Chairman Orrock, Vice Chairman Garrett, and distinguished members of the House of Delegates Health, Welfare, and Institutions Committee:

My name is Matthew Mitchell. I am an economist at the Mercatus Center at George Mason University where I am an adjunct professor of economics. In recent years, my colleagues and I have been studying certificate-of-need laws in healthcare. I am grateful for the opportunity to discuss our findings with you today.

Introduction to CON Laws

Certificate-of-need (CON) laws—or certificate-of-public-need (COPN) laws, as they are called in Virginia—require healthcare providers wishing to open or expand a healthcare facility to first prove to a regulatory body that their community needs the services the facility would provide. The regulations are typically not designed to assess a provider’s qualifications or safety record. Other regulations such as occupational licensing aim to do that. Instead, the process aims to determine whether or not a service is economically viable and valuable. The process for obtaining a CON or COPN can take years and tens or even hundreds of thousands of dollars in preparation costs. While these regulations appear to benefit incumbent providers by limiting their competition, their effects on patients and taxpayers have generally been found to be negative. This helps explain why antitrust authorities at the Federal Trade Commission (FTC) and at the US Department of Justice (DOJ) have long taken the position that these rules are anticompetitive. In a joint report from 2004, for example, the FTC and DOJ declared,

The Agencies believe that, on balance, CON programs are not successful in containing health care costs, and that they pose serious anticompetitive risks that usually outweigh their purported economic benefits.

In the remainder of my testimony today, I will offer a brief history of CON laws and an overview of the economic evidence that has led many, including the FTC and DOJ, to conclude that these laws pose anticompetitive risks to consumers and taxpayers. Finally, I compare Virginia’s COPN program to the CON programs in surrounding states.

A Brief History of Certificate-of-Need Regulation

More than four decades ago, Congress passed and President Ford signed the National Health Planning and Resources Development Act of 1974. The statute enabled the federal government to withhold federal funds from states that failed to adopt CON regulations in healthcare.

New York had already enacted the first CON program in 1964; by the early 1980s, with the federal government’s encouragement, every state except Louisiana had implemented some version of a CON program. Policymakers hoped these programs would restrain healthcare costs, increase healthcare quality, and improve access to care for poor and underserved communities.

In 1986—after Medicare changed its reimbursement practices and as evidence mounted that CON laws were failing to achieve their stated goals—Congress repealed the federal act, eliminating federal incentives for states to maintain their CON programs. Since then, 15 states, representing about 40 percent of the US population, have done away with their CON regulations, and many have pared them back. A majority of states still maintain CON programs, however, and vestiges of the National Health Planning and Resources Development Act can be seen in the justifications that state legislatures offer in support of these regulations.

The Economics of Certificate-of-Need Regulation

Unfortunately, by limiting supply and undermining competition, CON laws may undercut each of the laudable aims that policymakers desire to achieve with CON regulation. In fact, research shows that CON laws fail to achieve the goals most often given when enacting such laws. These goals include

ensuring an adequate supply of healthcare resources, ensuring access to healthcare for rural communities, promoting high-quality healthcare, ensuring charity care for those unable to pay or for otherwise underserved communities, encouraging appropriate levels of hospital substitutes and healthcare alternatives, and restraining the cost of healthcare services.

We have quite a bit of information to help us predict what would happen if other states such as Virginia were to repeal their laws because 15 states have repealed their CON programs. Economists have been able to use modern statistical methods to compare outcomes in CON and non-CON states to estimate the effects of these regulations. These methods control for factors such as socioeconomic conditions that might confound the estimates. Table 1 summarizes some of this research. It is organized around the stated goals of CON laws.

Certificate-of-Public-Need Regulation in Virginia

Virginia’s COPN program is one of the more comprehensive CON programs in the country. Among many other things, Virginia’s program regulates acute hospital beds, ambulatory surgical centers, medical imaging technologies, rehabilitation centers, and psychiatric care facilities. Table 2 shows the number of technologies and procedures regulated by Virginia and surrounding states. Nationally, the average number of technologies and procedures regulated is 12, among CON states the number is 16, and among states in the Mid-Atlantic region it is 18. Virginia regulates 20 technologies and procedures. All of the evidence reviewed in table 1 was derived from point estimates in regression analyses. Though a regression is one of the best ways to assess the effect of a policy while controlling for other factors, it is not an intuitive concept for many. So to better illustrate the data behind these results, I have created four charts that show changes over time in healthcare facilities per capita in Virginia and the two states in the region with limited or no CON programs, Ohio and Pennsylvania. These states are illustrative because they are comparable in location, size, and socioeconomic makeup. The differences that do exist between these states would lead one to believe that Virginia has the advantage. For example, per capita personal income is higher in Virginia than in either Ohio or Pennsylvania, while poverty rates are lower in Virginia than in either of the other two states.

As I have mentioned, Virginia regulates 20 different procedures and technologies. In contrast, Ohio’s CON program regulates just one item, nursing home and long-term care beds, while Pennsylvania has no CON program at all, having repealed its program in 1996.

Figure 1 shows hospitals per 100,000 residents. In Ohio, the number of hospitals per 100,000 residents rose slightly. Over the same period, in both Virginia and Pennsylvania, the number has fallen. In Virginia, however, the decline was sharper, falling 34 percent, compared with a 20 percent decline in Pennsylvania. On a per-resident basis, Virginia now has seven-tenths as many hospitals as Pennsylvania and a little more than six-tenths as many as Ohio. Figure 2 shows rural hospitals per 100,000 rural residents. Virginia not only has fewer rural hospitals per rural resident than either of the other two states; it is the only one of the three that has seen a decline in that figure over time.

Figure 3 shows ambulatory surgical centers (ASCs) per 100,000 residents over time. In all three states, the number of these centers per resident has been rising. In Virginia—the only state of the three that regulates ASCs through COPN—the rise has been the most modest. On a per capita basis, Virginia has about one-third as many ASCs as Pennsylvania and four-tenths as many as Ohio. Figure 4 shows rural ASCs per 100,000 rural residents. Virginia is the only state of the three that has seen a decline in this figure over time. On a per-rural-resident basis, Virginia has one-eighth as many rural ASCs as Pennsylvania and one-twelfth as many as Ohio. None of these results should be surprising. CON laws are a restriction on the supply of facilities and services, and economic theory suggests that supply restrictions limit access to services while raising costs and undermining quality. Indeed—as shown in table 1—that is exactly what empirical studies of CON have consistently found.

Concluding Remarks

Given the substantial evidence that CON laws do not achieve their stated goals, one may wonder why these laws continue to exist in so much of the country. The explanation seems to lie in the special-interest theory of regulation. Specifically, CON laws perform a valuable function for incumbent providers of healthcare services by limiting their exposure to new competition. Indeed, recent evidence suggests that special interests are able to use political donations to increase the odds that their CON requests will be granted. This aspect of CON laws helps explain why economists as well as antitrust authorities have long argued that these regulations are anticompetitive and harmful to consumers.

For those who are interested in further details on the effects of CON on spending patterns, I have also attached my paper, “Do Certificate-of-Need Laws Limit Spending?” Like all Mercatus Center research, it has been through a rigorous, double-blind peer review process.

Thank you again for the opportunity to share my research with you. I look forward to answering any questions you may have.