Commentary: It’s time to get rid of Certificate of Need law in Delaware

In any market where suppliers are protected from competition, their incentives are to restrict supply, raise prices and pay less attention to quality. In the rule of unintended consequences, this has been the result of Certificate-of-Need (CON) laws, which were passed under a federal mandate in 1974.

Under these laws, health care providers must prove there is a need for additional capacity before they can build new facilities or install major equipment. This was due to a mistaken idea that excess capacity raises prices.

However, CON laws do not reduce health care costs or improve quality and access. In fact, the opposite is true, as economic theory predicted. By 1986 the federal government realized its error and repealed the mandate. Ever since, the Federal Trade Commission (FTC) and Department of Justice (DOJ) Anti-Trust Division have advocated for states to eliminate CON laws.

Stacie Beck

Nevertheless, Delaware’s CON law, known as the Certificate of Public Review (CPR), lingers on.

Patients benefit from competition among healthcare providers. Certificate-of-need laws reduce competition. Evidence from numerous studies by both the FTC and DOJ and in the academic literature show this. High provider concentration, enabled by CON laws, raise costs, and can reduce quality according to this evidence. The evidence also suggests that access is not better with CON laws and may be worse, as number of facilities is restricted.

Indeed, the FTC and DOJ cite examples of CON programs that limited access to new cancer treatments and other medical innovations.

A study by the Mercatus Center, a research center at George Mason University, calculated the impact of repealing the CON law in over 35 states. The authors, Matthew D. Mitchell and Christopher Koopman calculated that in the state of Delaware, there would be a $270 saving on total healthcare per capita and $99 savings in physician spending per capita without the CON law.

There would be greater access to healthcare services as the study estimates that total hospital numbers will increase 42% and the number of ambulatory surgical centers would increase by 17%.

Finally, on the issue of quality, there would be a decrease in the mortality rate and readmission rate across the board. In addition to this, there would be an estimated 5.8% less post-surgery complications and 4.8% increase in patient ratings if the CON law had not been in place.

Under Delaware’s CON program, the Certificate of Public Review (CPR) applicants are required to provide detailed data, potentially giving away competitive advantage. They must prove the additional capacity is ‘needed’. This planned-economy approach to health care supply is equivalent to denying a grocery store (like Walmart) a permit to build because there is already an adequate grocery store supply in the area.

A new, more efficient store enters because it can underprice existing stores. This creates excess capacity which forces less efficient stores to close.

Even the threat of a new store will force existing stores to become more efficient, in order to deny the new entrant a market opportunity. This is how Walmart drove productivity gains in the retail sector throughout the U.S. in the 1990s.

Clearly it is to the advantage of existing health care providers to convince lawmakers to keep CON laws.

A particularly concerning feature of Delaware’s CPR program is the weight that is to be given to impacts on existing providers. Even worse, the program is administered by a board (the Health Resources Board) that includes representatives from applicants’ competitor firms. It is as though the surrounding grocery stores can decide whether Walmart can build.

A more anti-competitive system is hard to imagine.

There is only one way to reduce cost and improve quality and access at the same time; that is to improve productivity. The health care industry is one of the least efficient industries in the country, so the potential to raise productivity is great. Competition raises productivity much more effectively than government policy and the evidence shows it works in the health care industry.

Delaware’s CON law is shielding the health care industry from the competition necessary to incentivize efficiency. Worse, it results in higher prices and lower access to quality care for Delawareans. Compared with other states, Delaware ranks among the highest in health care costs yet the health of its residents is below average. It is time to do something about it.

Eliminate the Certificate of Public Review law and free the supply of health care in Delaware.

Stacie Beck is associate professor of economics at the University of Delaware and board member of the Caesar Rodney Institute, a Delaware-based nonprofit libertarian think tank.