February 6, 2018

Alaska's Certificate-of-Need Law

Testimony before the Senate Labor and Commerce Committee

Chairwoman Costello and distinguished members of the Senate Labor and Commerce Committee:

My name is Matthew Mitchell. I am an economist at the Mercatus Center at George Mason University, where I am an adjunct professor of economics. In recent years, my colleagues and I have been studying certificate-of-need laws in healthcare. I am grateful for the opportunity to discuss our findings with you today.

More than four decades ago, Congress passed and President Ford signed the National Health Planning and Resources Development Act of 1974. The statute enabled the federal government to withhold federal funds from states that failed to adopt certificate-of-need (CON) regulations in healthcare. CON laws require healthcare providers wishing to open or expand a healthcare facility to first prove to a regulatory body that the community needs the planned services. New York enacted the first CON program in 1964; a decade later the federal government began encouraging other states to follow suit, and by the early 1980s every state except Louisiana had implemented some version of a CON program. Policymakers hoped these programs would restrain healthcare costs, increase healthcare quality, and improve access to care for poor and underserved communities.

In 1986—as evidence mounted that CON laws were failing to achieve their stated goals—Congress repealed the federal act, eliminating federal incentives for states to maintain their CON programs. Since then, 15 states have done away with their CON regulations. A majority of states still maintain CON programs, however, and vestiges of the National Health Planning and Resources Development Act can be seen in the justifications that state legislatures offer in support of these regulations.

Unfortunately, by limiting supply and undermining competition, CON laws may undercut each of the laudable aims that policymakers desire to achieve with CON regulation. Research shows that CON laws fail to achieve the goals most often given when enacting such laws. These goals include

  1. ensuring an adequate supply of healthcare resources,
  2. ensuring access to healthcare for rural communities,
  3. promoting high-quality healthcare,
  4. ensuring charity care for those unable to pay or for otherwise underserved communities,
  5. encouraging appropriate levels of hospital substitutes and healthcare alternatives, and
  6. restraining the cost of healthcare services.

Because 15 states have repealed their CON programs, we have quite a bit of information to help us predict what would happen if other states such as Alaska were to repeal their CON laws. Economists have been able to use modern statistical methods to compare outcomes in CON and non-CON states to estimate the effects of the regulation. These methods control for factors such as socioeconomic conditions that might confound the estimates. Table 1 summarizes some of this research. It is organized around the stated goals of CON laws.

Table 1. Summary of Research Addressing the Goals of Certificate-of-Need (CON) Laws in Healthcare

Question Answer Research
1. Do CON programs help ensure an adequate supply of healthcare resources? No. CON regulation explicitly limits the establishment and expansion of healthcare facilities and is associated with fewer hospitals, ambulatory surgical centers, dialysis clinics, and hospice care facilities. It is also associated with fewer hospital beds and decreased access to medical imaging technologies. Residents of CON states are more likely than residents of non-CON states to leave their counties in search of medical services. Regression analysis by Stratmann and Koopman (2016) suggests that an Alaska without CON would have 42 percent more hospitals than it currently has. Ford and Kaserman (1993); Carlson et al. (2010); Stratmann and Russ (2014); Stratmann and Baker (2017); and Stratmann and Koopman (2016)
2. Do CON programs help ensure access to healthcare for rural communities? No. CON programs are associated with fewer hospitals overall, but also with fewer rural hospitals, rural hospital substitutes, and rural hospice care facilities. Residents of CON states must drive farther to obtain care than residents of non-CON states. Stratmann and Koopman’s research suggests that an Alaska without CON would have 45 percent more rural hospitals than it currently has. Cutler, Huckman, and Kolstad (2010); Carlson et al. (2010); and Stratmann and Koopman (2016)
3. Do CON programs promote high-quality healthcare? Most likely not. While early research was mixed, more recent research suggests that deaths from treatable complications following surgery and mortality rates from heart failure, pneumonia, and heart attacks are all statistically significantly higher among hospitals in CON states than hospitals in non-CON states. Also, in states with especially comprehensive CON programs such as Alaska, patients are less likely to rate hospitals highly. Stratmann and Wille (2016)
4. Do CON programs help ensure charity care for those unable to pay or for otherwise underserved communities? No. There is no difference in the provision of charity care between states with CON programs and states without them, and CON regulation is associated with greater racial disparities in access to care. DeLia et al. (2009) and Stratmann and Russ (2014)
5. Do CON programs encourage appropriate levels of hospital substitutes and healthcare alternatives? No. CON regulations have a disproportionate effect on new hospitals and nonhospital providers of medical imaging services. Research also finds that states such as Alaska that have an ambulatory surgical center–specific CON have, on average, 14 percent fewer total ambulatory surgical centers. Stratmann and Baker (2017) and Stratmann and Koopman (2016)
6. Do CON programs help restrain the cost of healthcare services? No. By limiting supply, CON regulations increase per-service and per-procedure healthcare costs. Even though CON regulations might reduce overall healthcare spending by reducing the quantity of services that patients consume, the balance of evidence suggests that CON laws actually increase total healthcare spending. Mitchell (2016) and Bailey (2016)

I have also attached two working papers: my own, “Do Certificate-of-Need Laws Limit Spending?,” and Thomas Stratmann and Christopher Koopman’s paper, “Entry Regulation and Rural Healthcare.” These papers, like all Mercatus Center research, have been through a rigorous double-blind peer review process. I believe their implications should be of particular interest to your state.

Given the substantial evidence that CON laws do not achieve their stated goals, one may wonder why these laws continue to exist in so much of the country. The explanation seems to lie in the special-interest theory of regulation. Namely, CON laws perform a valuable function for incumbent providers of healthcare services by limiting their exposure to new competition. Indeed, recent evidence suggests that special interests are able to use political donations to increase the odds that their CON requests will be granted. This aspect of CON laws helps explain why antitrust authorities at the Federal Department of Justice and the Federal Trade Commission have long argued that these regulations are anticompetitive and harmful to consumers.

Thank you again for the opportunity to share my research with you. I look forward to answering any questions you may have.