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Research & Commentary: Certificate of Need Laws Hurt Hospital Quality

October 21, 2016

In this Research & Commentary, Matthew Glans examines certificate of need laws and their effect on hospital quality.

Thirty-five states currently use certificate of need (CON) laws to slow the growth of health care prices, promote consolidation of health care providers, increase charity care, and limit duplication of services. States require CON commission approval for a wide range of expenditures, including the construction of new hospitals, purchase of major pieces of medical technology, or offering of new medical procedures. Unlike other licensing laws, CON laws generally are not based on quantifiable criteria such as experience or education.

Despite their prevalence, CON laws have failed in nearly every area of health care they were intended to improve. The stated goal of CON programs is to manage health care costs and improve health care outcomes, yet research shows they actually increase costs for consumers by hindering competition and forcing providers to use older facilities and equipment while generating a greater number of negative health outcomes.

A new study by Thomas Stratmann and David Wille of the Mercatus Center at George Mason University analyzed the effect of CON laws on specific metrics for nine different quality indicators at 921 hospitals. The study reviewed data from 2011 to 2015 and found the health care quality measures were significantly lower in CON states compared to states without CON laws.

The Mercatus results are sobering. While proponents of CON laws claim the laws improve hospital quality by allowing existing providers to improve their skills and work in a limited number of hospitals, death rates were found to be frequently higher in CON states. “We find that mortality rates for pneumonia, heart failure, and heart attacks are significantly higher in hospitals in CON states relative to those in non-CON states,” wrote Stratmann and Wille.

The researchers also say hospitals in CON states have on average 0.5 percentage points more patient readmissions in cases where patients present with pneumonia or heart failure.

One of the biggest discrepancies identified in the study is difference in the rate of mortality resulting from complications in hospitals. In CON states the mortality rate was about 5.5 percent higher than the average rate in non-CON states.

In addition to being linked to poor hospital quality, research shows CON laws drive up health care costs. Data from the Kaiser Family Foundation show health care costs are 11 percent higher in CON states than in non-CON states. The study also found a positive correlation between the number of CON law restrictions and the cost of health care. States requiring certificates of need on 10 or more services averaged per capita health care costs 8 percent higher than the $6,837 average for states requiring certificates of need for fewer than 10 services.

CON laws also give inappropriate influence to competitors during vetting processes. When a company applies to enter a new market, competitors often use the CON process to block potential competition. As a result, CON laws raise the price of medical care by preventing new medical providers from competing with existing hospitals.

A 2011 report from the National Institute for Health Care Reform confirmed this problem after interviewing stakeholders in the CON process in Illinois, Connecticut, Georgia, Michigan, South Carolina and Washington, stating: “In five of the six states studied – all except Michigan – the CON approval process can be highly subjective and tends to be influenced heavily by political relationships rather than policy objectives.”

CON laws increase the cost of health care while limiting access and benefitting those with political connections. The unintended consequences of CON laws have led many experts to call for reform or repeal of these policies. Eliminating certificate of need would move a state away from these outdated, ineffective policies and help to bring market principles back to the health care industry.

The following documents provide additional information about certificate of need laws.
 

Certificate-of-Need Laws and Hospital Quality
https://www.heartland.org/publications-resources/publications/certificate-of-need-laws-and-hospital-quality
Thomas Stratmann and David Wille of the Mercatus Center at George Mason University challenge the claim CON laws improve hospital quality. “Using a broad dataset, the study finds no evidence that CON laws improve hospital quality. In fact, there are more deaths and serious postsurgery complications in hospitals in states with CON laws,” wrote Stratmann and Wille.

Certificate-of-Need Laws Lower Quality of Care, Study Finds
http://www.modernhealthcare.com/article/20160928/NEWS/160929875
Shelby Livingston of Modern Healthcare examines a new study from the Mercatus Center that argues certificate of need laws that govern the construction and development of health care facilities do not raise the quality of care at hospitals and may even lead to higher readmission rates.

Certificate of Need Laws: A Prescription for Higher Costs
https://www.heartland.org/publications-resources/publications/certificate-of-need-laws-a-prescription-for-higher-costs
In this article published in Antitrust Magazine, Maureen Ohlhausen examines CON laws and argues for their repeal. “Regardless of one’s perspective on the proper balance between state and federal power, there are some very good reasons to repeal state CON laws,” wrote Ohlhausen.

Are Certificate-of-Need Laws Barriers to Entry? How They Affect Access to MRI, CT, and PET Scans
https://www.heartland.org/publications-resources/publications/are-certificate-of-need-laws-barriers-to-entry-how-they-affect-access-to-mri-ct-and-pet-scans?source=policybot
A study published in January 2016 from the Mercatus Center at George Mason University examines how CON regulations affect the availability of imaging services provided by hospitals and other medical providers. The results show CON regulations adversely impact non-hospital providers; hospitals largely remain unaffected. The study also shows residents of CON states are more likely to travel out of state to obtain imaging services than residents of non-CON states.

Do Certificate of Need Laws Increase Indigent Care?
https://www.heartland.org/publications-resources/publications/do-certificate-of-need-laws-increase-indigent-care?source=policybot
Thomas Stratmann and Jacob Russ of the Mercatus Center at George Mason University examine certificate of need laws and their effects on pricing and health care access. “While certificate of need laws significantly reduce available health care services for everyone, they do not lead to an increase in care for the needy.”

The Great Healthcare CON
http://fee.org/the_freeman/detail/the-great-healthcare-con
Jordan Bruneau of the Foundation for Economic Education finds CON laws raise health care prices and reduce availability. He advises, “Rather than pinning our hopes on grand plans to overhaul the system, we should first look at where we can make changes on the margin that would move us in the right direction. Abolishing CON laws – a barrier to entry that drives up price, restricts access, and is maintained by cronyism – would be a great place to start.”

Certificate of Need: State Health Laws and Programs
http://www.ncsl.org/research/health/con-certificate-of-need-state-laws.aspx
The National Conference of State Legislatures outlines the various state CON laws and the positions of CON law proponents and critics.

Ten Principles of Health Care Policy 
https://www.heartland.org/publications-resources/publications/ten-principles-of-health-care-policy?source=policybot
This pamphlet in The Heartland Institute’s Legislative Principles series describes the proper role of government in financing and delivering health care and provides reform suggestions to remedy current health care policy problems.

Health Care in the States
https://www.heartland.org/publications-resources/publications/health-care-in-the-states?source=policybot  
Cato Institute Fellow Michael Tanner compares health care reform among the states. Tanner says because there is no universal model available for states to follow, states create their own reform models. Tanner examines how these various efforts differ in cost-effectiveness and insurability, documenting states’ successes and failures.
 

Nothing in this Research & Commentary is intended to influence the passage of legislation, and it does not necessarily represent the views of The Heartland Institute. For further information on this and other topics, visit the Health Care News website, The Heartland Institute’s website, and PolicyBot, Heartland’s free online research database.

The Heartland Institute can send an expert to your state to testify or brief your caucus; host an event in your state; or send you further information on a topic. Please don’t hesitate to contact us if we can be of assistance! If you have any questions or comments, contact John Nothdurft, director of government relations, at jnothdurft@heartland.org or 312/377-4000.

Author
Matthew Glans joined the staff of The Heartland Institute in November 2007 as legislative specialist for insurance and finance. In 2012, Glans was named senior policy analyst.
mglans@heartland.org @HeartlandGR