What’s the point of certificate of need laws?

Certificate of need (CON) legislation exists in more than two-thirds of the states. Why? What’s it good for?

For those not in the know, CON laws require certain providers—hospitals, mainly—to secure a permit from the state before making specified capital expenditures. CON has been around since the 1960s and, originally, the goal was to restrain hospital spending by limiting the supply of hospital beds. If you buy Roemer’s law that “a built bed is a filled bed,” CON should reduce hospital costs by decreasing the hospitalization rate. The idea has been extended to all sorts of supply-sensitive care: if you don’t build it, they can’t come.

Only that’s not what happened. Most studies suggest that CON doesn’t do much, if anything, to reduce overall medical spending. Back in 1998, for example, Chris Conover and Frank Sloan found that the presence of CON in a state was not associated with any significant reduction in per capita health care spending. Plus, in those states that repealed CON, repeal did not lead to a surge in health care expenditures.

Still, CON could in theory have other benefits. Maybe, for example, it enhances quality by channeling patients to hospitals and physicians that, because they treat lots of patients with similar conditions, offer higher-quality care. The problem, though, is that the studies don’t find much of a link between CON and quality. Vivian Ho has done a bunch of work on the question and, as she put it in 2007, “the evidence supporting the clinical benefits of higher procedure volume is tenuous.”

Even if CON doesn’t much help on the cost or quality front, however, maybe it improves access. The idea here would be that CON could prevent the construction of facilities that, by cherry-picking paying patients, could undermine the financial viability of safety-net hospitals. Although that’s a nice theory, CON laws could perhaps more plausibly hamper access by limiting supply. Indeed, that’s what the available research, slim as it is, seems to suggest.

If CON doesn’t do much to save money, improve quality, or enhance access, then why is it so popular? In a wonderful paper in 1980 (gated), Sallyanne Payton and Rhoda Powsner made the case that CON was never really about costs, much less quality or access. Instead, it was about power. In the 1960s, large hospitals began to worry about the development of suburban hospitals that might siphon off their well-heeled patients. To fend off that unwelcome competition, they pushed for the enactment of CON. Sure, the hospitals defended CON as a cost-saving device. In Payton and Powsner’s telling, however, “attribut[ing] CON legislation to Roemer’s law is to mistake a convenient theoretical justification for an actual motivation.”

Put another way, maybe CON hasn’t failed. Maybe CON is working just as it was always meant to work. That would explain why large hospitals still favor it, even though CON is supposed to reduce what they can earn, and why federal antitrust officials worried in 2004 that existing providers might use CON “to forestall competitors from entering an incumbent’s market.”

The full implementation of the ACA, with its commitment to leveraging market forces to reduce health-care costs, may rekindle concerns about CON’s anticompetitive effects. Employers and insurers can demand low prices in the private market only if they can credibly threaten to send their patients elsewhere. In many communities, they can’t. Provider concentration in the health-care sector is already pervasive, and it’s getting worse.

Yet CON gives dominant hospital systems another tool to protect their turf. That’s unhelpful; indeed, it suggests that CON may work at cross-purposes with the ACA. If so, now may be a good time for states to reevaluate whether CON does more harm than good.


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