Do Certificate-of-Need Laws Still Make Sense in 2019?

It’s a usual regulation in a healthcare industry known for plenty of unusual rules: In 36 states and the District of Columbia, a healthcare provider hoping to open or expand her patient offerings must first prove to regulators that her community needs the service.

Providers can spend years and burn through tens or even hundreds of thousands of dollars to prove this need and thus obtain what is called a “certificate of need” (or CON). The CON process can be required for both small and large investments: from hospital beds and gamma knives to new hospitals and neo-natal intensive care units.

Originally intended to discourage the use of expensive technologies and procedures, in many states a CON is now required for relatively lower-cost modes of care such as ambulatory surgery centers and for services unlikely to be over-prescribed such as drug-rehabilitation services and hospice care.

The federal government once required states to have CON rules in order to obtain certain federal funds. But since the repeal of that mandate in the late 1980s, a substantial minority have done away with their CON programs. Of those that have retained the regulation, many have scaled it back. In June, Florida moved to eliminate its CON requirements for new hospitals, specialty hospitals converting to general hospitals, and for a raft of other service providers such as children’s care and substance abuse hospitals.

Related article: The Future of the ACA

About four in 10 Americans now live in a state without a CON requirement. These include urban, rural, low-income, and high-income populations alike. What are the experiences of patients and providers in these communities? What has happened to access, quality, and costs of care?

Using decades’ worth of state data, researchers can compare outcomes in CON and non-CON states. These statistical analyses include control variables that account for possibly confounding factors such as local economic and demographic patterns.

Their findings are consistent with economic theory: CON laws seem to limit access to healthcare, fail to increase the quality of care, and contribute to higher costs. I take each of these in turn.

Access  

The strongest evidence on the effects of CON relates to access to care. Economic theory predicts that a CON law will restrict the supply of healthcare services, and that once repealed, patients will tend to access greater levels of care.

Indeed, researchers have found that states that have removed these rules have more hospitals and more ambulatory surgery centers per capita. They also have more hospital beds, dialysis clinics, and hospice care facilities. Patients in non-CON states are more likely to utilize medical imaging technologies and less likely to leave their communities in search of care. Though CON advocates sometimes claim that the rules protect rural facilities, states without CON laws have more rural hospitals and more rural ambulatory surgery centers than states with CON laws.

Advocates also sometimes claim that CON rules encourage hospitals to provide low-cost or uncompensated care to low-income individuals. The idea here is to create a sort of quid-pro-quo: CON will protect hospitals from competition, and in return, hospitals will provide charity care. In some states, this quid-pro-quo is explicitly built into the CON approval process. In others, it is assumed. The evidence, however, suggests that there is no higher rate of charity care in states with CON laws. There is, however, greater racial disparity in the provision of care in CON states relative to non-CON states.

Quality

Though the CON approval process is not meant to directly assess a provider’s qualifications, safety record, or treatment success rate, it is sometimes said that CON programs might indirectly improve quality. The idea is that CON might cause more procedures to be channeled through fewer providers, allowing those providers to improve their proficiency. While not unreasonable, the idea must be weighed against another, well-supported proposition: that competition tends to elevate quality.

What do the data say? Early studies tended to focus on individual procedures such as coronary bypass surgery and had a difficult time distinguishing causation from correlation. The results were mixed, with some early studies associating CON with higher-quality outcomes, others with lower-quality outcomes, and still others with mixed or inclusive results. One recent study is worth discussing in detail because it touched on multiple aspects of the patient experience and because its careful research design makes it possible to draw causal inferences.

Related article: How Medicaid Expansion Impacts Cardiovascular Health

Two of my colleagues, George Mason University Professor Thomas Stratmann and PhD graduate student David Wille, set out to assess the effects of CON on hospital quality using Hospital Compare, a database maintained by CMS. This database assesses quality through multiple dimensions-everything from patient satisfaction surveys to heart attack readmission rates to pneumonia mortality rates. 

In a unique research design, Stratmann and Wille estimate the effects of CON by looking at healthcare markets spanning CON and non-CON states. This allows them to control for other, unobservable, factors that might affect health outcomes such as culture and environment. Like other CON researchers, they also control for several observable demographic and hospital characteristics that might confound their estimates.

Stratmann and Wille find that hospitals in non-CON states have statistically significantly lower mortality rates for pneumonia, heart failure, and heart attack. They also find lower mortality rates among surgical inpatients with serious treatable complications. Compared with hospitals in states that require CONs for four or more services, hospitals in non-CON states have lower readmission rates for heart failure and heart attack. Patients in these states are more likely to rate their hospital experience highly.

Cost

An initial goal of CON was to limit the utilization of costly and unnecessary care. The federal legislation that encouraged states to adopt CON rules lamented a “massive infusion of Federal funds into the existing healthcare system [that] has contributed to inflationary increases in the cost of healthcare.”

CON might seem an unusual instrument to achieve this end. After all, it is a supply restriction-and supply restrictions tend to increase the costs of goods and services, not decrease them. Moreover, by throttling competition, supply restrictions are likely to permit providers greater latitude to raise prices.

Still, by limiting access to healthcare services, CON might reduce the total amount spent per patient or per citizen, even if it raises the cost per service. What do the data show here?

I recently reviewed two decades’ worth of peer-reviewed studies-every academic assessment of CON and spending that I could find. Four studies estimate the effects of CON on cost per service. None find that CON reduces per-unit costs. Three of the four find that it is associated with higher per-unit costs. The most recent, for example, finds that five years after repeal of CON, charges are about 5.5% lower than they would otherwise be. The fourth study-which only focuses on per-diem Medicaid charges for nursing home and long-term care-found no statistically significant effect.

Twelve studies estimate the effects of CON on spending per patient or per citizen. Of these, seven find that CON is associated with higher spending, two find no statistically-significant effect, and two find that it is associated with higher spending in some areas and lower spending in others.

Only one study finds a connection between CON and lower spending, and it was tenuous at best: The author finds that CON is associated with fewer hospital beds, which are, in turn, associated with slightly slower growth in healthcare expenditures per capita. Importantly, however, the author finds no direct relationship between CON and such expenditures.

Taken as a whole, the literature suggests that CON is associated with both higher per-unit costs and greater total expenditures.

Showing the way

The six in 10 Americans who live in states with CON laws need not speculate about what would happen should these regulations be removed. Both economic theory and data accumulated over the last four decades strongly suggest that CON removal will result in greater access to higher-quality, lower-cost care. 

Matthew D. Mitchell is a senior research fellow and director of the Equity Initiative at the Mercatus Center at George Mason University. He’s overseen and authored numerous studies on the effects of state certificate-of-need laws.