What does it take to open a new hospital or health facility? Certainly a building, equipment, supplies, and a staff of trained medical professionals. But in most states, this is not enough. Health care providers must also obtain a “certificate of need” from a state board certifying that there is an “economic necessity” for their services.The controversy plays out among hospitals precisely the same way it played out in transportation.
Some economic theorists argue that when costs are fixed, free markets will lead to excess entry, making regulatory restrictions on entry desirable (Mankiw and Whinston 1986). But we should not conclude that because markets are imperfect, regulation can necessarily improve upon them—this is a logical leap which must always be taken carefully.Indeed. But regulation in the public interest generates juicy rents.
There are good reasons to be especially suspicious in this case. Top theorists of industrial organization, including some who published one of the first proofs of excess entry, have warned of the dangers of regulatory capture leading to too little competition (Laffont and Tirole 1993, Suzumura 2012). More ominously, theoretical work shows how even a well-meaning and well-informed regulator charged with limiting entry to the socially optimal level can be tricked by incumbents into permitting too few new entrants (Kim 1997).
CON restrictions are an example of how such entry barriers fail in practice. Certainly we see abuses and regulatory capture. Yet the real problem is not the abuse, but the thing itself. Reducing the supply of an inelastically demanded good such as health care simply isn’t a recipe for lower spending. It is a recipe for high prices and high spending, which is what we see in practice.
By repealing CON laws and allowing more health care providers and competition, states have the opportunity to attract new investment and innovation while reducing spending and keeping care affordable.