Repeal Certificate-of-Need Laws in Health Care

They Raise Healthcare Prices and Worsen Services By Squelching Competition

Image Credit: Dos Amigos Restaurant, Libertyville Illinois.

Let’s do a thought experiment. Let’s imagine that you wanted to set up a new Mexican restaurant but:

There’s a law that says that before you can do so, you have to prove that there’s a need for Mexican food in the area you propose to set up the restaurant. You’re confident there’s demand but proving that need would be challenging.

• Then let’s imagine that the board which you have to go before was frequently comprised of people who currently or previously owned Mexican restaurants in that area.
• Then imagine that once you come before the board, other Mexican restaurant owners in the area are given the opportunity to object to your application and significantly increase the cost and time it takes for you to get that application through (and they may even be able to fully block it).
• Also imagine that in many cases the only way to buy off the incumbent restaurants’ opposition to your application is to agree not to encroach on their business so you’re all but forced into agreeing that you won’t operate past 8pm.

Finally, imagine that in many cases these laws require the board to deny your application if you ‘duplicate’ — that is you compete with — an incumbent’s offerings. Another taco stand nearby sells carnitas, so no pork can be on your menu.

This sounds insane, right?

This would obviously strangle competition in Mexican restaurants and so raise prices for people who want to buy tacos. But at least tacos aren’t truly a necessity. But what if people needed tacos — not in a jokey haha-haha way but in an honest-to-goodness had-to-have-tacos-for-their-well-being way. The insane regulations stop being funny. Now we’re talking about a serious problem.

That’s what Certificate-of-Need (CON) Laws are doing in healthcare in the states that have them. Even as they fail to accomplish their stated goals, they raise prices, and make it more difficult for people -and particularly people in rural areas- to access needed healthcare services.

Where Did CON Laws Come From and What Were They Supposed to Achieve?

In the late 1960s, more than two dozen states adopted Certificate-of-Need laws. At the time, there was a widespread belief that high healthcare costs were because of over-investment in facilities. Additionally, Medicare reimbursed in a way that was effectively ‘cost-plus’ and so there was an incentive for providers to spend more than necessary.

The idea behind CON laws was that they would discourage the build out of health care services, thus forcing providers to ration care and spend less money. Existing providers, however, quite liked that these laws squelched competition and so the American Hospital Association began to lobby heavily for their expansion to other states.

In 1974, Congress passed the National Health Planning and Resources Development Act which strongly encouraged states to adopt CON laws and even threatened to withhold federal funds from any state that didn’t, and so, nearly every state adopted some kind of CON law. By the mid-1980s, Congress had reformed Medicare reimbursement and had concluded that CON laws weren’t working out as effectively as advertised so they repealed the CON mandate.

Incumbent providers understand that it was politically untenable to say to state legislatures that they should keep CON laws on the books simply because the incumbents do not want more competition. They had to make public interest arguments.

CON law proponents contend that they promote cross-subsidization and so improve indigent care. They argue that CON laws lower all-cause mortality by pushing greater concentration of care to large facilities. They also say that they reduce healthcare spending.

None of these arguments are supported by the evidence. To the contrary, there’s no evidence they promote cross-subsidization or improve indigent care. There is no evidence they lower all-cause mortality, and, as we’ll see below, there is substantial evidence that they raise healthcare spending and per service costs.

The Barriers to Competition That CON Laws Create

Several states have repealed their CON laws over time. Still, today 39 states have a CON law in place for at least one medical service. The extent and rigor of these laws varies. Six states have CON laws for only one medical service, but 22 states have them for 15 or more different kinds of medical services.

As in our Mexican restaurant thought experiment, in states with CON laws, would-be new medical service providers must go before board and prove that there is a need for their service in order to acquire that “certificate-of-need.”

Employees of incumbent providers are frequently allowed, and frequently do, sit on these boards. In all but six states, incumbent firms are allowed to object to the application of their nascent competitor. CON laws typically require those boards to deny the certificate if the would-be provider is going to ‘duplicate’, i.e. compete with, a service already being provided by an incumbent.

Some CON laws also require that a new service provider obtain a transfer agreement with an existing hospital; while that makes sense in certain circumstances, it creates yet one more way that incumbents can block the establishment of a new provider in their area.

Who Wins and Who Loses

Who wins from all this?

• First, the incumbent providers who get to experience less competition obviously.
• Second, in three states where the connection has been studied (Georgia, Michigan, and Virginia), there is a positive correction between would-be providers being approved and their donations to political action committee.
• Third, CON laws are also associated with higher pay for hospital CEOs. And boutique consulting firms that help would-be providers make it through the process profit from providing that specialized expertise; without CON laws, their money IV would go away.

Everyone else loses. There is no telling how many would-be providers never even apply for a certificate-of-need because they know that they will never get through the process. The breadth of evidence that these laws raise costs is nevertheless staggering. CON laws are associated with:

• higher variable costs in general acute hospitals,
• higher Medicaid costs for home health services,
• higher per admission hospital expenditures,
• uninsured patients having to pay more out-of-pocket, and
• higher expenditures per resident in nursing homes.

Researchers have collectively done 52 statistical tests on CON laws and costs. Just 7% of those tests find an association between CON laws and lower costs while 60% of them find that CON laws increase costs.

Image credit: Matthew Mitchell.

Compared to states without CON laws, states with CON laws have:

• 30% fewer rural hospitals,
• 13% fewer rural ambulatory surgical centers,
• 20% fewer psychiatric facilities
• Fewer hospital beds,
• Fewer imaging service providers,
• More post-surgery complications and worse readmission rates,
• Longer wait times,
• Less access to care for underserved populations, and
• Higher mortality rates for heart attacks, respiratory disease, diabetes, COVID-19, and Alzheimer’s.

Each one of these findings is worth stopping to dwell on. Each one of them amounts to unnecessary human suffering. The scale and breadth of harm here in exchange for zero or near-zero benefit is, frankly, an outrage.

These are not cherry-picked results. Of 83 statistical tests done by researchers on CON laws, just 7% find an association between CON laws and greater availability of services while 78% of them find that CON laws are associated with diminished availability of services.

Image Credit: Matthew Mitchell.

Matthew Mitchell, who has done some of the most comprehensive research there is on CON Laws, conducted a meta-analysis of over 450 statistical tests across 128 research papers on Certificate-of-Need laws and found that:

“The balance of research suggests that CON laws do not achieve their state goals. There is little evidence that they restrain spending, increase access, enhance quality, or improve the provision of care to underserved populations. In fact, the most-common finding is that CON laws undermine each of these goals. For every test associating CON with a ‘good’ outcome, there are more than 4 that associate it with a ‘bad’ outcome.”

CON laws don’t make sense to keep. Getting rid of them will not fix all of American healthcare but it will lead to more competition, better health care services, and lower prices. Lawmakers in states with CON laws should repeal them as quickly as feasibly possible and the federal government should encourage states to do so as well.

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