In 1986, President Ronald Reagan convinced Congress to eliminate an ill-conceived requirement that states restrict investment in health care. Cronyism is hard to uproot, however. Almost 30 years later, 35 states and the District of Columbia still maintain these restrictions on medical investment.
For a decade before Reagan’s reform, Washington had been leaning on state governments to implement the not-so-bright idea that constraining private medical investment would be a good way to decrease health care costs.
Their analysis betrayed a lack of economic understanding: restricting supply raises prices and protects monopolists. The reduction in spending under such schemes happens only if people receive less health care, surely not a desirable outcome. This approach is like forcing people to be homeless so they can save money on rent.
The method the states used was to require any hospital that wanted to make a significant investment (with its own money) to get a “certificate of need” from a state board. The boards are often staffed by competing hospitals, who naturally want to minimize competition. These regulations are known evocatively as “CON laws.”
In a new working paper for the Mercatus Center at George Mason University, economist James Bailey found that certificate of need laws were associated with higher health spending per capita. In states with CON laws, per capita spending is about 3 percent higher, controlling for demographic and economic factors. The effect is even larger for Medicare, where CON law states have 7 percent higher health spending per capita.
Although Bailey is not able to rigorously prove a causal relationship, he does present the straightforward economic theory of supply restraints.
When consumers are highly responsive to prices, as they are with optional purchases, restricting supply tends to lower total expenditure (although it’s still not a good idea). But when consumers are less responsive to prices, supply restrictions raise total expenditure. Have you ever thought, “Maybe I’ll just set this broken bone myself, the doctor’s expensive”? Probably not—most of us will pay whatever it costs to stay healthy and avoid an early death.
Economic theory thus predicts that CON laws increase total spending while limiting access to health care, making us sicker and poorer. The data do not disagree.
Stories from around the country show how CON laws hamper competition:
- The Town of Niagara, New York, needs state permission to sign a contract for emergency medical response service.
- In Tupelo, Mississippi, a competitor tried to prevent the aptly named Dr. Mike Currie from opening a radiology center in 2002. Currie prevailed, and got revenge by using the same bureaucracy to prevent his competitor from getting a certificate of need for a new MRI machine a few years later.
- Near Myrtle Beach, South Carolina, Tidelands Waccamaw Community Hospital and Grand Strand Regional Medical Center have been locked in a three-year fight over which will get permission to purchase more beds and expand rehabilitation services.
- In Louisville, Kentucky, a $1.8 million investment in assisted living is being delayed as the state’s certificate of need board considers it.
- In Huntley, Illinois, an investor fought for four years to get state approval for a new hospital over the objections of competitors. The new hospital finally opened last Tuesday, employing 400 people.
- The states of Missouri and Iowa rejected $12.6 million and $14 million in out-of-state investment, respectively, for proposed psychiatric facilities.
State legislators routinely promise to support job creation and attract investment. To follow through on those promises, they should finish what Reagan started and repeal their certificate of need laws.
