Do Certificate-of-Need Laws Limit Spending?

Abstract

In 35 states, certificate-of-need (CON) laws in health care restrict the supply of medical services. These regulations require providers hoping to open a new healthcare facility, expand an existing facility, or purchase certain medical equipment such as an MRI machine or a hospital bed to first prove to a regulatory body that their community needs the service in question. The approval process can be time consuming and expensive, and it offers incumbent providers an opportunity to oppose the entrance of new competitors. However, it was originally hoped that these laws would, among other things, reduce healthcare price inflation. In this brief, I review the basic economic theory of a supply restriction like CON, then summarize four decades of empirical research on the effect of CON on healthcare spending. There is no evidence that CON regulations limit healthcare price inflation and little evidence that they reduce healthcare spending. In fact, the balance of evidence suggests that CON laws are associated with higher per-unit costs and higher total healthcare spending.

Keywords: Economics of Regulation, Certificate of Need, Supply Constraints, Regulatory Capture, Special Interests, Rent-Seeking

JEL Classification: D72, D78, H75, I1, L51