A certificate of need (CON) is a government-mandated permission slip that is required before a firm can enter certain industries. In Kentucky, healthcare providers must get a CON before opening or expanding a healthcare facility, buying equipment, or offering new medical services. The Commonwealth’s CON laws apply to more than 30 different services and technologies. 1
The original theory behind CON laws is attributed to Milton Roemer, a health researcher at UCLA in the 1950s. He suggested that any hospital bed that is built will be filled. 2 With this principle in mind, lawmakers thought that reducing the supply of healthcare facilities would reduce healthcare spending. For example, in 1964, when New York adopted the nation’s first healthcare CON law, 3 the New York Department of Health shared its belief that “[o]f the many factors contributing to the unnecessarily high costs of medical care, the construction of unnecessary and inadequate hospital beds is the most readily controlled.” 4 Even then, CON laws were not without controversy. One person testified that existing healthcare planning councils were “controlled by the larger hospitals” and had already “attempted to prevent a smaller hospital from building.” 5 CON laws would just exacerbate existing problems.
Other states followed New York, and CON laws rose to prominence in the 1970s. Likewise, Kentucky adopted its CON law in 1972. 6 Then, in 1974, in an attempt to rein in federal healthcare spending, Congress enacted the National Health Planning and Resources Development Act (NHPRDA). 7 Through NHPRDA, Congress threatened to withhold certain federal reimbursements from states that did not adopt CON laws. Every state except Louisiana complied. Apart from controlling costs, Congress hoped exercising this degree of central planning would ensure a more equitable distribution of healthcare services and improve the quality of available services.
It is crucial to understand that at the time, the federal government reimbursed hospitals for their actual expenses. 8 This is known as “cost-plus reimbursement.” This system incentivized “unchecked hospital spending,” 9 because providers knew they would be reimbursed for the full costs of any services rendered. Thus, the government’s concern for limiting the supply of hospitals was different than its concerns today. Now, providers are reimbursed on a fee-for-service basis. Government payors reimburse providers based on a set fee schedule, regardless of a provider’s actual expenses. The true motivation for CON laws is gone, as is any justification for purposely limiting access to healthcare. 10
Even under cost-plus reimbursement, the experiment with CON laws failed. To its credit, Congress quickly recognized its mistake and repealed NHPRDA in 1986. 11 A dozen states immediately eliminated their CON programs.
Modern CON laws vary greatly from state to state. Some states, like Indiana, Montana, Ohio, and (soon) South Carolina, apply CON laws only to nursing homes. Approximately 40% of Americans live in a state with only one or zero CON laws. Yet 31 states and Washington, D.C., apply CON laws to multiple facilities and services. States like Alabama, Hawaii, Kentucky, and New York are some of the worst offenders. Their statutes contain more than 30 unique CON requirements for healthcare facilities, equipment, and services.
Encouragingly, around 30% of Americans live in a state with no CON laws at all. States without CON laws are spread across the country and represent diverse populations. For example, California, Idaho, Pennsylvania, and Texas are all states that have repealed their CON laws.