This week is National Hospital Week, which is as good a time as ever to examine certificate of need (CON) laws, one of the biggest obstructions facing new hospitals, hospital expansion, and access to quality health care.
In all industries, competition improves services and lowers costs because the presence of additional product or service providers creates innovation and gives consumers additional choices. Despite the wealth of evidence proving free-market principles benefit everyone in society, many states continue to hinder competition in health care. One of the most effective ways to do this is through an arduous regulatory process known as a certificate of need (CON). Currently, 35 states use CON laws to limit the ability of health care providers to expand their businesses.
CON laws, first passed in the 1960s by states to slow increasing health care prices, were supposed to limit duplication and promote health care consolidation. CON programs require health care providers to receive state approval, generally from the state’s health care agency or a designated CON commission, to expand facilities and services. These artificial rules are one of the biggest hurdles blocking providers from adding new beds or building new, badly needed hospitals and nursing homes.
Under a CON law regime, states require a certificate of need for a wide variety of expenditures, such as facility construction and modification, new medical procedures offered, and increased inpatient care beds. States with CON programs regulate on average 14 different medical services, devices, and procedures.
Recent studies show CON laws fail to achieve many of their stated goals and increase costs for consumers by preventing competition, thus forcing providers to use older facilities and equipment.
Ample research demonstrates CON laws drive up health care costs, which are on average 11 percent higher in CON states than in non-CON states, according to data from the Kaiser Family Foundation. Kaiser also found a positive correlation between the number of CON law restrictions and the cost of health care. States requiring certificates of need on 10 or more services averaged per capita health care costs 8 percent higher than the $6,837 average for states requiring certificates of need for fewer than 10 services.
Furthermore, health care quality measures were significantly lower across nine different indicators in CON states compared to states without CON laws, according to a study by Thomas Stratmann and David Wille of the Mercatus Center at George Mason University. One of the biggest discrepancies identified is the difference in the mortality rate resulting from complications in hospitals. In CON states, the mortality rate was about 5 percent higher than the average rate in non-CON states.
One of the most common arguments in support of CON laws is that they help to protect access to health care in rural communities by shielding hospitals from increased competition. Several states have imposed restrictive regulations on so-called “hospital substitutes,” such as ambulatory surgical centers (ASCs), in a misguided attempt to protect patient access to health care in rural communities.
Such laws limiting competition are designed to prevent what supporters call “cherry picking” or “cream skimming,” a scenario in which hospital substitutes such as ASCs will accept only the more-profitable and well-insured patients, leaving general hospitals with the less-profitable and uninsured patients. Currently, 26 states regulate the entry of hospital substitutes through their CON programs.
In reality, CON laws produce the opposite effect. States restricting entry and competition through a CON program have fewer total hospitals and fewer rural hospitals per capita than non-CON law states. CON programs result in “30 percent fewer total hospitals per 100,000 state population and 30 percent fewer rural hospitals per 100,000 rural population,” according to a 2016 study by Stratmann and Koopman of the Mercatus Center.
CON laws also give undue influence to competitors during vetting processes. When a health care company applies to enter a new market, competitors often use the CON process to block potential competition. CON laws are a barrier to entry and raise the price of medical care by preventing new medical providers from competing with existing hospitals, thereby eliminating important market forces.
Instead of resorting to crony capitalism and indulging certain providers with special treatment, states should open up the market by rolling back or, better yet, outright repealing CON laws. Eliminating unnecessary barriers to the health care market such as CON laws would unleash competition, thus producing myriad choices and innovations that will benefit all health care consumers.
Absent CON laws, more medical facilities will be built and additional procedures will be offered, allowing new and existing patient services to be met in a convenient, reliable, affordable, and timely manner. Repealing CON laws sounds like a no-brainer—hopefully, state lawmakers come to the same conclusion.