In most industries, entrepreneurs can open new businesses whenever they identify unmet demand. Healthcare operates differently. In 35 states, anyone wanting to build a new hospital, add beds, or purchase expensive medical equipment must first obtain government permission through a certificate-of-need (CON) process.

These regulations emerged from 1970s federal policy designed to control healthcare costs by preventing unnecessary duplication of services. The theory seemed logical: if regulators could limit the supply of hospital beds and expensive equipment, they could prevent wasteful spending and keep prices down.

Five decades later, the evidence tells a more complicated story. CON laws remain among the most contested policies in American healthcare, with critics arguing they've achieved the opposite of their intended purpose—protecting incumbent hospitals while raising costs and limiting patient access.

Certificate-of-need laws originated from a specific economic theory about healthcare markets. Unlike typical consumer goods, healthcare demand was thought to be heavily influenced by supply—a phenomenon economists call supplier-induced demand. The logic went like this: if you build more hospital beds, physicians will find ways to fill them.

The 1974 National Health Planning and Resources Development Act required states to implement CON programs as a condition for receiving certain federal healthcare funds. Policymakers believed that by requiring state approval before expanding capacity, they could prevent the medical arms race that drove up costs without improving outcomes.

The original rationale extended beyond cost control. Supporters argued that concentrating complex procedures in fewer facilities would improve quality through higher patient volumes. A hospital performing 500 cardiac surgeries annually develops more expertise than one performing 50.

This theoretical framework assumed regulators could accurately predict community healthcare needs and that limiting competition would benefit patients. Both assumptions would eventually face serious empirical challenges as researchers began examining how CON laws actually functioned in practice across different states.

Takeaway

When policy assumes regulators can predict market needs better than market participants, the burden of proof should be on demonstrating that assumption holds—not on those questioning it.

The CON approval process contains a structural feature that critics argue corrupts its original purpose: existing hospitals can formally oppose applications from potential competitors. This creates what economists call regulatory capture, where the regulated industry influences regulations to serve its own interests.

Research consistently shows that CON applications face significantly higher rejection rates when incumbent hospitals file opposition. A prospective competitor must navigate months or years of hearings, submit extensive documentation, and sometimes litigate challenges—all before breaking ground. For many potential entrants, this barrier proves insurmountable.

The effects appear in the data. Studies comparing states with and without CON laws find that CON states have fewer hospitals per capita, fewer ambulatory surgery centers, and longer travel times to healthcare facilities. A Federal Trade Commission and Department of Justice report concluded that CON laws create barriers to entry that can deny consumers the benefits of competition.

Perhaps most telling, the federal government repealed its CON mandate in 1987 after studies showed the laws failed to contain costs. Yet most states retained their programs. Incumbent hospitals had become effective advocates for maintaining a system that protected their market position, even as the policy's original justification eroded.

Takeaway

When regulated entities can formally oppose new competitors, regulatory processes often evolve to protect incumbents rather than serve consumers—regardless of the original policy intent.

The natural experiment of state-level variation provides valuable evidence about CON effects. Fifteen states have eliminated or never adopted certificate-of-need requirements, creating comparison groups for researchers studying outcomes.

Studies examining this variation find consistent patterns. States without CON laws have approximately 30 percent more ambulatory surgery centers per capita, more hospital beds per capita in rural areas, and greater adoption of new medical technologies. Importantly, these increases in supply don't appear to raise overall healthcare spending.

The quality argument for CON laws—that concentrating procedures improves outcomes—has also faced empirical challenges. While volume-outcome relationships exist for some complex procedures, research suggests CON laws don't effectively concentrate care in high-volume centers. They simply reduce overall capacity.

Rural communities may bear the heaviest burden. CON laws designed to prevent urban hospital proliferation also block rural healthcare expansion. When rural hospitals close—as many have in recent years—CON requirements can impede replacement facilities or competing services that might fill the gap. States that have recently reformed their CON laws, including Florida and Georgia, often cite rural access concerns as primary motivations.

Takeaway

State-level policy variation creates natural experiments that can reveal whether regulations achieve their stated goals—making comparative analysis essential for evidence-based policy reform.

Certificate-of-need laws represent a policy that outlived its original justification but persists through institutional inertia and stakeholder advocacy. The evidence suggests these regulations primarily function to protect incumbent hospitals from competition while limiting healthcare access, particularly in rural areas.

Understanding CON laws illuminates broader principles about healthcare regulation. Well-intentioned policies can produce unintended consequences, and regulatory processes can be captured by those they regulate. The gap between policy theory and policy practice deserves constant scrutiny.

For patients and policymakers, the CON debate offers a concrete example of how competition policy directly affects healthcare access and costs—making it a crucial lever for anyone seeking to improve health system performance.