Certificate Of Need Wildly Inflates Healthcare Costs
For the 60 years Certificate of Need (CON) legislation has existed, supporters have cited lower healthcare costs as one justification for its continued enforcement. This claim always flew in the face of basic economic theory, as intentionally restricting the number of businesses allowed to operate is a known recipe for higher costs.
The total cost of CON is astronomical. The Mercatus Center, a non-profit think tank at George Mason University, found that CON laws increased “overall” healthcare spending by 3.1%, and 5% for physician care. It increased Medicare spending by 6.9%. In the real world, where total healthcare spending totals $14.5 trillion in the United States, these numbers on paper indicate a massive financial burden on the whole population. Rough estimates of excess costs vary all the way from $300 million to $40 billion, and possibly even higher.
The statistics have repeatedly made clear that CON causes a financial drain on innocent participants throughout the healthcare system. Worse, the problem is entirely unnecessary. Voters and legislators must stand up to lobbyists who mislead the public about the nature of these laws.
CON laws require all prospective medical practices to prove they are needed by the area they want to serve before they can open or even expand. They are not safety regulations, and the supposed need (or lack thereof) is decided not by community members, but by a government committee. These committees often outright disregard the wishes of community members in favor of existing medical providers, who naturally do not want the new provider—their potential competition—to operate.
Ignoring economic theory, snubbing potential patients, and squelching entrepreneurial efforts garnered a great deal of criticism, but legislators nevertheless gave CON laws a chance to prove they would somehow lower healthcare costs. And no matter how ill-advised the experiment, supporters could possibly be forgiven for attempting a new financial approach in the new healthcare landscape of the mid-sixties.
As the Institute for Justice (IJ)—a nonprofit, public interest law firm—pointed out in their exhaustive analysis of CON in 2023, “There is no doubt that healthcare is a highly regulated market with many distortions (hidden pricing, third-party payment, etc.).” For better or worse, the evolving healthcare market in the Johnson reform era was already being heavily warped by government policies, so trying something innovative in response to rising costs may have been understandable.
However, as IJ’s report further explained, “Even so, there’s no reason to believe that restricting supply (another distortion) will decrease per-service spending. Instead, supply restrictions—even in regulated and distorted markets—tend to increase spending per service. Additionally, because of their anti-competitive properties, CON laws seem likely to permit some degree of monopoly pricing power. This too, is likely to increase spending per service.”
Along with the obvious logical rebuttals to CON support, six decades of empirical evidence are more than enough to prove that the experiment failed. IJ concluded, “The data bear this out: the findings in the CON literature are predictable. Restricting the supply of healthcare does not decrease costs.”
Statistics have consistently and completely debunked vague claims of lower costs, and voters and legislators need to stop allowing healthcare behemoths to get away with using this excuse to subvert their competitors. Patients, newer (and less wealthy and politically connected) healthcare practitioners, and the healthcare system as a whole have suffered demonstrable financial losses due to CON.
Immediate Cost To Patients Per Service
The patient pool comprises the most obvious group of CON victims. Nearly everyone suffers injury or illness at some point, and high costs in health care immediately hit them at point of service.
IJ performed a meta-analysis of 43 distinct studies examining CON’s effect on patient spending per service. Of those tests, 56% (28 tests) found patients subject to CON spent more, whereas only 7% (three tests) found they spent less. The remaining results were statistically insignificant.
This part of the report, although thorough in itself, only addressed the costs to a particular patient evident at point of service. Each patient’s bill was compared to every other patient’s bill, and this allowed for quick and concise cost comparison across patients.
However, analyzing costs requires a broader analysis.
Costs Over Time And Population
To see the effect on a larger scale and eliminate other possible factors influencing the data, IJ also analyzed spending per capita. Its analysts examined 50 tests and found that 46% (23 tests) saw higher spending per capita among patients subject to CON. Only 16% (eight tests) showed lower spending per capita. Again, the remaining results were not considered statistically significant.
IJ explained, “Since CON laws are likely to decrease the number of services that people obtain while increasing the amount spent per service, its effect on total spending is theoretically ambiguous. A CON program might, for example, lead to zero spending if it eliminated all healthcare resources (though undoubtedly this would not be socially optimal).”
In other words, IJ went to great lengths to take into account the possibility that CON would lower costs over time by pricing patients out of health care entirely. Not only would this be a chilling occurrence, but the studies showed that any forcing of patients to avoid care still did not lower their overall costs.
Costs To Providers
Patients might be tempted to roll their eyes at extra costs to physicians, who tend to have relatively large salaries. However, costs to physicians always roll down to patients. Doctors do not have endless money, and a dollar that goes toward a regulation fee cannot go toward offering lower-cost (or free) services.
And those regulation fees are staggering. CON application fees alone in Iowa can cost $16,000, and the lawyer’s fees to appeal literally have no guaranteed cap. The appeals process may also drag on for more than a decade, so lost opportunity costs have to be considered as well. At the end of the process, the hopeful provider may still not be awarded a certificate.
In New York, building a $100 million hospital requires a CON fee of $5 million. In Washington, an application can cost $3 million.
Notably, applying for a CON does not assure a provider that the committee will grant one. Numerous doctors have spent vast amounts of time and money in the application process, only to be denied the certificate.
In South Carolina, for instance, the average time to obtain a certificate is 134 days. But that can extend to more than a decade if current providers continually protest their potential new competition. The costs in fees and lost opportunity are not even quantifiable at that point.
Costs To “The System”
Attributing costs to “the healthcare system” gravely distorts reality. Individuals—including patients, doctors, and taxpayers—make up the system, often with virtually no control over how their money is used. However, the term is sometimes necessary when discussing health care, as it is a way to describe the total effect.
According to KFF, an established, non-partisan, and non-profit organization focused on health issues, states with CON laws suffer 11% overall higher healthcare costs. This number is the cost to the system.
CON laws increase the time and money needed to reach providers, as areas with CON laws consistently have far fewer facilities. Lost time and money spent on health care affects every other aspect of life. Any day spent on a long journey to a doctor instead of work causes the loss of salary. Any dollar spent on a bill or a CON application or appeal is a dollar that cannot go to a more productive cause.
The damage this legislation does is difficult to quantify. But a close look at affected individuals, along with a bird’s-eye view of the cost to society at large (the “system”), show that the negative effects are enormous.