Saying the quiet part out loud: Understanding the “sacred cow” of healthcare regulation

A few months ago, I was invited to testify at a policy hearing about Certificate-of-Need (CON) laws in South Carolina. CON laws are regulations that impose financial and bureaucratic costs by requiring healthcare providers who plan on offering a new healthcare service or an additional bed to first show to a regulatory body that their region needs the service or bed. After a few conversations with scholars involved in the hearing I quickly noticed something: When it comes to policy making, nursing homes are the “sacred cow” of healthcare policy.

I was quickly told that the bill in question was to repeal all CON laws in South Carolina, except for nursing homes. I was advised to not even mention nursing homes in the hearing because proponents of repealing CON were afraid that the bill would die if nursing homes were mentioned. Nursing homes were not to be mentioned, debated or included in bills. I asked several people why that was the case and generally got the same answer: Because there is no way nursing home CON laws could be repealed.

This is similarly the case in many states throughout the country. Several states have already repealed CON laws for other healthcare sectors but kept it for nursing homes. Ohio dropped all its CON regulations in 1997 except for nursing homes. Indiana revoked all its CON regulations in 1999 but reinstated only nursing home CON in 2019. In 2019, Florida repealed most of its CON restrictions but maintained CON laws for nursing homes. In 2023, West Virginia repealed CON laws for nearly all of its healthcare services except nursing homes. Many other examples from various states show a common trend: Repealing nursing home CON laws is far more difficult than CON laws for any other healthcare service — so difficult that even policy makers trying to repeal CON laws don’t want to mention it.

Nursing home CON regulations have historically been the most prevalent CON regulation. Thirty-six American states regulate nursing homes via CON laws, which is more than any other health service. Often, CON regulations on nursing homes are more restrictive than other health services. While all CON regulations impose a bureaucratic cost of applying for a license, it is still possible to get the license and offer the new service for most categories of CON regulations. Nursing home CON, however, has been applied in many states as a moratorium. Even states that do not have a moratorium still require nursing homes to go through a long and costly review process to get a permit for any additional beds.

So why are nursing homes more regulated via CON laws than all other healthcare services? Why does it seem to be this sacred cow? In this paper, I argue that it is because CON laws have a unique effect on Medicaid expenditures such that policy makers can use this regulation to constrain state healthcare expenditures. What I show in that paper is that CON laws have an insignificant effect on healthcare expenditures in all healthcare services. Thus, repealing CON laws for these services will have little impact on states’ expenditures. Repealing nursing home CON, however, could lead to a substantial increase in expenditures. In Pennsylvania, for example, I find that the repeal of nursing home CON laws nearly doubled nursing home Medicaid expenditures.

But keep in mind what these laws do: restrict the supply of healthcare services available to older and sick people who need nursing home care. They also reduce the quality of nursing homes via reduced competition. But few people know what CON laws are, and even fewer understand how these laws affect nursing homes.

Politicians are people, too, and they respond to their incentives. If repealing nursing home CON will mean a large increase in government spending, that money will have to come from somewhere. Most politicians would prefer to use public money on their pet priorities before spending an extra dollar on nursing homes. So how could such incentives be changed? I don’t have an answer for that yet. But before solving any problem, it is important to first understand it. I hope this discussion (and my original paper on the topic) can contribute to the understanding of why nursing homes are so heavily regulated.

Obviously, nursing home providers have influential lobbies in many states. I would love to hear your feedback on how to counteract that influence, or even to bring the industry on board with market-based reforms.