How Do Certificate-of-Need Laws Affect Hospitals? A Review of the Evidence

Certificate-of-Need (CON) laws require the approval of states’ health planning agencies for health care providers to engage in regulated actions such as opening or expanding facilities or purchasing equipment. This study reviews the literature on CON laws, with an emphasis on how they affect hospitals. All else equal, economic theory suggests that hospitals should see fewer new competitors, charge higher prices, and earn higher net revenues. However, these predictions assume otherwise perfectly competitive markets, and health care markets are heavily distorted in ways that change meaningfully over time. Further, CON laws restrain not only entry of new facilities but also expansion of existing facilities, reducing their ability to leverage any potential regulatory advantages. Viewed in its totality, the literature suggests that CON laws benefit hospitals in some ways and hinder them in others. There is strong evidence of restricted entry and an increase in the number of procedures per hospital. However, other evidence points towards constraints on hospital expansion, while effects on prices and profitability are mixed and quality of care, if anything, appears to worsen.