients                                                               
by reducing the  quality of health care. Finding two  is that CON                                                               
laws harm  patients by  reducing access  to health  care. Finding                                                               
three  is  that  CON  laws  harm  patients  by  reducing  medical                                                               
equipment that helps to diagnose  illnesses and prevent premature                                                               
deaths.  He said  that  these findings  are  consistent with  the                                                               
Federal Trade Commission and the  Department of Justice positions                                                               
that  CON laws  fail  to meet  stated goals  and  are harmful  to                                                               
patients because  they: reduce the availability  of medical care,                                                               
make it  difficult for  providers to offer  services, and  do not                                                               
save costs. He said these  harmful effects are enhanced in Alaska                                                               
that is geographically distant from  the Lower 48. He opined that                                                               
it is cost-prohibitive for most  residents to travel to the Lower                                                               
48 to access medical services not provided in the state.                                                                        
10:17:35 AM                                                                                                                   
MR. STRATMANN stated that Certificate  of Need laws require state                                                               
agency  approval  before  a licensed  health  care  provider  can                                                               
either expand or  establish a new health care  facility. CON laws                                                               
require  permission from  a state  regulator  to provide  medical                                                               
services or  to produce  medical equipment.  New York  became the                                                               
fourth  state to  pass  CON  laws in  1964  and  25 other  states                                                               
followed  over the  next 10  years. In  1974 Congress  passed the                                                               
National  Health  Planning  and Resources  Development  Act  that                                                               
required states to implement CON  requirements to receive funding                                                               
for certain  federal programs. Congress repealed  the CON mandate                                                               
in 1986 and many states began to retire the program.                                                                            
He   emphasized  that   CON  laws   are   designed  to   restrict                                                               
competition.  He said  he's aware  of no  other industry  where a                                                               
competitor can  oppose the application  of another  entity simply                                                               
by claiming  that there is  no need for that  additional service.                                                               
"In  my  view  this  is  akin  to  a  McDonald's  having  to  get                                                               
permission  from Burger  King to  open a  restaurant in  Alaska."                                                               
Medical  providers  in  Alaska are  required  to  get  government                                                               
permission to  compete for  20 medical services.  There is  a CON                                                               
for adding hospital beds, to open  a new hospital, to purchase an                                                               
MRI machine or a CT scanner  or a PET scanner. Permission is even                                                               
required to open a neo-natal care unit in Alaska.                                                                               
MR. STRATMANN  stated that  the primary  goals of  Certificate of                                                               
Need  laws are  to:  ensure  an adequate  supply  of health  care                                                               
resources, protect  access to rural and  underserved communities,                                                               
promote higher  quality care, support  charity care,  and control                                                               
costs.  He said  that while  the laws  were introduced  with good                                                               
intentions, their  effectiveness is  measured by  their outcomes.                                                               
His research looking at whether  the express goals of Certificate                                                               
of  Need are  being  achieved  used measures  such  as number  of                                                               
hospitals,  number of  hospital  beds, and  number of  ambulatory                                                               
surgery centers. The data unambiguously  show that states without                                                               
CON laws  have more  than 30 percent  more hospitals  than states                                                               
with CON laws.  Alaska had about 25 hospitals in  2011, whereas a                                                               
comparable  state  without  CON   laws  had  35  hospitals.  This                                                               
suggests that  CON reduces access  to medical  care, particularly                                                               
in rural areas.  Another finding is that states  without CON have                                                               
more  beds per  capita. This  is important  because patients  are                                                               
less likely to  be turned away from a hospital  and hospitals are                                                               
closer to  patients' residences. Another finding  is that without                                                               
CON Alaska would  have had 25 ambulatory  surgery centers instead                                                               
of the 17 it currently has.                                                                                                     
He said  the negative effects of  CON on medical supplies  is not                                                               
just  restricted to  facilities. Medical  input is  also affected                                                               
because  Alaska  has CONs  that  require  permission to  purchase                                                               
imaging equipment.  The data shows that  Alaska residents receive                                                               
about  6,000  MRI  scans,  but he  estimates  that  residents  in                                                               
statistically similar states but  without CON receive about 8,000                                                               
scans or 30 percent more.  Similarly, residents in states without                                                               
CON have 30 percent more CT scans than Alaska residents.                                                                        
In  states  without CON  laws,  hospitals  have an  incentive  to                                                               
compete to  attract patients.  However, hospitals  cannot compete                                                               
that well on prices as most  competitors do because many of their                                                               
patients are Medicare  and Medicaid and the  prices hospitals can                                                               
charge  for  these patients  are  pretty  much fixed.  Therefore,                                                               
hospitals will compete on different  margins so there is a strong                                                               
incentive  in  states without  CON  to  compete for  patients  by                                                               
providing   better  quality   medical  services.   However,  this                                                               
incentive does not  exist to the same extent in  states that have                                                               
a CON law  because in these states hospitals are  shielded by law                                                               
from competition.                                                                                                               
MR. STRATMANN  said that in  contrast to this line  of reasoning,                                                               
some  proponents of  CON  claim that  it is  good  to have  fewer                                                               
hospital  providers. The  argument is  that physicians  have more                                                               
experience  in  performing  operations  because  they  have  more                                                               
volume which translates to more  experience in operating and thus                                                               
higher quality of medical services.                                                                                             
To analyze  which of  these competing views  is correct,  he used                                                               
data from the  Centers for Medicare and Medicaid  Services on the                                                               
quality of medical services delivered  by hospitals. He found CON                                                               
does not  improve the  quality of medical  care. In  fact, states                                                               
without a CON  law have lower quality of services  as measured by                                                               
the  hospital mortality  rates and  readmission rates.  There are                                                               
also  higher mortality  rates for  surgery patients  with serious                                                               
complications in states  with CON laws. This  includes Alaska, he                                                               
10:26:14 AM                                                                                                                   
MR. STRATMANN  said that one of  the claims of CON  proponents is                                                               
that CON  increases charity care,  but the  data do not  show any                                                               
additional services for  the poor. The takeaway is  that CON laws                                                               
are  bad for  Alaska residents,  he said.  They reduce  access to                                                               
facilities, particularly  in rural  areas. They reduce  access to                                                               
equipment  and  services  like  MRIs  and  most  importantly  CON                                                               
decreases quality  of services and  increases mortality  rates of                                                               
residents. Alaska would be better  off joining the 15 states that                                                               
do not have CON laws, he concluded.                                                                                             
CHAIR COSTELLO  advised members get  questions to her  office and                                                               
they would be distributed to today's presenters.                                                                                
[CHAIR COSTELLO held SB 62 in committee.]                                                                                       
10:27:59 AM                                                                                                                   
There being no further business to come before the committee,                                                                   
Chair Costello adjourned the Senate Labor and Commerce Standing                                                                 
Committee meeting at 10:27 a.m.                                                                                                 

Document Name Date/Time Subjects
ASHNA Presentation - SB 62 CON.pdf SL&C 4/6/2017 9:00:00 AM
SB 62
SB 62 - Background Document - Federal Trade Commission - January 2016 South Carolina.pdf SL&C 4/6/2017 9:00:00 AM
SB 62
SB 62 - Background Document - John Locke Foundation - Case Against CON.pdf SL&C 4/6/2017 9:00:00 AM
SB 62
SB 62 - Background Document - The James Baker III Institute for Public Policy Rice University.pdf SL&C 4/6/2017 9:00:00 AM
SB 62
SB 62 - Background Document - U.S. Department of Justice-Antitrust Division-February 2007.pdf SL&C 4/6/2017 9:00:00 AM
SB 62
SB 62 - Background Document - US Dept of Justice - July 2004 executive summary.pdf SL&C 4/6/2017 9:00:00 AM
SB 62
SB 62 - Background Document - US Dept of Justice Antitrust Division Rpt.pdf SL&C 4/6/2017 9:00:00 AM
SB 62
SB 62 - Background Document - Washington U - Joint Audit & Review Committee - January 1999.pdf SL&C 4/6/2017 9:00:00 AM
SB 62
SB 62 - Background Document - Watchdog Organiztion - April 2015.pdf SL&C 4/6/2017 9:00:00 AM
SB 62
SB 62 - Background Document -Federal Trade Commission - January 2016.pdf SL&C 4/6/2017 9:00:00 AM
SB 62
SB 62 - Background Document -Federal Trade Commission - July 2015.pdf SL&C 4/6/2017 9:00:00 AM
SB 62
SB 62 - Background Document -Federal Trade Commission-Alaska House of Representatives-2008.pdf SL&C 4/6/2017 9:00:00 AM
SB 62
SB 62 - Background Document -John Locke Foundation - June 2015.pdf SL&C 4/6/2017 9:00:00 AM
SB 62
SB 62 - Background Document -Maureen Ohlhausen - Fall 2015.pdf SL&C 4/6/2017 9:00:00 AM
SB 62
SB 62 - Background Document -Mecatus Center-George Mason University - July 2014.pdf SL&C 4/6/2017 9:00:00 AM
SB 62
SB 62 - Background Document -Mercatus Center-George Mason University - September 2016.pdf SL&C 4/6/2017 9:00:00 AM
SB 62
SB 62 - Background Document -National Institute for Health Care Reform - May 2011.pdf SL&C 4/6/2017 9:00:00 AM
SB 62
SB 62 - Fiscal Note - DHSS 2.pdf SL&C 4/6/2017 9:00:00 AM
SB 62
SB 62 - Fiscal Note - DHSS 3.pdf SL&C 4/6/2017 9:00:00 AM
SB 62
SB 62 - Fiscal Note - DHSS.pdf SL&C 4/6/2017 9:00:00 AM
SB 62
SB 62 - Opposition Letter - Fairbanks Hospital.PDF SL&C 4/6/2017 9:00:00 AM
SB 62
SB 62 - Opposition Letter - Fresenius.PDF SL&C 4/6/2017 9:00:00 AM
SB 62
SB 62 - Sectional Analysis.pdf SL&C 4/6/2017 9:00:00 AM
SB 62
SB 62 - Sponsor Presentation.pdf SL&C 4/6/2017 9:00:00 AM
SB 62
SB 62 - Sponsor Statement.pdf SL&C 4/6/2017 9:00:00 AM
SB 62
SB 62.pdf SL&C 4/6/2017 9:00:00 AM
SB 62