Thirty-five states — including Alabama — currently employ Certificate of Need (CON) laws in health care, which require approval for new facilities in an industry.
But CON laws are one of numerous poor policies artificially inflating health care costs and leading to shortages in rural areas. Indeed, government interference, rather than corporate greed, is what is causing bloat in America’s health care system.
Managing entry is the economic principle behind public utilities regulation. Economists who promote managing entry see excess capacity as unnecessarily driving up costs, and believe that experts can provide the benefits of market competition through regulation without the costs. For example, we could avoid two electric power grids or unneeded hospital beds.
But excess capacity fosters competition, and competition in the market disciplines firms by enabling customers to take their business elsewhere. Those competitors, however, must be able to serve their new customers. In essence, if there are no vacant apartments anywhere, then threatening to move will not scare your landlord.
Markets rely on competition to drive prices down to costs, but the public utility school thought wise economists could align prices with costs through command. But the public utility school massively overestimated economists’ ability to independently discern costs. This resulted from thinking that costs were identifiable through engineering studies. Yet every product or service has something like 10 dimensions and 10 qualities of inputs on each. Real world complexity overwhelms economists trying to estimate costs.
Limiting capacity results in government monopoly (with utilities) and sometimes an exclusive government contract because government must be involved to prevent unapproved entry. CON laws establish a government board to control entry. A new facility or expansion must receive a “certificate of public convenience and necessity” from boards comprised of industry representatives. Hospitals thus get the authority to keep competitors out.
The laws create a massive conflict of interest known as the public choice problem, which afflicts many expert-driven plans for government policy. Public choice, which applies economic methods to study government, models the human beings populating markets and governments similarly. If we assume consumers, businesses, and investors do the best they can for themselves given their circumstances, so should voters, elected officials, and bureaucrats, the public choice thinking goes.
Doctors and hospital executives on a CON board have a financial interest in preventing competition, and thus we should expect these experts to make decisions based on their self-interest, not the well-being of consumers. State legislators receiving campaign contributions from health care firms will tolerate this. Government agencies purportedly advancing consumer interests will frequently be “captured” by the regulated businesses to the detriment of consumers.
I believe CON laws persist because people think medicine is not commercialized. Doctors have a professional responsibility to their patients’ best interests and insurance covers the bills, so we imagine that medical care is not driven by profit.
Yet medicine is big business, almost 20 percent of GDP, a $5 trillion annual industry. Many hospitals are for-profit, stocked with equipment supplied by for-profit companies, and administer drugs produced by for-profit companies. Doctors are well paid. Some of the money even trickles down to the nurses and physician assistants.
Economists have investigated the impact of CON laws, and a widely-cited study from the Kaiser Family Foundation estimates that they increase health care costs by 11 percent, controlling for other factors. Research from the Mercatus Center at George Mason University finds 30 percent fewer hospitals and 99 fewer hospital beds per 100,000 state residents. Clearly, CON laws reduce the availability of health care in rural areas, and some studies find that they reduce hospital quality.
These differences in facilities do not translate into measurably worse health care outcomes, although, to be sure, longer ambulance trips during medical emergencies cannot improve outcomes. However, any such cases do not produce statistically significant state level outcomes.
But CON laws arguably cost Americans freedom during the pandemic. The unprecedented restriction of freedom of stay-at-home orders was driven largely by fears of hospitals being overwhelmed. Our expert-planned health care system limited hospital capacity and then restricted our freedom in response to the shortage.
CON laws are one of the many poor policies artificially inflating health care costs. Let’s end this CON job and lower Alabama’s health care costs without sacrificing quality.
Daniel Sutter is the Charles G. Koch Professor of Economics with the Manuel H. Johnson Center for Political Economy at Troy University and host of Econversations on TrojanVision. The opinions expressed in this column are the author’s and do not necessarily reflect the views of Troy University.
