June 11, 2015

The Con of Certificate of Need Laws

Veronique de Rugy

Senior Research Fellow
Summary

If I got a dollar each time the federal or state government promised that new regulations of the health care market would reduce the cost of health care — and it subsequently failed to deliver on that promise — I would be a rich woman. The Affordable Care Act is the most recent example of such failed promises, obviously. But certificate of need laws take the cake at the state level.

If I got a dollar each time the federal or state government promised that new regulations of the health care market would reduce the cost of health care — and it subsequently failed to deliver on that promise — I would be a rich woman. The Affordable Care Act is the most recent example of such failed promises, obviously. But certificate of need laws take the cake at the state level.

CON restrictions come in addition to state licensing and training requirements for medical professionals. They require that all medical providers wanting to build or expand an existing health care facility, offer new services or acquire new medical equipment must first gain approval from state regulators.

Born out of bad economics and fears that the oversupply of hospital capacity would increase costs, New York was the first state to institute a CON program, in 1964. Over the following decade, 23 other states adopted CON programs. In 1974, the federal government joined in the effort and required states to implement CON requirements in exchange for receiving funding through certain federal programs.

In theory, the regulation would cut health costs while increasing the provision of care for lower-income people. By restricting market entry, lawmakers believed, the regulatory winners could be forced to use their government-inflated profits to subsidize indigent care or medical services to the poor. These services are seen as socially desirable but notoriously unprofitable to providers.

Though the theory of cross-subsidization is well-established, in practice CON laws were soon captured by established interests that used them to keep competition out and raise the cost of medical services. In 1987, the federal government repealed its mandate after recognizing the program as a failure. Though a few states have since retired their programs, 36 states and the District of Columbia are still living under this type of law, with negative consequences for their residents.

As part of a large effort by the Mercatus Center to study CON laws around the country, economists Thomas Stratmann and Jacob W. Russ published a comprehensive empirical study looking at whether CON laws increase indigent care. They found that under the regulatory scheme, the poorest Americans see no increase in the availability of care and that it limits the provision of medical services.

Their study shows that while on average there are 362 hospital beds per 100,000 people in the United States, the presence of a state CON regulation program reduces that number by 99 beds. They also found that for each additional service that a state regulates — such as the acquisition of CT scanners or MRI machines — the number of hospital beds per 100,000 people decreases by 4.7.

Looking at CON laws on a state-by-state basis, my colleague Christopher Koopman found that Vermont is the worst offender, with its CON program currently regulating 30 different services, devices and procedures, which is much more than the national average of 14.

But hospital beds aren't the only casualties of CON regulations. They also reduce the number of hospitals with MRI technology by one to two hospitals per 500,000 people. Koopman calculated that in North Carolina, the fourth-worst CON state, it could mean 49 fewer hospitals offering MRI services.

CON laws were intended to limit the supply of health care services. They succeeded. Not surprisingly, they also failed to contain the cost of health care. State policymakers looking for ways to bend the health care cost curve downward should get rid of CON laws. As Koopman summed up in his work, it would open the market, create more competition and ultimately give more options to those seeking care.