Association for Public Policy Analysis & Management

For 50 years, US policy-makers and economists have searched for ways to slow the growth of spending on health care. One approach currently taken by 35 states is to restrict the supply of health care by requiring new and growing providers to show that they serve an “economic need”. Hospitals and certain other health providers must obtain a Certificate of Need (CON) from a state board before opening or expanding. I develop the first theoretical model of how these laws affect total spending. I show that in a simple model where CON restricts supply, the effect of CON on spending depends on the elasticity of demand for health care. CON will work to restrain spending when demand is elastic; however, most estimates show the demand for health care to be quite inelastic. I therefore predict that CON is likely to backfire, resulting in increased prices for health care without much reducing its use. Using data from the National Health Expenditure Accounts, I estimate that CON laws do not reduce spending by any major payer or on any major type of provider, and that they increase spending on some types of health care.