Explainer: Certificate of Need Determines Fate of Healthcare Facilities in NJ

Andrew Kitchenman | December 15, 2015 | Explainer
State has overseen healthcare regulation since 1971, but long process can leave hospital officials, local residents frustrated

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Whenever there’s a proposal to open a new hospital or significantly change services at an existing New Jersey hospital, state officials have the final say on whether it will happen. For more than 40 years, the document that’s determined these changes has been the certificate of need.

The certificate of need, or CN, process can be controversial.

For example, in the case of the proposed sale of St. Michael’s Medical Center in Newark, the state Department of Health asked hospital executives to answer a long series of questions about their application for a CN – and the process took nearly three years.

What it is: A certificate of need is a document issued by the commissioner of the Department of Health approving the opening, closing, or [link: https://www.njspotlight.com/stories/15/12/02/hospital-s-sale-would-complete-state-s-first-ever-switch-back-to-nonprofit-status/|sale of entire hospitals or changes in services offered by hospitals.

The commissioner is required to determine whether adding new hospitals or services would harm existing providers, including urban hospitals, as well as whether ending specific services or the sale of facilities or services would harm the public interest.

Their history: New Jersey followed other states, beginning with New York in 1964, in requiring certificates of need. It did this by enacting the Health Care Facilities Planning Act of 1971. A 1974 federal law followed, requiring every state to have a CN process.

The laws in New Jersey and elsewhere were prompted by a period of rapid hospital building, which was contributing to higher healthcare costs and leaving many hospitals with empty beds. Supporters of the laws believed that the state could make the planning for new hospitals and services more rational and help contain healthcare costs.

In the 1980s, federal funding for doing certificate of need reviews was eliminated, and some states dropped the regulations. However, New Jersey kept its CN process.

Key considerations: In deciding whether to issue a certificate of need, the health commissioner must look at whether a proposed change will protect and promote the health of New Jersey’s residents. The State Health Planning Board, which reviews all CN applications, provides recommendations to the commissioner.

The commissioner’s options could include blocking the expansion of a new service, in order to protect service offices at a nearby hospital. As part of the process, the department considers whether a newly proposed service can be sustained financially and maintained, that the facility will be properly licensed, and whether it will contribute to adequate and effective healthcare.

Powerful tool: Since adding services can be crucial for hospitals trying to create new sources of revenue, the CN is one of the state’s most powerful regulatory tools.

Hospital executives usually want to stay on positive terms with state officials, as least in part so that they are seen as making a good-faith effort to serve the public interest when they [link: https://www.njspotlight.com/stories/15/07/13/union-at-meadowlands-hospital-alleges-lax-enforcement-of-state-regulations/seek changes in their CNs].

Always controversial: Certificates of need have never been universally popular, with critics saying they stifle competition. Opponents have also questioned whether political influence and factors other than the public interest have affected CN decisions.

In 2008, the final report of the New Jersey Commission on Rationalizing Health Care Resources raised concerns that New Jersey had applied the CN process in an uneven manner. In particular, the commission was concerned that ambulatory surgery centers weren’t covered by the full range of CN regulations, putting hospitals at a disadvantage. However, regulation of ASCs has increased since that report was written.

The commission, chaired by Princeton University professor Uwe Reinhardt, noted that the CN process effectively gives monopolies to existing hospitals. However, the state doesn’t regulate prices, leading the report to describe healthcare policy in the state as a “half-hearted” combination of competition and regulation.

Shifting focus: When New Jersey enacted its certificate of need law, much of the focus was on whether recently opened hospitals would benefit the state.

However, during much of the law’s existence, many of the key CN reviews have been of proposed hospital closures, often prompting bitterness at the local level as jobs were eliminated and services were cut back. In the case of closures, state officials generally use the CN process as a way of examining how residents and other facilities will be affected – as a general rule, the state doesn’t require failing hospitals to remain open.

In the past several years, the most prominent CN reviews have been of transfers of hospital ownership.

This has been particularly true of the sale of nonprofit hospital to for-profit operators. Concerns over this trend prompted the Legislature to pass the Community Health Care Assets Protection Act, which adds an additional layer of regulatory scrutiny by giving the attorney general a say in the process, in addition to the health commissioner.

Timeline: The state law says that the State Health Planning Board must make recommendations within 90 days of the certificate of need application being deemed complete. The commissioner then has 120 days to make a decision.

At the point, the applicants have 30 days after the commissioner makes a decision on a certificate to ask for a hearing. The hearing must be held within 60 days, with the commissioner issuing a final decision within 30 days after the hearing.

However, the law doesn’t define a timeline to determine whether an application is complete, which has caused frustration for Saint Michael’s executives. It took nearly three years for the Department of Health to determine that the CN application was complete.