Association for Public Policy Analysis & Management

The rapid growth of ambulatory surgery centers (ASCs) has posed an increasingly competitive threat to hospitals. Competition in the outpatient surgery market may lead to lower prices and create incentives for hospitals to provide higher quality care in order to attract and retain patients. On the other hand, a number of papers have documented that increased competition with ASCs is associated with lower hospital outpatient volume and hospital profit (Carey, Burgess, and Young, 2011; Courtemanche and Plotzke, 2010; Lynk and Longley, 2002; Bian and Morrisey, 2007). Outpatient procedures provide important revenue streams that subsidize less profitable procedures and patients in hospitals. Estimating the effect of increased competition on hospital behavior is complicated by the fact that market entry is endogenous; that is, existing market characteristics may influence the entry of new facilities rather than the converse. As a result, any estimation of the relationship between ASC market growth and hospital behavior without accounting for this endogeneity may lead to biased estimates of the effect of increased competition on hospital outcomes.

In this paper, we examine hospitals’ response to increased competition due to the repeal of Certificate of Need (CON) programs. In an effort to reduce health care spending, states established CON programs beginning in the 1970s; these programs required facilities to obtain approval before undertaking large capital projects or investing in expensive technologies. In 1987, a federal mandate that had required all states to establish processes for regulating major health care capital projects was repealed, and 14 states subsequently discontinued their CON programs. Additionally, state CON laws vary in the extent to which they apply to ASCs. Our analysis exploits variation in the timing and type of state CON programs to examine the increasingly competitive market faced by hospitals.

Our paper’s contribution is twofold. First, we provide evidence on the direct effect of CON programs on ASC growth. Second, our paper documents how hospitals behave in response to a plausibly exogenous shock in competition in the outpatient surgery market. While CON programs were initially established as a means of controlling health care spending, reduced competition due to deterred market entry may lead to inefficient spending, higher hospital prices, and poor health outcomes. In particular, we examine the effect of increased competition with ASCs on hospital spending, service mix, and surgery volume. These findings are important for understanding the consequences of competition in the surgery market, and informing public policies designed to reduce health care spending.