Why Do Some States Still Require Certificates of Need?

Updated January 2020

What are certificates of need?

Certificates of Need (CON) are legal documents that all hospitals, health systems, and other healthcare providers must submit to their state regulatory agency in advance of making proposed changes to any new or existing facility. These changes can include new construction, equipment acquisitions, or notice of facility renovations, relocations, recertifications, and closures.

Certificates of Need represent one of the longest-running and most controversial issues in state-level healthcare policy. Why? Not all states abide by CON laws.

In 1964, New York became the first state to adopt CON laws as a way to review capital expenditures of $100,000 or more, and to regulate some hospital service expansions. Within the next decade, a total of 26 states had enacted CON laws of their own. By 1974, these laws were mandated by the federal government—requiring all U.S. states to implement Certificate of Need requirements as part of a health cost-containment strategy.

According to the National Conference of State Legislatures (NCSL), CON laws are mechanisms intended to control—and ultimately reduce—health care costs by restricting service duplication and assessing whether capital expenditure aligns with community need. Many states, however, have found that CON laws do not help them effectively reduce healthcare spending. A handful of states began repealing their own CON laws in the early 1980’s and, in response, the federal mandate was formally repealed in 1987.

Despite this, 35 states have CON laws of some type still in effect today. The program faces near-universal criticism from economists and business advocacy groups, who say that the rules stifle price competition among healthcare facilities and diminish quality performance. As more states discuss changes or repeals to their CON laws, it’s important to assess the current state of the debate and see where the issue is headed.

The changing state of CON laws

In June 2019, Florida repealed a significant portion of its existing Certificate of Need laws—making it the fifth state to abide by a limited CON program. The state has plans to dissolve all CON requirements by July 2021, which would then allow all facility types to expand their services without first demonstrating fulfillment of an unmet need in the community.

As of today, only 12 states have fully repealed these laws. Advice from the federal government might, however, spur more states to consider reversing their own Certificate of Need regulations.

In December 2018, the U.S. Department of Health and Human Services issued a report encouraging states to scale back on policies—like CON laws—that stifle market innovation, limit patient choice, and reduce price competition. It’s possible that this influence may cause more states to repeal or limit their CON law programs within the next several years.

Cost reduction—for both patients and providers—has always been the end goal of Certificate of Need programs. What’s changed between 1974 and now, however, is the strategy for realizing this goal within the industry. What exactly do CON laws achieve?

The cons of CON laws

After 40 years to assess the effects of CON laws, researchers have become overwhelmingly critical of the process. A 2016 study from the Mercatus Center at George Mason University suggests that Certificate of Need policies have not only failed to reduce unnecessary healthcare spending, but have actually increased costs across the industry.

Critics of the program cite the central problem as this: in restricting competition among healthcare providers, CON laws drive up the cost of available medical services. This speaks less to a failure in the regulatory system, and more to a simple fact of economic theory—where limiting the competition removes incentive for established providers to reduce costs.

Opponents have also identified certain flaws in the structure and organization of CON laws as prohibitive of program success, stating that these programs:

• • Vary from state to state, with inconsistencies in management
  • Allow room for political sway and subjectivity to inadvertently influence decisions regarding which facilities will be built, and
  • Aren’t well-suited to objectively identify the “best interests” of a community

A common criticism of the CON program is that it attempts to assign objective value to what is a subjective assessment of a facility’s community value. Decisions made for what some perceive to be the “greater good” of a community fail, however, in the long-term—particularly because they are unable to predict how a changing economy or shifting demographic may impact the needs of a given community.

CON Statistics by Year: 2016 - 2020

Note: Certificate of Need data is sourced from the Purchasing dashboard of Definitive Healthcare’s comprehensive Hospital & IDN platform. Data accessed on January 27, 2020.

The benefits of CON laws

The arguments in favor of CON laws are far less convincing than those in opposition to them. With a comparative lack of strong statistical evidence to promote the benefits of the program, many proponents instead reference a point in the opposition’s argument: the idea that healthcare, as the opposition sees it, is considered an economic product.

To recap, critics of the CON program cite restricted competition among healthcare providers as one of the biggest problems of the regulatory process—not just because it drives up cost, but also because it limits care options for patients.

Supporters of the Certificate of Need process point out that physicians—not patients—are responsible for ordering most health services, like lab tests and prescriptions. By this argument, patients don’t shop around for their health care services in the same way that they would other goods and services.

In cases of emergency, for instance, patients are not typically in any condition to make choices regarding where or from whom they receive care. Any investment in emergency services, then, that doesn’t offer some new or more significant care benefit—like more efficient physician response time—might represent wasteful spending.

This argument, however, is not the reason why so many U.S. states still implement CON laws in one form or another. Supporters maintain that, in theory, Certificate of Need programs are able to:

• • Maintain a smaller volume of healthcare facilities that provide quality care
  • Distribute care access to disadvantaged populations, or other geographic areas not served by existing medical facilities, and
  • Invite public or stakeholder input regarding proposed changes to new or existing community services

Though the future of CON laws is uncertain, the debate surrounding this regulatory process indicates an industry-wide appetite not just for healthcare cost-containment strategies, but for methods of preserving quality care and patient satisfaction.

Webinar: 8 Top-of-Mind Trends for Physician and Hospital Buyers in 2020

The healthcare industry is in the midst of radical change, and not just regarding Certificate of Need programs. Value-based care initiatives are taking hold across the industry, and new technologies—like artificial diagnostic tools and precision medicine—are advancing the scope of modern healthcare delivery.

Interested in learning more about the ways in which we might expect the industry to grow and respond to these advancements? Join Definitive Healthcare CEO Jason Krantz in a webinar today, January 29^th at 2pm EST.

For more information, and to register for the webinar, visit: 8 Top-of-Mind Trends for Physician and Hospital Buyers in 2020