A Review of the Impact of Certificate of Need Regulation on Hospital Spending

Certificate of Need (CON) regulation has been maintained by the majority of U.S. states as a method for controlling hospital-related health care costs. From 1976 to 1983 the Federal government mandated that all states have some type of CON in place. Congress envisioned that CON, which focused primarily on hospitals and nursing homes, would control costs, regulate and control the medical technology race, and promote access and quality in the health care delivery system. The enactment of these regulations was considered important since the health care sector does not completely conform to traditional economic models. By placing restraints on hospital bed expansion the goal was to reduce duplication of services and eliminate unnecessary supply. These actions would also reduce supplier induced demand (e.g. Roemer's Law). Currently 34 states and the District of Columbia maintain CON while 16 states have repealed CON regulation. An analysis of American Hospital Association data from 1985 to 2004 reveal that CON has not achieved its desired results. Multiple regression models show that presence of CON is not significant in predicting per capita hospital costs or per capita inpatient hospital beds when controlling for population alone or when adding state health status as a covariate. Additionally, non-CON states spend a lower percentage of their state GDP as compared to CON states. These results are consistent when treating CON/non-CON as a dichotomous variable or when grouping states by levels of CON stringency. An often cited concern over repealing CON is an expected growth in the number of hospitals as well as expansion of current facilities. The data indicate the opposite where the number of per capita beds has decreased for most states following CON repeal. CON creates an additional barrier to entry for new hospitals and contributes to an anti-competitive market in its current forms. With healthcare costs continuing to be a large part of the U.S. GDP the time is ripe to examine CON policies. Benefits and consequences of eliminating, changing, and removing CON will be discussed.