Healthcare

Certificate of Need Laws: Are They Just a CON?

Certificate of Need (CON) laws were initially put into effect as part of the “Health Planning Resources Development Act” of 1974. The law incentivised states to create CON programs by offering additional funding or withholding Medicare and Medicaid funds from those states that decided not to participate.

The act sought to restrain health care facility costs and coordinate new facility construction and the implementation of new services. Now, hospitals must obtain a certificate of need from a state board before opening or expanding. The regulations were put into place under the theory that unregulated market competition would raise the cost of medical care because providers would be over-investing in facilities and equipment. The United States currently struggles with the cost of health care, and many avenues exist to maintain competition among providers, which in turn will keep down costs. CON laws have done the opposite of their intended effect by decreasing competition in the markets and increasing costs.

Imagine if these same principles were applied to a different market. For example, a Pizza Hut wants to open down the street from an already existing Domino’s Pizza. Pizza Hut is not required to go to the state board and demonstrate that the area needs another pizzeria. Domino’s Pizza also has no right to object to the opening of Pizza Hut in that same location on the ground that they already provide all the pizza the area requires. However, under CON laws, Domino’s could prove that they provide enough pizza for that area and not permit Pizza Hut to open service. This is exactly what CON laws do resulting in less competitive markets for health care services.

Prevalence

By 1980, every state but Louisiana had a CON program, and the federal government was pushing states to adopt it. Since the Medicare payment reform and the end of the federal push for CON in the 1980s, fifteen states have repealed their CON laws. They are currently being implemented in thirty-five states and the District of Columbia. With many states removing their CON programs or scaling them back, researchers have been able to compare the impact of the regulations in CON states vs. non-CON states. The findings suggest that CON laws affect access, quality, and cost of healthcare services.

Access

Research has shown that CON laws restrict the supply of healthcare services, including the supply of dialysis clinics and hospice care facilities. Those states that have removed their laws have more hospitals and surgery centers compared to CON states. There is also evidence that CON programs decrease access to rural care facilities. These small communities would not have enough money to pay for new facilities and therefore would not meet the certificate of need requirements.

Quality

CON laws were intended to reduce mortality by concentrating care into fewer facilities, but there is no evidence that this was the result. It is known that competition leads to an improvement in clinical quality and management. However, because CON laws cause a decrease in competition, quality of care is negatively affected. Additionally, mortality rates are found to be higher at hospitals in CON states than in non-CON states.

Cost

According to the Kaiser Family Foundation, per-capita health spending is 11% higher in CON states compared to those without them. Healthcare is found to mostly be an inelastic demand, meaning that people buy about the same amount regardless of whether the price rises or drops. CON laws would likely have their intended effect of lowering costs if the demand was elastic but, given that the demand is not elastic, the cost rises.

Conclusion

CON laws were intended to provide an adequate supply of health resources, ensure rural access, increase quality, and decrease cost. However, it seems that CON laws have done the opposite of their intended goals by limiting access to healthcare, failing to increase the quality of care, and contributing to higher costs. As mentioned, competition lowers prices and improves quality and ineffective and inferior providers will lose business to better rivals. Those are simple economic principles, which have been proven true. Government regulations that undermine this competitive process, without offsetting it with proven benefits, should be more closely reviewed.

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