More than five decades have passed since New York state first enacted something called a certificate-of-need law (CON) in an effort to curb rising health care costs. Such laws, now enforced in 35 states and the District of Columbia, require providers to first seek permission from their state’s government before opening a new practice, expanding services and making certain investments in devices and medical technology. In short, they force would-be competitors in the health care sector to get a permission slip to do what they’re trained to do.
It has become increasingly clear that these laws have failed to achieve their goal. And if that isn’t enough reason to be skeptical, we are now beginning to understand the real effect they have on the provision of health care in America. It isn’t pretty: CON laws may be diminishing hospital quality, and even raising death rates in some cases.
For the better part of the last century, CON laws have enjoyed relative obscurity. Oftentimes, existing providers are even invited to challenge an applicant’s claim that the local market needs increased competition. Because these programs were well-intentioned and are rather innocuous-looking, however, health care reformers have a tendency to focus their efforts on other issues, and certificate-of-need laws have been given little attention. As a result, they have persisted with consistently unfortunate results.
This is not to say that there is no role for regulation, especially when real public-safety concerns are in play. But these regulations have nothing to do with quality or safety: CON laws are enforced in addition to all the licensing and training already required of health care providers.
While certificate-of-need laws were not initially enacted with quality-control in mind, proponents have begun to use that argument to justify them. Allowing only a few providers, the argument goes, will mean that each provider sees more patients. As a result, they will conceivably garner more experience and become better at diagnosing and treating complications.
It is correct that CON laws affect the level of care provided. The problem is that they have had the opposite outcome.
Evidence for this comes in a new working paper published by the Mercatus Center at George Mason University coauthored by one of us (Thomas Stratmann) and David Wille, which shows that mortality rates are higher at hospitals in CON states than in non-CON states. After controlling for demographic and other factors, the average 30-day mortality rate for patients with pneumonia, heart failure and heart attacks discharged from hospitals in CON states is between 2.5 percent and 5 percent higher.
This is alarming news, but it shouldn’t be too surprising. Providers compete on a variety of margins beyond price, and quality is one of them. As a result, when CON laws artificially restrict the number of providers in a local market — protecting those few favored providers from increased competition — there is less pressure for them to worry about the quality of care. Patients are then left with fewer options.
Comparing states with and without certificate-of-need laws provides us with a unique window into how providers would react in a world without CON laws: When providers have to compete for patients, the level of care increases. Individual doctors, nurses and health care administrators are doing their best, but on the macro level, the basic laws of economics still apply to their industry.
While it is troubling to note that certificate-of-need programs are tied to poorer outcomes, this finding should also come as welcome news. With some effort, we can achieve marked improvements in our health care markets. It is simply a matter of admitting that these programs have failed and recognizing that the goal isn’t the health of existing providers but the health of patients.
— Christopher Koopman is a research fellow at the Mercatus Center at George Mason University. Thomas Stratmann is a Mercatus Center scholar, professor of economics and law at George Mason University, and coauthor (with David Wille) of a new Mercatus Center working paper that asks, “Do CON Laws Affect Hospital Quality?”