Best of Open Health: Are certificate-of-need laws helping or hurting rural healthcare?

Revisiting our recently published and now trending journal article

Note [AB]: Last week, our team was delighted to see that the paper described in this post was trending as the #2 paper in economics, according to OOIR. It’s encouraging to see an increased interest in policy solutions that can provide greater healthcare accessibility to people in rural communities. We invite you to dive into the full study (linked below) and share it with your friends and colleagues.

Our research — recently published at the Southern Economic Journal — indicates that repealing CON laws increases hospital access, including in rural areas.

Rural Americans fare worse than their urban counterparts on many indicators of health, including mortality, chronic disease and behavioral risk factors. A long-standing challenge is that acute shortages of healthcare providers, in addition to already long driving times to healthcare facilities, make it difficult for many residents of sparsely populated areas to receive needed care.

Some policymakers claim that by controlling where additional health services can be offered, they can direct providers to invest more in rural and other underserved areas. That has been one of the primary justifications for Certificate-of-Need (CON) laws to remain on the books since 1986, when the federal government repealed its CON mandate on states after just 12 years. These laws require that healthcare providers receive approval from a state board before opening a new facility, offering additional services or making major capital investments in a given community. Proponents of CON often claim that these regulations ensure care will be provided to residents in rural, geographically underserved or economically depressed communities.

For example, the West Virginia Health Care Authority, the agency tasked with administering the state's CON program, argues: “In West Virginia, the CON program offers some protection for small, often financially fragile, rural hospitals and the underinsured population they serve by promoting the availability and accessibility of services." The Kentucky Hospital Association has claimed that repealing CON “would be another nail in the coffin for rural communities."

Yet, this may be just an excuse to restrict competition. In many states, the CON application process is lengthy and expensive, imposing a disproportionate burden on providers that are smaller, newer or from disadvantaged communities. Larger and more politically influential healthcare entities are often better positioned to navigate the bureaucratic process and exert both public and behind-the-scenes pressure to secure favorable outcomes. Indeed, there is evidence that political contributions affect the likelihood of CON application approval.

Maureen Ohlhausen, former commissioner of the U.S. Federal Trade Commission, asserts that CON laws “effectively serve primarily, if not solely, to assist incumbents in fending off competition from new entrants." Courts have repeatedly struck down CON restrictions for being blatantly anti-competitive, such as when “a state program was found to have denied a proprietary hospital's application because of a hidden preference for existing facilities."

So which story is true: Are CON laws used to direct providers to rural areas, or is that just an excuse used by incumbents to limit competition? In our recent research, we and our co-authors show strong evidence in support of the latter. We conduct a careful causal estimation of the effects on hospitals and find that repealing CON causes a substantial increase in hospital facilities per capita in both rural and urban areas. Moreover, we find that the repeal encourages smaller hospitals to enter the market, suggesting that CON laws are allowing existing large hospitals to suppress competition.

Given the careful analysis and clear results in our forthcoming paper, our conclusion is that repealing CON laws would go a long way toward increasing access and competition in healthcare, including in rural areas.