Frank Cotter, a Roanoke opthamologist, was convinced he could provide better health care by building his own outpatient center. After failing to negotiate a partnership with Carilion Health System, he applied for a COPN. The local health planning board voted for his plan 22 to one. But the state health commissioner reversed the approval.

Rather than sue, Cotter took his case to the General Assembly to get an exemption to the COPN law. After mobilizing 150 patients who armed themselves with bills comparing inpatient and outpatient cataract surgery — Carilion charged $120 for eye drops costing a dime, they contended — he won his exemption. "An archaic Certificate of Need law has bred the present noncompetitive environment of high bills and poor convenience," says Cotter. "Virginia hospitals use the law to create and protect monopolies."

And hospitals use the monopolies, critics contend, to maximize their return on investment in medical equipment like MRI scanners and facilities like cancer centers. In Northern Virginia, restrictions on the number of emergency-room and critical-care beds means hospitals can operate these facilities at full capacity. But the shortage has led to a dramatic increase in so-called "by-passes" in which hospitals lacking beds divert rescue squads on emergency runs to other hospitals. Carlton Brown, a Loudoun County anesthesiologist, cites the story of a patient who was hemorrhaging following an outpatient surgery at Loudoun Memorial. Loudoun was full, so the patient was rerouted to Reston Hospital, which also was full, then to Fairfax Memorial 20 miles from home. Her surgeon, who did not have practice privileges at Fairfax, could not treat her. In May alone, according to rescue squad reports obtained by Virginia Business, there were 95 instances of ambulance rerouting in Northern Virginia due to bed shortages in hospitals.

"Bypass is the symptom; archaic regulations are the underlying disease," says Brown. "It is the very same COPN regulations that all these hospitals are vigorously defending that make it impossible to quickly respond to changing market conditions. I can open a free-standing ICU within 45 days. It would be good business to do so. If there is a need, why not? Simple answer: COPN regulations prevent anyone from entering the ICU bed market without permission from Richmond regulators."

But defenders of COPN say there are no simple solutions. Yes, they concede, COPN does help protect hospitals from competition. But, then, hospitals bear social responsibilities that free-standing clinics do not. They provided $420 million of uncompensated care costs in Virginia in 1999.

What’s more, hospitals can be safer spots to prevent infection and monitor malpractice issues because they have had a sophisticated regime of controls for years. "The franchise for institutional providers ensured that there were some systems in place to control quality and when you leave the hospital setting or licensed facility setting, that no longer exists," says Laurens Sartoris, president of the Virginia Hospital & Health Association. "The process to detect, protect, investigate and analyze when something goes wrong with infection control, well, that may not exist anywhere else."

Besides quality control issues, profitable lines of medical business protected by COPN subsidize the money-losers that for-profit competitors would be less eager to take on. Many hospitals, especially in urban and rural areas, are financially stressed. Scrapping COPN and letting competitors skim the cream could prove devastating. If they fold, who will fill the void in the medical marketplace?

Deregulation foes predict other grim results if COPN is repealed. A commitment to treating indigent patients makes academic health centers particularly vulnerable. Profitable services protected by COPN fund indigent care as well as research and medical education. That stream of revenue could be at risk with deregulation. "We have to balance the books somehow," says Larry Fitzgerald, CFO of the University of Virginia Health System. In the past, not much help has been forthcoming from the state —Virginia supports medical education at rates below the national average, and state Medicaid expenditures per capita are among the lowest in the country, ranking 48th.

Meanwhile, a flood of new players into the field could spur an exodus of employees from hospitals, which must operate 24 hours a day, to facilities with better pay and less onerous hours. Even now, hospitals and nursing homes are having a tough time staying fully staffed.

COPN deregulation in other states has yielded mixed results. The free market has not always worked as hoped, says Ray Baxter, vice president of the Fairfax-based Lewin Group, a consulting company. In some markets, deregulation has spurred medical arms races rather than competition on the basis of cost and quality. In Florida, 50 hospitals have shut down since partial deregulation, says Bill Bell, general counsel and senior vice president for the Florida Hospital Association. Although he cannot attribute the closings directly to deregulation, the industry can’t afford to risk full competition. "Our large number of uninsured are creating more of a problem," he says. "This is not the time to start creating an open market. We think it’s dangerous to deregulate further."

Virginia foes warn that deregulation may turn out like California’s hasty power deregulation, albeit with lives at stake rather than air conditioning. Citing rolling blackouts and a $1 billion increase in electric bills the summer California deregulated power, Virginia should follow the commonwealth’s path to power deregulation by spreading it over a three-year period. Virginia should take time to introduce thoughtful legislation that protects the quality of care, says Carilion’s Bell. "There has to be some mechanism to make certain care is rendered in appropriate settings and have some way to monitor and report."

Ironically, the best way to counteract the negative effects of COPN deregulation may be an even bigger dose of market discipline. Labor shortages could be addressed, for instance, by loosening up licensing restrictions on physicians, nurses and other medical professions. Licensing has created a guild-like labor force that is significantly overqualified for much of the work that’s done, argue Clayton M. Christensen and his two co-authors of "Will Disruptive Innovations Cure Health Care?" in the September issue of the Harvard Business Review. And the way to ensure quality may be to release more information about medical outcomes to the public, including sensitive data on the incidence of mortality and complications, errors and adverse events.

At this time, however, no one in Virginia is giving serious thought to such reforms, each of which has powerful constituencies opposing it. Even the move towards abolition of COPN may bring only incremental change. "Virginia is not going to totally deregulate. COPN will probably be replaced with another set of regulations that will focus on quality of service," says Mike Jurgensen, the director of health policy for the Medical Society of Virginia.