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Certificate of Need (CON) Laws

Summary: 32 US states require government approval before opening or expanding hospitals, allowing incumbent hospitals to block competitors.

The Problem

Certificate of Need laws require anyone wanting to open or expand a healthcare facility to prove to a state board that there is a "community need" for the service.

Result: Incumbent hospitals can legally block competition by arguing there's no need.

How It Works

Application Process

  1. Entrepreneur wants to open new hospital or add beds/services
  2. Must submit application to state CON board
  3. Existing hospitals can object and provide testimony
  4. Board decides if "need" exists
  5. Process takes 6-18 months, costs $50k-500k
  6. If denied, cannot proceed

Who Sits on CON Boards?

Often includes representatives from existing healthcare providers → conflict of interest.

States with CON Laws (2024)

32 states still have some form of CON: - Alabama, Alaska, Arkansas, Connecticut, Delaware, Florida, Georgia, Hawaii, Illinois, Kentucky, Maine, Maryland, Massachusetts, Michigan, Mississippi, Missouri, Montana, Nevada, New Hampshire, New Jersey, New York, North Carolina, Oregon, Pennsylvania, Rhode Island, South Carolina, Tennessee, Vermont, Virginia, Washington, West Virginia, Wisconsin

18 states repealed or never had CON: - Arizona, California, Colorado, Idaho, Indiana, Iowa, Kansas, Louisiana, Minnesota, Nebraska, New Mexico, North Dakota, Ohio, Oklahoma, South Dakota, Texas, Utah, Wyoming

Historical Origin

1970s: Federal government encouraged states to adopt CON laws - Goal: Control healthcare costs by preventing "overbedding" - Theory: More hospital beds → more usage → higher costs

1986: Federal mandate repealed (evidence showed it didn't work) - Many states kept laws anyway - Incumbent hospitals lobby to maintain them

Evidence of Impact

Studies show:

  • ✅ CON laws increase costs by 5-15%
  • ✅ CON laws reduce competition
  • ✅ CON laws do not improve quality
  • ✅ States without CON have more hospitals per capita, lower prices

Mechanism:

  • Protects existing hospitals from competition
  • Allows them to maintain high prices
  • Reduces innovation and new entry
  • Particularly blocks specialty hospitals

Real-World Examples

Blocked Competitors

  • Heart hospitals trying to compete with large systems → blocked for "duplication of services"
  • Ambulatory surgery centers → blocked to protect hospital OR revenue
  • Imaging centers → blocked in some states

Delays and Costs

  • Even when approved, process adds $50k-500k and 6-18 months
  • Creates uncertainty that deters investment
  • Lawyers and consultants required to navigate process

International Comparison

Most developed countries DO NOT have CON-type laws: - ❌ UK: No CON (public system, government decides capacity) - ❌ Germany: No CON (regulated prices, competition on quality) - ❌ France: No CON (public system) - ❌ Switzerland: No CON (private but regulated) - ❌ Canada: No CON (public system, provincial planning)

US is unique in using CON laws to restrict private competition.

Why Do They Persist?

Political Economy:

  1. Incumbent hospitals lobby hard to keep them
  2. Frame as "preventing wasteful duplication"
  3. Claim quality concerns

  4. Fund political campaigns

  5. Concentrated benefits, diffuse costs

  6. Hospitals gain millions from reduced competition

  7. Patients lose but don't notice it's due to CON

  8. Regulatory capture

  9. CON boards often staffed by industry insiders
  10. Regulators sympathetic to incumbent arguments

Counter-Arguments (Hospital Industry Claims)

Claim 1: "Prevents overbuilding and waste"

Reality: Studies show CON increases costs, doesn't reduce utilization. Market discipline works better.

Claim 2: "Ensures rural access"

Reality: CON doesn't require service to rural areas. Rural hospitals close at similar rates in CON vs non-CON states.

Claim 3: "Maintains quality through oversight"

Reality: Quality is already regulated through licensing, accreditation, Medicare certification. CON adds no quality benefit.

Claim 4: "Prevents cherry-picking profitable patients"

Reality: EMTALA already requires ERs to treat all. CON is about protecting hospital revenue, not patient access.

Consequences

CON laws directly contribute to: - Hospital monopoly power - reduces competitive threat - Entry barriers - explicit legal prohibition - High prices - protects incumbents from disruption

Repeal Efforts

States that repealed:

  • Indiana (1999): Prices did not increase, access improved
  • Pennsylvania (1996): More competition, no negative effects
  • New Hampshire: Recent repeal, early data positive

Reform attempts:

  • Some states narrowed CON scope (fewer services covered)
  • Others streamlined approval process
  • Ongoing legislative battles in many states

What Would Happen If Repealed Nationally?

Expected effects: - ✅ More specialty hospitals and surgery centers - ✅ Increased competition in urban areas - ✅ Lower prices for elective procedures (5-15% reduction) - ✅ More innovation in care delivery - ⚠️ May not help rural areas (fundamental economics, not just regulation)

Would not solve: - Emergency care pricing (still geographic captivity) - Labor costs (fundamental shortage) - Insurer incentive problems

But would remove one major barrier to competition.

Political Feasibility

Moderate-High at state level: - Some states have successfully repealed - Bipartisan appeal (free market + lower costs) - Strong opposition from hospital lobby

Low at federal level: - Healthcare regulation is state-level - No current federal CON mandate to repeal - Would need state-by-state campaigns

Parent Causes

  • 1970s misguided cost-control policy
  • Regulatory capture by incumbent hospitals
  • Political lobbying by healthcare industry