How Do Certificate-of-Need Laws Affect Hospitals? A Review of the Evidence

Certificate-of-Need (CON) laws require the approval of states’ health planning agencies for health care providers to engage in regulated actions such as opening or expanding facilities or purchasing equipment. Such laws initially aimed to restrain health care costs and wasteful redundancies, but they are also now seen by advocates as helping to preserve the financial viability of struggling hospitals. Opponents of CON laws argue that they stifle competition, leading to inflated costs and limited options for accessing care. This study reviews the literature on the impacts of CON laws. All else equal, economic theory suggests that hospitals should see fewer new competitors, charge higher prices, and earn higher net revenues as a result of CON laws. Reduced competition can also weaken incentives to operate efficiently and deliver high quality care. However, these predictions assume otherwise perfectly competitive markets, and health care markets are heavily distorted in ways that change meaningfully over time. The need for new entrants to obtain regulatory approval could conceivably improve their quality of care while also helping to ensure that safety-net hospitals do not need to shut down unprofitable departments or close completely. Further, CON laws restrain not only entry of new facilities but also expansion of existing facilities, limiting their ability to leverage potential regulatory advantages. Viewed in its totality, the available evidence supports some of the predictions of conventional economic theory but not others. In at least some cases, CON laws restrict both entry of new competitors and expansion of existing hospitals. The reduction in competitors increases the number of procedures per hospital. However, there is little evidence that this translates to increased prices or higher hospital profitability, and hardly any research tests for reduced closure rates. Studies on hospital efficiency and quality of care for procedures performed exclusively at hospitals mostly point to null or negative effects, but evidence on quality is more favorable for services that can be provided outside of hospitals. We conclude that, despite the fact that the literature on CON laws is already large, more research is needed. Future work should utilize the latest tools for identifying causal effects and better account for the wide variation in CON laws across states.