A study of U.S. states estimates that repealing Certificate-of-Need laws lowered health spending relative to state economic output, adding evidence to a long-running debate over whether the rules restrain costs or limit competition.
James Bailey, Ph.D., of Providence College, and Shishir Shakya, Ph.D., of Appalachian State University, published the study online Oct. 14 in Health Economics. They analyzed state spending data from the Centers for Medicare & Medicaid Services covering 1980 through 2020. Their estimate puts the reduction at about 1 percentage point of state economic output, or 7.6%.
Certificate-of-Need laws require health care providers to obtain government approval before opening facilities or expanding services. Thirty-five states still had the rules. Supporters have presented approval as a way to avoid unnecessary projects, contain costs and direct medical resources toward community needs.
Applying their estimate to those 35 states, Bailey and Shakya calculated that repeal would have meant $123 billion less in health spending than a scenario in which the rules stayed in place. The calculation uses the states’ combined $12.6 trillion in gross domestic product in 2020. It is a counterfactual estimate, rather than a tally of savings already recorded.
The authors cite earlier work, including Mitchell (2016) and Bailey (2018), for an economic argument that restricting provider entry can limit competition and supply. If patients do not substantially reduce care when prices rise, higher prices could outweigh savings from lower use and increase total spending. The authors identify this as an argument from prior research, not a separate finding of their study.
Bailey wrote in an Oct. 22 post on Economist Writing Every Day that the result resembles one in his 2022 research. He said the newer analysis uses more recent data and measures spending against the size of each state’s economy.
The authors suggest comparing approval requirements across states and across types of providers, equipment and medical services.
