COVID-19 Pandemic Highlights Why States Should Do Away With Certificate of Need Laws
175535710 © Patrik Slezák |


COVID-19 Pandemic Highlights Why States Should Do Away With Certificate of Need Laws

Certificate of need laws are an anti-competitive barrier to entry and are associated with increased costs, lower quality care, and reduced access to care.

The COVID-19 crisis has shown how overly restrictive health care regulations can have devastating consequences for patients. As the pandemic threatened to overwhelm hospitals across the country, governors rushed to temporarily suspend certificate of need laws that prevent the expansion of health care facilities. However, permanent reforms are necessary to ensure access to care after the coronavirus pandemic subsides.

State-level certificate of need (CON) laws require health care providers to receive government approval to construct new facilities, expand existing ones, or offer new medical services. To gain approval, health care providers are often required to demonstrate that there is an unmet need for additional capacity. However, existing providers–who have an interest in limiting competition–may block new entrants and competitors by arguing that there is no additional need.

New York became the first state to enact a certificate of need law in 1962. Over the next decade, 26 other states adopted CON laws. Further expansion of certificate of need laws occurred in response to the National Health Planning and Resources Development Act of 1974. The act conditioned federal funding on the enactment of CON laws. By 1982, every state except Louisiana had some form of certificate of need program.

These certificate of need laws were promoted under the misguided notion that unregulated competition could lead to unnecessary spending and increase health care costs. This line of reasoning is, in part, based on the work of Milton Roemer, a public health professor at the University of California—Los Angeles. Roemer observed that the rate and length of hospital stays were greater in regions with a higher number of hospital beds per capita. Based on this observation, Roemer concluded that, in an insured population, an increase in the supply of hospital beds creates ‘induced demand’ for hospital services. In other words, “a bed built is a bed filled.” Roemer’s work was so influential that this theory came to be known as Roemer’s Law.

Following the logic of Roemer’s Law, certificate of need laws were initially intended to slow the growth of health care costs by restricting the supply of services. However, ample evidence suggests that CON laws have failed to accomplish the goals of preventing over-investment and reining in health care costs. CON laws instead serve as an anti-competitive barrier to entry and are actually associated with increased costs, lower quality, and reduced access to care.

Since the federal mandate was repealed in 1987, several states eliminated or modified their certificate of need laws, but 35 states and the District of Columbia maintain some form of CON program.

Experiences during the COVID-19 pandemic have prompted some of these states to consider certificate of need reform. The ideal reform for each state is to fully repeal CON requirements for all facilities, equipment, and services. However, full repeal can be politically challenging given the strong interest and lobbying power of incumbent health care providers in the market.

Incremental reform may be more feasible for legislators. Matthew D. Mitchell and his colleagues at the Mercatus Center have identified several reform options that states should consider. For example, many states have opted to repeal portions of their certificate of need laws while maintaining CON requirements for some facilities and services. Lawmakers could begin with CON laws for facilities and services that provide low-cost care, serve particularly vulnerable populations, or are least likely to be overprescribed.

Where CON requirements are maintained, efforts should be made to ensure that approval processes are subject to transparency and accountability. States should disclose the percentage of applications that are approved and denied. Total application fees, attorney fees, and litigation costs should be reported so that lawmakers and the public are aware of the costs associated with CON laws. Care should also be taken to ensure that CON review boards are not dominated by industry insiders or individuals with financial ties to existing providers in the market.

While these and other incremental approaches would be beneficial, some potential reforms would be counterproductive. For example, states should avoid creating formulas to determine need. While this may appear less susceptible to capture than subjective assessments of need, formulas are often designed to achieve utilization targets that protect incumbent providers from competition.

Lawmakers should also avoid replacing certificate of need programs with similar restrictions on construction. As research on the effects of CON laws indicates, supply constraints are not an effective means for reining in health care costs. Any form of a moratorium, quota, or need-based planning is short-sighted and counterproductive to the intent of CON reform.

Finally, lawmakers should be wary of replacing certificate of need laws with policies that are intended to encourage construction in certain communities or that require providers to serve particular populations. Research suggests that CON requirements reduce access in rural areas and do not promote indigent care. Therefore, CON repeal does not necessitate additional requirements that could have unintended consequences. The essence of CON repeal is the recognition that centralized planning is not more capable of determining the optimal distribution of health care resources than investors and market forces.

While several states wisely suspended their certificate of need laws in response to the COVID-19 pandemic, permanent reform is still necessary. Lawmakers have a variety of options in addition to full repeal, but they should be careful to avoid policies that would continue to limit access to health care.