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Health-Care Supply: About Those Certificate-of-Need [CON] Statutes

by Thomas Stratmann and Jacob W. Russ

Many states have certificate-of-need regulations, which prohibit hospitals, nursing homes, and ambulatory surgical centers from entering new markets or making changes to the existing capacity of medical facilities without first gaining approval from certificate-of-need regulators. These regulations purport to limit the supply of medical services and to induce regulated institutions to use the resulting economic profits to cross-subsidize indigent care. We document that these regulations do limit supply. However, we do not find strong evidence of higher levels of indigent-care provision in states that have certificate-of-need regulations as opposed to those that do not.

Discussion and Conclusion
This paper analyzes the connection between CON laws and cross-subsidization in the health care industry. We consider CON laws as a mechanism for financing a subsidy to the medically indigent.

The theory of cross-subsidization requires that CON programs do two things: First, they must act as an entry barrier to reduce the competitiveness of regulated medical sectors and increase the profitability of existing providers. Accomplishing that, these regulations must also force firms to provide the cross-subsidy. CON laws must provide incentives for the regulated to
use their profits to provide more indigent services than they otherwise would.

We investigated indigent care with state-level hospital data and put together the most comprehensive CON-regulation database to date. We do not find any evidence of an increase in indigent care. Our coefficients are small in magnitude, not statistically different from zero, and the direction of the effect changes across specifications. Our evidence is consistent with previous studies in showing that CON programs are effective at restricting the supply of regulated medical services. It appears, however, that CON programs do not induce cross-subsidization. Since we lack measures of hospital profitability, our data do not allow us to make conclusions about whether this is because supply restrictions have not increased hospital profits, or because indigent care provision is not sufficiently enforced by the states that have these provisions.

Link to the entire paper appears below: