Certificate of Need Laws

In 1960 $1 out of $20 in the United States was spent on healthcare. Sixty years later, nearly $1 out of $5 is spent on healthcare.

A dozen facts about the economics of the US health-care system

There are many reasons for this increase in spending (e.g. demographic shift, increased income, and more). In this post, I want to focus on competition in the healthcare industry. There is an excellent Brookings Institution piece from earlier this year on competition in healthcare. Martin Gaynor writes,

“The research evidence shows that hospitals and doctors who face less competition charge higher prices to private payers, without accompanying gains in efficiency or quality … the evidence also shows that lack of competition can cause serious harm to the quality of care received by patients.”

If there are benefits to competition in healthcare, the question becomes how we can increase competition. One of Martin Gaynor’s proposals is to eliminate or reform Certificate of Need (CON) regulations that require health care providers to obtain permission slips from a state health planning agency before the provider opens a new facility, purchases new equipment, or supplies a new service.

These laws were enacted federally in 1972 in an effort to control rising healthcare costs. The logic was that healthcare providers who are reimbursed for services would have incentive to invest in facilities and equipment that allows them to perform more services.

There is mixed evidence that CON regulations have achieved their goals. But, what is clear is that requiring permission erects barriers to entry. Moreover, these barriers to entry become more pronounced if the state health planning agencies are captured by existing hospital interests. Consumers like competition but suppliers do not.

In a new paper titled, “The Impact of Certificate of Need Laws on Heart Attack Mortality: Evidence from County Borders”, economist Kevin Chiu reports that the introduction of Certificate of Need Laws resulted in 6-7 additional heart attacks per 100,000 people. He focuses on heart attacks because the acute nature of heart attacks means you can’t “shop for care”.

The paper is an improvement over the existing literature because it zooms in on counties along state borders with and without CON regulations to get more apples-to-apples comparisons. For example, there could be regional trends that make a Florida to Washington comparison less valuable than a Florida to Georgia comparison. He also performs a number of tests that make the result more believable. For example, CON regulations have zero impact on suicides that normally take place outside the hospital.

Competition reduces prices, increases quality, and encourages innovation. Certificate of Need is one way in which laws have reduced competition in healthcare. The consequences are life-and-death without much apparent upside from cost containment. Currently 35 states still have Certificate of Need Laws. If you’re interested in finding out where your state stands, check out this map from the National Conference of State Legislatures.

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