Certificate-of-Need Laws: Are They Achieving Their Goals?

More than four decades ago, Congress passed and President Ford signed the National Health Planning and Resources Development Act of 1974. The act withheld federal funds from states that failed to adopt certificate-of-need (CON) laws regulating healthcare facilities. 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 had enacted the first CON program in 1964, a full decade before 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In 1986—as evidence mounted that CON laws were failing to achieve their stated goals—Congress repealed the federal act, eliminating federal incentives for states to maintain their CON programs.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. Policymakers claim CON regulation is intended to

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

Research, however, shows that CON laws fail to achieve these laudable goals. In fact, by limiting supply and undermining competition, CON laws may undercut each of these aims.

1. Do CON Programs Ensure an Adequate Supply of Healthcare Resources?

CON programs limit the introduction and expansion of a wide variety of medical services and equipment, such as rehabilitation centers, nursing home beds, and medical imaging technologies. The process for obtaining a CON can take years and tens or even hundreds of thousands of dollars. By definition, CON programs restrict supply, making them unlikely to ensure an adequate supply of healthcare resources. Research on the supply of dialysis clinics and hospice care facilities finds that CON programs do, indeed, restrict the supply of both.

George Mason University Professor and Mercatus-affiliated scholar Thomas Stratmann led the most recent comprehensive study of the effect of CON programs on the supply of medical equipment. Stratmann and his coauthor, Jacob Russ, report that there are on average 362 hospital beds per 100,000 people in the United States. Controlling for other factors, however, they find that states with CON programs have about 99 fewer hospital beds per 100,000 people than states without these regulations. Moreover, they find that CON programs that specifically regulate acute hospital beds are associated with an average of about 131 fewer hospital beds per 100,000 people relative to non-CON states. Furthermore, they find that CON regulations reduce the number of hospitals with MRI machines by one to two hospitals per 500,000 people and that states that regulate MRI machines have, on average, 2.5 fewer hospitals providing MRI services than non-CON states. Taking Michigan as an example, this means the state may have between 20 and 40 fewer hospitals offering MRI services than it would if it had no CON program.

In separate research, Stratmann and his coauthor Matthew C. Baker find that patients in states with CON programs are more likely to travel out of their county to obtain healthcare services, a fact that has been documented by others. They also assess the effect of CON regulations on nonhospital providers such as ambulatory surgical centers (ASCs), finding that—controlling for other factors—there is less market entry and lower market penetration of nonhospital providers in CON states than in non-CON states. They also find that hospitals that opened before the implementation of CON laws face less competition in CON states than in non-CON states. This may explain why hospitals tend to support CON regulation.

2. Do CON Programs Ensure Access to Health Care for Rural Communities?

Rural access to health care was a priority of the National Health Planning and Resources Development Act, and many states continue to justify their CON programs by claiming the regulations ensure care will be provided to residents in geographically underserved, economically depressed, or rural communities. Theory, however, suggests that a supply restriction will decrease, not increase, access to care. And, as I have noted, researchers have found that CON regulation is associated with longer travel distance to care. In recent research, Stratmann and his colleague Christopher Koopman explicitly address the question of rural access to hospitals and hospital substitutes such as ambulatory surgical centers.

Examining over 25 years’ worth of data and controlling for other factors that might influence the number of hospitals, they find that states with CON programs not only have 30 percent fewer total hospitals per 100,000 residents, but also have 30 percent fewer rural hospitals per 100,000 residents compared with non-CON states. Moreover, their research finds that states with ASC-specific CON restrictions had on average 13 percent fewer rural ASCs per 100,000 residents compared with non-CON states.

Their findings are consistent with previous research that found that CON programs correlate with less rural access to hospice care. In short, there is no evidence to indicate that CON programs increase access to care, and they may actually be limiting access for rural residents of CON states.

3. Do CON Programs Promote High-Quality Health Care?

Unlike other regulatory regimes, such as occupational licensure and scope-of-practice rules, CON regulations do not specifically aim to improve quality. That is, CON regulators typically do not attempt to assess whether providers are qualified to do their jobs, focusing instead on whether there is an economic “need” for their services. Nevertheless, CON advocates sometimes claim that because CON regulations reduce the number of institutions providing care, they will cause more procedures to be performed by the institutions that do obtain permission. Thus, the argument goes, practitioners in CON states will tend to see more patients with the same conditions and therefore might become more specialized and proficient. This theory must be weighed against competing theories that suggest that competition tends to increase quality, 

especially when regulations prevent price competition.

Much of the literature assessing the effect of CON regulation on quality has tended to focus on individual conditions and procedures, and researchers have had a difficult time disentangling causation from correlation. These studies either suggest that CON regulation has no effect on quality or come to different conclusions about the effect.

In recent research, Stratmann and his coauthor David Wille attempt to overcome the shortcomings of these research designs in two ways. First, they assess the effect of CON regulation using data pertaining to multiple aspects of the patient experience, including readmission rates, mortality rates, and patient experience surveys. Second, they attempt to isolate the causal effect of CON regulation by comparing variation in hospital quality within markets that span CON and non-CON states. This allows them to control for market-specific differences that might otherwise confound estimates. They find that “in states where CON laws regulate provider entry into healthcare markets, incumbents tend to provide lower-quality services.” In particular, they find that deaths from treatable complications following surgery and mortality rates from heart failure, pneumonia, and heart attacks are all significantly higher among hospitals in CON states than in non-CON states. They also find that in states with four or more CON restrictions patients are less likely to rate hospitals highly.

4. Do CON Programs Ensure Charity Care for Those Unable to Pay or for Otherwise Underserved Communities?

If CON programs limit the overall supply of health care, perhaps they do so by ensuring that supply is more equitably distributed. Some have argued that CON programs were established with the partial intent of creating a quid pro quo: by restricting competition, the regulation increases the profit of some providers who, in return, might use some of this extra profit to subsidize medical services to the poor or underserved. In 11 states, CON statutes explicitly include requirements for the provision of charity care; in others, the quid pro quo is widely assumed.

While this presumed effect is theoretically possible, there is no evidence that hospitals in states with CON programs provide any more charity care or care to underserved communities than hospitals in states without CON programs. In fact, researchers have found that CON regulation seems to increase racial disparities in the provision of certain services. Stratmann and Russ examine the level of uncompensated care across CON and non-CON states and, controlling for other factors, find that CON regulation has had no effect.

What is more, CON programs are a costly and poorly targeted means of ensuring charity care, especially when there are more direct means to achieve the same end. For example, 26 states simply reimburse providers for at least a portion of any uncompensated care they provide.

5. Do CON Programs Encourage Appropriate Levels of Hospital Substitutes and Healthcare Alternatives?

CON programs were once intended to promote lower-cost hospital substitutes such as ambulatory surgical centers. In the National Health Planning and Resources Development Act, Congress explicitly declared that “there are presently inadequate incentives for the use of appropriate alternative levels of health care, and for the substitution of ambulatory and intermediate care for inpatient hospital care.”

Ironically, many advocates of CON regulation now believe that ASCs and other hospital substitutes are a threat to the sustainability of hospitals and contend that CON laws are necessary to preserve community hospitals. Their concern is that ASCs cater to wealthier, less-complicated, and better-insured patients, “cream-skimming” these more profitable patients away from hospitals, diminishing the profitability and long-term sustainability of the affected hospitals. This thinking may explain why CON laws in 26 states and the District of Columbia now explicitly restrict the establishment and expansion of ASCs.

Research suggests that these restrictions significantly reduce access to alternative means of care, contrary to the original intent of CON advocates. Stratmann and Koopman, for example, find that states with ASC-specific CON restrictions have 14 percent fewer total ASCs per 100,000 residents and 13 percent fewer rural ASCs per 100,000 residents than non-CON states. Additionally, Stratmann and Baker find that CON states have significantly fewer nonhospital providers of medical imaging services than non-CON states.

Furthermore, these restrictions on hospital alternatives do not seem to lead to any more community hospitals, as proponents of the cream-skimming argument contend. In fact, Stratmann and Koopman find that, controlling for other factors, CON laws are associated with 30 percent fewer hospitals per 100,000 residents and with 30 percent fewer rural hospitals per 100,000 residents. Thus, these regulations seem to restrict the supply of both hospitals and hospital substitutes.

6. Do CON Programs Restrain the Cost of Healthcare Services?

As they are today, policymakers in 1974 were concerned about healthcare price inflation, and Congress hoped that CON regulations would address the problem. Today, many states explicitly name cost control as a goal of their CON programs. The Virginia Certificate of Public Need Program’s website, for example, states that “the program seeks to contain health care costs while ensuring financial viability and access to health care for all Virginia at a reasonable cost.”

Cost is a per-unit concept. It refers to the amount of money needed to produce one unit of a product or service. Economic theory predicts that a supply restriction such as CON regulation will increase per-unit costs by reducing supply. As economists Jon Ford and David Kaserman put it, “To the extent that CON regulation is effective in reducing net investment in the industry, the economic effect is to shift the supply curve of the affected service back to the left. . . . The effect of such supply shifts is to raise . . . [the] equilibrium price.” The empirical evidence on how CON regulation affects cost has been consistent with economic theory, showing that CON regulation tends to increase the cost of healthcare services.

By decreasing the supply of health care, however, CON regulations also reduce the quantity of services consumed. So it is possible that CON regulations might reduce overall spending on healthcare services even if they increase the cost per unit of each service. In recent research, I review the literature on CON regulations and healthcare spending. Seven studies find that CON regulation increases healthcare spending, two find no statistically significant effect, and two find that CON regulation increases some expenditures while reducing others. To date, only one study finds that CON regulation is associated with less healthcare spending. In this case, however, the connection is tenuous. The author finds that CON regulation is associated with fewer hospital beds, and he finds that fewer hospital beds are associated with slightly slower growth in aggregate healthcare expenditures per capita. Importantly, however, he finds that “certificate-of-need programs did not have a direct effect on healthcare expenditures.”

If the goal of CON regulation is to discourage excessive spending caused by the third-party payer problem and other distortions in the healthcare market that divorce consumers from cost considerations, then CON regulations are a poorly targeted method of achieving this end. As many healthcare experts have suggested, the best way to deal with this problem is to reform the policies that divorce consumers from cost. In contrast, CON regulations restrict the ability of everybody—including customers who pay out of pocket—to access healthcare services.

Conclusion

CON programs are a remnant of an era in which it was thought that central regulatory planning could yield better outcomes by restricting the supply of services valued by consumers. Despite the fact that the federal government no longer encourages states to restrict the supply of healthcare services, 35 states and the District of Columbia still maintain CON programs. The justifications for these programs are compelling when they are taken at face value, but a review of the literature finds that CON regulations fail to achieve their worthy goals. This research is summarized in table 1.

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

For state policymakers eager to modernize their healthcare systems, the first step may be as simple as opening the door to competition. CON programs are effective barriers to entry that give incumbent providers an advantage over new providers. Evidence suggests that CON programs reduce the supply of healthcare resources, limit rural access to health care, diminish the quality of health care provided at hospitals, fail to promote charity care, impede the supply of hospital substitutes, and raise healthcare prices and overall expenditures. Furthermore, CON programs have a disproportionate effect on nonhospital providers, which supports the theory that larger, more established hospitals are benefitting from these restrictions on competition.