April 21, 2021

Alaska's Certificate-of-Need Program: Lessons from Research

Testimony before the Senate Labor and Commerce Standing Committee of the Alaska State Legislature
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Chair Costello and distinguished members of the committee:

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

Today, I will

  1. offer a brief history of CON laws,
  2. compare Alaska’s CON program to the programs in other states,
  3. give an overview of the economic evidence that has led many to conclude that these laws harm patients and taxpayers, and
  4. conclude with a number of suggested reforms, including outright repeal.

Introduction to CON Laws

CON laws require healthcare providers wishing to open or expand a healthcare facility to first prove to a regulatory body that their community needs the services the facility would provide. The regulations are typically not designed to assess a provider’s qualifications or safety record. Other regulations such as occupational licensing aim to do that. Instead, CON laws aim to determine whether or not a service is economically viable and valuable.

The process for obtaining a CON can take years and can cost tens or even hundreds of thousands of dollars in preparation costs. Although these regulations appear to benefit incumbent providers by limiting their competition, their effects on patients and taxpayers have generally been found to be negative. This finding helps explain why antitrust authorities at the Federal Trade Commission (FTC) and at the US Department of Justice (DOJ) have long taken the position that these rules are anticompetitive. In a joint report from 2004, for example, the FTC and DOJ declared,

The Agencies believe that, on balance, CON programs are not successful in containing health care costs, and that they pose serious anticompetitive risks that usually outweigh their purported economic benefits.

A Brief History of CON Regulation

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 CON regulations in healthcare.

New York had already enacted the first CON program in 1964; by the early 1980s, with the federal government’s encouragement, every state except Louisiana had implemented some version of a CON program. Policymakers hoped that these programs would restrain healthcare costs, increase healthcare quality, and improve access to care for poor and underserved communities.

In 1986—after Medicare changed its reimbursement practices and 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, representing about 40 percent of the US population, have done away with their CON regulations, and many have pared them back. 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.

CON Regulation in Alaska

Alaska operates an extensive CON program, requiring providers to obtain permission before making changes to equipment, services, facilities, hospital beds, and nonhospital beds. Alaska’s application fees can be as high as $75,000, and in Alaska the application process typically takes 60–180 days. Among all states with CON regulations, the average number of technologies and procedures regulated is 15. Alaska regulates 19 technologies and procedures.

The state requires CONs for several services that are unlikely to be overprescribed, such as burn care, neonatal intensive care, renal failure treatment, and radiation therapy. The state also requires CONs for facilities and types of care that often go to vulnerable populations, such as intermediate care facilities for those with intellectual disabilities and psychiatric care. Some of the regulated services can be provided without expensive capital investments (psychiatric are, for example). And some of these regulated services are lower-cost alternatives to care such as ambulatory surgery. The following services and technologies are regulated under Alaska’s CON program:

  • Ambulatory surgical centers (ASCs)
  • Burn care
  • Cardiac catheterization
  • Computed tomography (CT) scanners
  • Hospital beds
  • Intermediate care facilities (ICFs) for individuals with intellectual disabilities
  • Linear accelerator radiology
  • Long-term acute care (LTAC)
  • Magnetic-resonance imaging (MRI) scanners
  • Mobile HI technology (CT/MRI/PET, etc.)
  • Neonatal intensive care
  • New hospitals or hospital-sized investments
  • Nursing home beds/long-term care beds
  • Obstetrics services
  • Open-heart surgery
  • Positron emission tomography (PET) scanners
  • Psychiatric services
  • Radiation therapy
  • Renal failure/dialysis

The Economics of CON Regulation

Unfortunately, by limiting supply and undermining competition, CON programs may undercut each of the laudable aims that policymakers desire to achieve with these rules. In fact, 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.

Researchers have ample information to help predict what would happen if Alaska were to repeal its CON regulations because 15 states have repealed their CON programs, and others have pared theirs back. Economists have used modern statistical methods to compare outcomes in CON and non-CON states to estimate the effects of these regulations. 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, nursing home beds, 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); Harrington et al. (1997); 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 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. Researchers also find that states such as Alaska that require CONs for ambulatory surgical centers have, on average, 14 percent fewer such 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. Bailey’s research suggests that an Alaska without CON would spend about $294 less per person per year on healthcare.

Nyman (1994); Mitchell (2016); and Bailey (2016)

Sources: James Bailey, “Can Health Spending Be Reined In through Supply Constraints? An Evaluation of Certificate-of-Need Laws” (Mercatus Working Paper, Mercatus Center at George Mason University, Arlington, VA, July 2016); Melissa D. A. Carlson et al., “Geographic Access to Hospice in the United States,” Journal of Palliative Medicine 13, no. 11 (2010): 1331–38; David M. Cutler, Robert S. Huckman, and Jonathan T. Kolstad, “Input Constraints and the Efficiency of Entry: Lessons from Cardiac Surgery,” American Economic Journal: Economic Policy 2, no. 1 (2010): 51–76; Derek DeLia et al., “Effects of Regulation and Competition on Health Care Disparities: The Case of Cardiac Angiography in New Jersey,” Journal of Health Politics, Policy and Law 34, no. 1 (2009): 63–91; Jon M. Ford and David L. Kaserman, “Certificate-of-Need Regulation and Entry: Evidence from the Dialysis Industry,” Southern Economic Journal 59, no. 4 (1993): 783–91; Charlene Harrington et al., “The Effect of Certificate of Need and Moratoria Policy on Change in Nursing Home Beds in the United States,” Medical Care 35, no. 6 (1997): 574–88; Matthew D. Mitchell, “Do Certificate-of-Need Laws Limit Spending?” (Mercatus Working Paper, Mercatus Center at George Mason University, Arlington, VA, September 2016); John A. Nyman, “The Effects of Market Concentration and Excess Demand on the Price of Nursing Home Care,” Journal of Industrial Economics 42, no. 2 (1994): 193–204; Thomas Stratmann and Matthew C. Baker, “Barriers to Entry in the Healthcare Markets: Winners and Loser from Certificate-of-Need Laws” (Mercatus Working Paper, Mercatus Center at George Mason University, Arlington, VA, August 2017); Thomas Stratmann and Christopher Koopman, “Entry Regulation and Rural Health Care: Certificate-of-Need Laws, Ambulatory Surgical Centers, and Community Hospitals” (Mercatus Working Paper, Mercatus Center at George Mason University, Arlington, VA, February 2016); Thomas Stratmann and Jacob W. Russ, “Do Certificate-of-Need Laws Increase Indigent Care?” (Mercatus Working Paper, Mercatus Center at George Mason University, Arlington, VA, July 2014); Thomas Stratmann and David Wille, “Certificate-of-Need Laws and Hospital Quality” (Mercatus Working Paper, Mercatus Center at George Mason University, Arlington, VA, September 2016).

Based on the experiences of other states, one can estimate what fiscal and health outcomes are likely to prevail in an Alaska without CON regulation. These estimates are derived from cross-state regression analyses that track outcomes over decades. They account for socioeconomic differences as well as differences in the underlying health of the state populations.

Figure 1 shows the actual number of hospitals and ASCs as well as the estimated number of hospitals and ASCs in an Alaska without CON regulation.

FIGURE 1. ESTIMATED DIFFERENCE IN ACCESS TO HEALTHCARE FACILITIES IN AN ALASKA WITHOUT CON LAWS

Sources: Mitchell et al., “Certificate-of-Need Laws: Alaska State Profile,” Mercatus Center at George Mason University, November 11, 2020; Stratmann and Koopman, “Entry Regulation and Rural Health Care.”

Alaska’s rural hospitals are financially strained, so the effect of CON regulation on rural care is especially important to the state’s rural communities. Figure 2 shows the number of rural hospitals in Alaska and estimates of how many there would be in an Alaska without CON regulation.

FIGURE 2. ESTIMATED DIFFERENCE IN ACCESS TO RURAL HEALTHCARE FACILITIES IN ALASKA WITHOUT CON REGULATION

Sources: Mitchell et al., “Certificate of Need Laws: Alaska State Profile”; Stratmann and Koopman, “Entry Regulation and Rural Health Care.”

Figure 3 shows the actual as well as the estimated mortality rates following heart attack, heart failure, and pneumonia. Figure 4 shows the actual as well as estimated readmission rates following heart attack and heart failure.

FIGURE 3. ESTIMATED DIFFERENCE IN MORTALITY RATES IN ALASKA WITHOUT CON REGULATION (RESTRICTED SAMPLE, FOUR OR MORE CON LAWS)

Sources: Mitchell et al., “Certificate of Need Laws: Alaska State Profile”; Stratmann and Wille, “Certificate-of-Need Laws and Hospital Quality.”

FIGURE 4. ESTIMATED DIFFERENCE IN READMISSION RATES IN ALASKA WITHOUT CON REGULATION (RESTRICTED SAMPLE, FOUR OR MORE CON LAWS)

Sources: Mitchell et al., “Certificate of Need Laws: Alaska State Profile”; Stratmann and Wille, “Certificate-of-Need Laws and Hospital Quality.”

In addition, researchers estimate that postsurgery complications would be approximately 5.6 percent lower and that the share of patients rating their hospital experience a 9 out of 10 or 10 out of 10 would be approximately 4.8 percent higher in an Alaska without CON regulation. Finally, economists estimate that annual per capita healthcare spending would be approximately $294 lower in an Alaska without CON regulation.

Reform Options

The weight of evidence suggests that a full repeal of CON laws would expand access to healthcare in Alaska that is of both high quality and low cost. Repeal might be scheduled to take effect in the near future or at a later date. Alternatively, policymakers might phase in repeal by requiring the CON board to approve an ever-larger percentage of applications over a certain number of years.

Short of full repeal, policymakers have a number of options to reform the program and limit its negative effects. For example, the state might eliminate specific CON requirements. Some requirements ripe for reform include

  1. CONs that restrict access to facilities and services used by vulnerable populations, such as intermediate care facilities for those with intellectual disabilities or psychiatric services;
  2. CONs for services that are unlikely to be overprescribed, such as burn care, neonatal intensive care, renal failure treatment, and radiation therapy;
  3. CONs for services that require limited capital expenditures, such as psychiatric services; and
  4. CONs that restrict access to low-cost modes of care, such as ASCs.

Policymakers might also consider a number of options to ease the administrative burden of CON laws. For example, they might reduce Alaska’s fees, reduce the administrative burden of the application process, or require incumbents who unsuccessfully challenge an entrant’s CON application to pay the entrant’s legal and compliance costs.

The criteria used to evaluate a CON application might also be changed. For example, a CON application should not be rejected to prevent the provision of duplicative services. Such a rejection would guarantee monopoly status for the current service providers, and healthcare monopolies are associated with high-cost, low-quality care. Utilization rate is another poor criterion. If an existing hospital knows that potential competitors are less likely to obtain CONs if it keeps its bed utilization rate low, then it faces an incentive to acquire more beds than it needs and ensure that many of them remain empty. This is exactly the sort of unnecessary capital expenditure that CON was supposed to discourage.

In addition, the state might raise the $1.5 million monetary threshold of an investment that necessitates a CON or apply this threshold to medical equipment. It might also require the CON board to seek input from parties without financial interest in the outcome or from parties dedicated to the preservation of market competition, such as patient health advocates, economists, or antitrust authorities at the FTC.

Finally, policymakers might consider a number of options that would increase the transparency of the CON program and make legislative oversight easier. One option would be to require the board to regularly disclose the CON approval rate. The board could also be required to report the share of applications opposed by incumbent providers as well as the different approval rates for opposed and unopposed applications. The board could be required to ask applicants to estimate their costs of applying for a CON and then regularly report these numbers to the public. And finally, the board could be required to follow up with denied applicants to evaluate how the denial has affected their provision of services.

Concluding Remarks

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. Specifically, 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 interest groups are able to use political donations to increase the odds that their CON requests will be granted. This aspect of CON regulation is one reason why economists as well as antitrust authorities have long believed that these regulations are anticompetitive and harmful to consumers.

For those who are interested in further details on the effects of CON laws on spending patterns, I have attached my paper, “Do Certificate-of-Need Laws Limit Spending?” Like all Mercatus Center research, it has been through a rigorous, double-blind peer review process.

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