Certificate of Need laws limited healthcare capacities in the years leading up to COVID-19

Temporary hospitals are popping up all over New York in anticipation of a growing number of coronavirus patients and an undersupply of hospital beds. The U.S. has just 2.8 hospital beds per 1,000 Americans⸺even fewer than Italy (3.2) and drastically lower than South Korea (12.3). But those so-called “field” hospitals, hidden beneath makeshift tents and set among Central Park’s trees, were made possible only because Governor Cuomo suspended the state’s Certificate of Need (CON) law. Unless other states do the same, health care providers will be limited in their capacity to respond to the pandemic.

CON laws require hospitals and other health care providers to seek permission from a state agency before opening a facility, adding hospital beds, offering certain services, or purchasing new technology or equipment. Though intended to ensure an “adequate supply” of health care services, these laws make health care harder to access and more expensive for both providers and patients.

The Certificate of Need process works like this: When a hospital seeks to do something that requires a Certificate, like adding beds, it must apply for permission from the relevant state agency. The agency then gives notice of the application to all of the existing Certificate-holders who may protest the application for any reason. A protest sends the applicant to a hearing, where it must prove that the new service is “needed.” In practice, agencies largely base this determination on the statements of the existing providers, who can testify that a new operator is not needed because it will harm their economic interests. The Certificate of Need process is long, onerous, and expensive⸺often requiring attorneys and resembling civil litigation.

For almost 40 years, Certificates of Need have artificially created an undersupply of health care services, even though states claim that the laws ensure there’s no “overinvestment” in “unnecessary” equipment. Today, CON laws exist in 36 states plus the District of Columbia. Twenty-eight of those states regulate the mere addition of hospital beds. Four require a Certificate to operate an ambulance. Even ventilators may be regulated in states that require Certificates to purchase new devices. In Ohio, one family ambulance business has been told they can’t transport coronavirus patients just a mile away in Kentucky due to their inability to get a Certificate of Need in that state. CON laws bar people from helping, even when they’re ready, willing, and able.

About 60% of Americans live in a state with Certificate of Need restrictions. On average, these states have 30% fewer hospitals per 100,000 residents, compared to non-Certificate of Need states. Reduced access to care means that residents of Certificate of Need states are more likely to travel across state lines to access MRI, CT, and PET imaging. Certificate of Need regulation is also associated with higher prices and no improvement in indigent care. Even the federal government has acknowledged that CON laws were a failed experiment. While it formerly tied funding to whether states adopted CON laws, it abandoned that program just a decade later, based on evidence that they incentivized hospitals to engage in anti-competitive behavior and raised costs.

In the midst of the current COVID-19 crisis, states would be wise to take CON laws off the books⸺especially for hospital beds⸺to improve access for patients and efficiency across an already-strained system. Health care providers should be the ones to decide how to allocate their resources, because more responsive health care markets lead to better outcomes for providers and consumers. But CON laws aren’t just bad policy. Because they essentially serve as a handout to incumbent providers at the expense of the broader public, they are also legally dubious.

The Fourteenth Amendment to the United States Constitution requires states to provide “due process of law.” According to the Supreme Court, this means that laws must have a rational relationship to some health or safety objective; they can’t arbitrarily deprive people of liberty. Any law that restricts the ability of entrepreneurs to innovate or to otherwise earn an honest living without providing a legitimate public benefit denies that due process.

As the research shows, CON laws do not serve health or safety. In fact, none of the steps in the protest procedure serve the patient: Allowing incumbent businesses to protest new applications, forcing applicants to prove that there’s a “need” for a new business or service in an expensive hearing, and defining “need” with reference to the existing providers’ economic interests place the Certificate-holder’s interest over the consumer. These laws therefore allow regulatory bodies to deny Certificates regardless of the provider’s skill and for the explicit purpose of keeping out competition.

The Supreme Court and other federal courts have struck down CON laws in other contexts. As early as 1932, the Court ruled that a CON law was akin to an “attempt of the dairyman under state authority to prevent another from keeping cows and selling milk on the ground that there are enough dairymen in the business,” or a law that “prevent[s] a shoemaker from making or selling shoes because shoemakers already in that occupation can make and sell all the shoes that are needed.” Any such law “thus create[s] and foster[s] monopoly in the hands of existing establishments, against, rather than in aid of, the interest of the consuming public.”

There is no worse time for an inflexible and onerous regulatory barrier than in a crisis. Providers need the ability to respond to new demands. CON laws hold them back.

Fortunately, at least 15 states, including North Carolina, South Carolina, Michigan, and New York, are suspending their CON laws, implicitly recognizing that the laws act as an unnecessary barrier to the expansion of much-needed medical services. But some, like New Jersey, have done nothing. Others, like Kentucky, have made the problem worse by refusing to accept any Certificate of Need applications during the pandemic. And even some of those that have acted have not gone far enough. New York, for example, has not done anything to ameliorate the harmful effects of its ambulance CON law, even though overstretched ambulances have lagging wait times.

Moreover, if we can admit that these laws are unnecessary to protect health and safety now, why keep them on the books once the COVID-19 pandemic passes?

Perhaps the COVID-19 outbreak will make plain what was always true: CON laws prevent patients from getting the care they need. Now more than ever, it’s time for that to change.

Anastasia Boden is a Senior Attorney at Pacific Legal Foundation

Anne Philpot is a legal research associate at the Mercatus Center at George Mason University