States are rolling back Certificate of Need, or CON, laws in the face of growing demand for healthcare and mounting evidence that they might not lower spending.
CON laws often require providers to get regulatory approval for large capital expenditures and projects, like some healthcare facilities. Facility mergers, acquisitions and ownership changes also require CON approval in some states.
The laws aim to control spending by limiting unnecessary facility expansion or duplicative services within an area. Without CON laws, supporters say providers could raise prices to compensate for underutilized hospital beds and services.
When the COVID-19 pandemic began, some healthcare experts believed states would change or eliminate their CON laws to ensure people could access medical care rather than be turned away due to a lack of available beds.
While some states have repealed or curtailed CON laws in the wake of the pandemic, others are considering doing away with the laws based on evidence that they might not be as effective at lowering healthcare costs as policymakers thought.
“There is little evidence that [CON laws] restrain spending, increase access, enhance quality, or improve the provision of care to underserved populations,” according to a 2024 study published in the Southern Economic Journal. “In fact, the most common finding is that CON laws undermine each of these goals.”
States curb the use of CON laws
Today, 39 states and Washington, D.C., maintain CON laws, which vary considerably by state, according to the 2024 study. Nursing homes, however, remain subject to CON laws in 34 states.
New Hampshire was the last state to repeal its CON law in 2016, but many states have modified their laws in recent years.
From 2021 to 2023, 21 states updated their CON laws. Most of the changes created new exemptions or additional flexibility for certain providers, such as mental health treatment facilities.
States also implemented CON moratoria during the COVID public health emergency to address widespread hospital bed shortages. In some areas, the shortages were so severe that hospitals used planes, helicopters and ambulances to transport the sickest patients to other hospitals.
Loosening the rules worked in Illinois, experts say. Hospitals in the state usually need to go through a “rigid process,” including a design, safety and construction review, to get new beds approved, according to Juan Morado Jr., partner at law firm Benesch.
However, after the state declared a public health emergency and suspended CON requirements, hospitals “could request beds and get them approved within a couple of days. It was happening in real time,” Morado said.
Many of those waivers have been extended since, although long-term increases in healthcare spending may be a bigger factor in states curbing their use of CON laws. The CMS recently estimated national health expenditures will increase from 17.3% of gross domestic product in 2022 to 19.7% of gross domestic product by 2032.
CON laws can increase healthcare costs and impede access by limiting the supply of services, including hospital beds, and allowing existing providers to charge higher prices by reducing competition among providers in local healthcare markets, experts say.
Repealing CON laws would allow existing or new providers to add beds, build new facilities and offer more services, all of which could increase competition, lower costs and improve access, according to experts and research.
That could help hospitals avoid overcrowding during the next pandemic. It could also reduce or eliminate healthcare spending growth “for a couple of years” to help the U.S. address rising costs, said James Bailey, an economics professor at Providence College who researches CON laws.
“But it’s only one piece of the puzzle,” Bailey said, noting that reducing national healthcare spending significantly would require multiple policy interventions since many factors drive costs.
States, especially those with growing populations, will probably continue to roll back their CON laws because they often limit bed capacity, Bailey said.
“Even though there are some places in the country where you have all the hospitals you need and then some, there are a lot of other places where the population is growing really quickly, and you probably need a lot more facilities than you used to,” he said.
States are turning to new ways, other than CON laws, to regulate healthcare M&A. In addition to the changes in CON laws, 15 states now have healthcare transaction laws that address provider consolidation, according to the National Conference of State Legislatures. At least 13 states have also refused to approve certain healthcare activities or capital expenditures.
Those states are trying to develop new ways to regulate who provides healthcare without negatively affecting access, which can be affected by provider consolidation, said Nicole Aiken-Shaban, partner at law firm Reed Smith.
For instance, rural hospitals that merge with other hospitals are more likely to stop offering maternity care services, according to KFF. Additionally, greater hospital market concentration can lead to lower Medicaid admissions and higher income thresholds for charity care, KFF says, making it more difficult for underserved populations to get treatment.
Policymakers’ concerns about provider consolidation are “not going away. I just think the mechanisms states use to get there is changing,” Aiken-Shaban said.
Why CON laws often regulate nursing homes
CON laws often regulate long-term care facilities and, in some instances, only long-term care facilities, due to a lack of nursing home beds and ongoing reimbursement issues.
The U.S. has been dealing with a growing shortage of nursing homes and staff, even though the demand for nursing home beds is increasing, according to a recent report by the American Health Care Association and National Center for Assisted Living. Many nursing homes are limiting admissions, downsizing or closing.
During the COVID pandemic, the shortage of nursing home beds and staff made it difficult for many hospitals to discharge their patients, leading to longer lengths of stay, increased patient loads for staff and lower margins. In many instances, nursing homes with open beds could not admit patients due to staffing shortages.
Many policymakers thought making it easier to add beds could reduce strain on the system, leading several states to waive CON rules for nursing homes during the pandemic. However, preserving CON requirements for LTCFs may not affect bed capacity, according to a study published in Inquiry in September.
“In the context of nursing homes, we conclude that CON deregulation was relatively ineffective at mitigating pandemic-era supply concerns,” the study says.
Still, many states have CON laws that make building nursing homes or adding beds challenging.
That might be because LTCFs care for vulnerable populations, Aiken-Shaban said, noting that nursing homes are often subject to more scrutiny than other providers. States frequently have “more robust licensing requirements” for LTCFs, and Medicare and Medicaid now require nursing homes to disclose their ownership, she said.
“I’m not surprised that long-term care has been one of the remaining providers subject to certificate of need,” Aiken-Shaban said. “I think it’s just the fact that it’s a vulnerable population that has a fair amount of political sway.”
Low reimbursement rates and limited payers can also make it difficult for nursing homes to earn excess revenue, leading owners of LTCFs to seek protection against competition from regulators, said Kara Friedman, a healthcare attorney at law firm Polsinelli. Medicaid, which has low reimbursement rates, was the primary payer for 62% of nursing facility residents as of July 2023, according to KFF.
“Owners are very engaged in protecting their franchise,” Friedman said.
