Skip Navigation

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

August 1, 2016
By James Bailey

This paper, written by Creighton University assistant professor of economics and finance James Bailey, examines the effects of certificate of need (CON) laws on health care costs.

stethoscope and insurance docs

This paper, written by Creighton University assistant professor of economics and finance James Bailey, examines the effects of certificate-of-need (CON) laws on health care costs.

Because price does not strongly affect the demand for health care, restricting health care’s supply does not reduce people’s costs, Bailey writes.

“However, health care is generally estimated to be price inelastic, suggesting that CON
laws are likely to backfire and increase total spending on health care for two reasons,” Bailey wrote. “First, inelastic demand means CON will increase the price of the services it targets more than it will reduce their use. Second, CON is not completely comprehensive. To the extent that sectors covered and uncovered by CON are substitutes, CON that succeeds in restraining the use of covered care will increase the demand for, and spending on, uncovered care.

CON laws don’t achieve their stated goals, Bailey writes.

“Certificate-of-need laws aim to bend the health cost curve downward by slowing the entry of
new providers and the adoption of new technology,” Bailey wrote. “I show that such laws could be effective in a market where demand is price elastic. But in a market with inelastic demand, as our actual market for health care seems to be, my model predicts that CON will increase spending by raising prices. The data partially bear out these predictions, showing that CON does not reduce any type of spending and may actually increase spending on hospitals and physicians, especially by Medicare.”