Can Health Spending Be Reined in Through Supply Constraints? An Evaluation of Certificate-of-Need Laws

39 Pages Posted: 12 Jul 2018

See all articles by James B. Bailey

James B. Bailey

Providence College Department of Economics

Date Written: 08/01/2016

Abstract

For 50 years, US policymakers and economists have searched for ways to slow the growth of spending on health care. One approach currently taken by 35 states is to restrict the supply of health care by requiringnew and growing providers to show that they serve an “economic need.” Hospitals and certain other health providers must obtain a certificate of need (CON) from a state board before opening or expanding. I show that in a simple model where CON restricts supply, the effect of CON on spending depends on the price elasticity of market demand for health care. CON will work to restrain spending when demand is elastic; however, most estimates show the demand for health care to be quite inelastic. I therefore predict that CON willincrease prices for health care without much reducing its use, leading to an increase in spending. Using data from the National Health Expenditure Accounts, I estimate that CON laws do not reduce spending by any major payer or for any major type of provider and that they increase spending on some types of health care.

Suggested Citation

Bailey, James B., Can Health Spending Be Reined in Through Supply Constraints? An Evaluation of Certificate-of-Need Laws (08/01/2016). MERCATUS WORKING PAPER, Available at SSRN: https://ssrn.com/abstract=3211647 or http://dx.doi.org/10.2139/ssrn.3211647

James B. Bailey (Contact Author)

Providence College Department of Economics ( email )

1 Cunningham Sq
Providence, RI 02918
United States

HOME PAGE: http://https://economics.providence.edu/faculty-members/james-bailey/

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