The basic premise of CON statutes is that the free market is inefficient and that government planning can make better decisions concerning the allocation of capital. CON laws require government approval for new companies to enter a market or for existing businesses to expand.
CON laws were originally applied to public utilities and transportation companies. Unfortunately in 1964 the State of New York decided to apply this legal theory to hospitals and nursing homes. In 1974 the Federal Government required all 50 states to "have structures involving the submission of proposals and obtaining approval from a state health planning agency before beginning any major capital projects such as building expansions or ordering new high-tech devices". Many states implemented CON programs in part because of the incentive of receiving CON federal funds.
The Federal mandate was repealed in 1987 but today 36 states still maintain CON laws for health care, and the states that have repealed their original CON statues have retained some aspects of them. Effectively today the construction of any new medical facility or the installation of any new medical equipment requires the approval of a state governmental agency. The anti-competitive inflationary effects of the CON statutes on the cost of heath care are astronomical.
The following article by Timothy Sandefur of the Pacific Legal Foundation is an excellent historical perspective on CON legislation:
Some of the highlights of this article:
CON laws were originally devised to regulate railroads and other public utilities. They first appeared in Massachusetts in the 1880s, and were soon taken up in other states, where they were often applied to streetcar lines.
As William K. Jones explains in his 1979 Columbia Law Review history of CON laws, Progressive Era proponents offered five main justifications for these restrictions, they would:
- prevent “wasteful duplication” of services,
- prevent “ruinous competition,”
- ensure that regulated entities would continue to serve out-of-the-way customers,
- promote private investments in public service industries,
- forestall certain kinds of externalities.
Many economists and social theorists of the time believed competition was economically inefficient because it wasted resources on, say, multiple railroad lines between the same destinations. Worse, they thought competition fostered the “boom-and-bust” cycle that drove out investment and ultimately left customers without the products and services they needed.
Possibly the most foolhardy CON requirements are laws that apply to hospitals. Originally adopted to prevent what economists saw as inefficient over-expansion of hospitals, the laws were soon captured by established interests that used them to raise the cost of medical services. In the 1970s, 49 states imposed CON requirements on hospitals, leading to higher costs and less innovation in medical care. Economist Thomas E. Getzen wrote in 1997 that “almost every well-established, wealthy, and politically connected hospital that applied for certification eventually got it, while denials fell disproportionately on outsiders that threatened the status quo or weaker institutions that lacked a constituency.”
Federal CON requirements were repealed in the 1980s, but many states still employ them. For example, Hawaii bureaucrats held up construction of a new $220 million private hospital on Maui for years, forcing the island’s 144,000 residents to depend on a single, state-run facility or on clinics. The State Health Planning Development Agency rejected a 2007 proposal to build a new, state-of-the-art facility, denying it a certificate of need because it would negatively affect the existing government-run hospital.
Occupational licensing laws are among the most common abridgments of economic liberty, but CON rules are more pernicious. They do not even pretend to protect public safety by ensuring that practitioners are educated or skilled; they exist for the explicit purpose of preventing competition. Whatever merit that might have in the context of public utilities or natural monopolies, there is no reasonable foundation for applying such rules to moving companies, taxi companies, or hospitals. In these markets, CON restrictions unfairly favor entrenched private interests, increase the cost of living for consumers, destroy economic opportunity for the most vulnerable entrepreneurs, and in the case of hospitals, threaten Americans’ very lives. Certificate of necessity laws are arbitrary, discriminatory, and economically foolish.
The National Conference of State Legislatures has a brief description of CON laws along with a discussion of individual states statutes. There is also a "pros and cons" chart:
This passage from the "pros" section of the chart is interesting:
Advocates of CON programs say that health care cannot be considered as a “typical” economic product. They argue that many “market forces” do not obey the same rules for health care services as they do for other products. In support of this argument, it is often pointed out that, since most health services (like an x-ray) are “ordered” for patients by physicians, patients do not “shop” for these services the way they do for other commodities. This makes hospital, lab and other services insensitive to market effects on price, and suggests a regulatory approach based on public interest.In the above defense of CON laws we find a government program (CON) is promoted to cure the unintended consequences of a previous government program (third party payer insurance coverage). Obviously if the patient were paying for the cost of service (or a portion of the cost of service) they would "shop" for these services the way they do for other commodities.
For our friends who live in Hawaii you can find out how to apply for a Certificate of Necessity by studying this website:
http://hawaii.gov/shpda/certificate-of-need
If you are confused by the wording on the above page or you are frustrated that the application is 17 pages long, have no fear as the State of Hawaii has prepared a flowchart for this process (who would like to bet that it takes longer than 90days?):
Certificate of Necessity is an unnecessary and unconstitutional intervention into commerce by state governments. It is perpetrated by existing businesses using the power of government to restrict competition. We are all worse off because of these statutes. The statutes must be repealed but more importantly we must explain to our fellow citizens why it is never better to let government make decisions that should be made by individuals.
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