Facing growing healthcare demands and increasing evidence that Certificate of Need (CON) laws may not effectively control spending, many U.S. states are gradually repealing or relaxing such regulations.

CON laws typically require healthcare providers to obtain regulatory approval for large capital expenditures and projects, such as certain medical facilities. In some states, facility mergers, acquisitions, and ownership changes also require CON approval.

These laws aim to control spending by limiting unnecessary facility expansion or duplication of services within a region. Supporters argue that without CON laws, providers might raise prices to compensate for losses from underutilized hospital beds and services.

At the onset of the COVID-19 pandemic, some healthcare experts predicted that states would modify or repeal CON laws to ensure people could access medical services rather than being turned away due to a lack of beds.

Although some states have repealed or scaled back CON laws after the pandemic, others are considering complete elimination based on evidence showing that CON laws may be less effective at reducing healthcare costs than policymakers expected.

"There is little evidence that CON laws curb spending, improve access, enhance quality, or increase services to vulnerable populations," noted a 2024 study published in the Southern Economic Journal. "In fact, the most common finding is that CON laws harm these goals."

States limit the use of CON laws

According to the 2024 study, 39 states and Washington, D.C. currently retain CON laws, but provisions vary significantly by state. Among them, 34 states still impose CON requirements on nursing homes.

New Hampshire was the last state to repeal CON laws in 2016, but in recent years many states have modified related regulations.

Between 2021 and 2023, a total of 21 states updated their CON laws. Most changes aimed to create new exemptions or increase flexibility for specific providers, such as mental health treatment facilities.

During the COVID-19 public health emergency, many states also implemented CON suspensions to address widespread hospital bed shortages. In some areas, shortages were so severe that hospitals had to use planes, helicopters, and ambulances to transfer the most critical patients to other hospitals.

Experts point out that deregulation in Illinois has yielded results. According to Juan Morado Jr., a partner at the law firm Benesch, hospitals in the state typically had to go through a "rigorous process" (including design, safety, and construction reviews) to obtain approval for new beds. However, after the state declared a public health emergency and suspended CON requirements, hospitals "could apply for and receive approval for beds within days, almost in real time," Morado said.

Since then, many exemptions have been extended, but long-term healthcare spending growth may be a larger driver for states limiting the use of CON laws. The Centers for Medicare & Medicaid Services (CMS) recently projected that national healthcare spending as a share of GDP would rise from 17.3% in 2022 to 19.7% by 2032.

Experts say CON laws may drive up healthcare costs and hinder access by limiting the supply of services, including hospital beds, and reducing competition in local healthcare markets, allowing existing providers to raise prices.

Research and expert opinion suggest that repealing CON laws would allow existing or new providers to add beds, build new facilities, and offer more services, which could enhance competition, lower costs, and improve access.

This could help hospitals avoid overcrowding during the next pandemic and may also slow or eliminate healthcare spending growth over "several years," helping the U.S. address rising costs, said James Bailey, an economics professor at Providence College who studies CON laws.

"But this is only part of the puzzle," Bailey noted, as costs are driven by multiple factors, and significantly reducing national healthcare spending would require multiple policy interventions.

Bailey believes states, especially those with growing populations, may continue to relax CON laws because these laws often restrict bed capacity.

"While some parts of the U.S. already have an oversupply of hospitals, many other regions are experiencing rapid population growth and may need far more facilities than before," he said.

States are turning to new ways beyond CON laws to regulate healthcare mergers. In addition to CON law changes, according to the National Conference of State Legislatures (NCSL), 15 states have now enacted healthcare transaction laws targeting provider consolidation. At least 13 states have refused to approve certain healthcare activities or capital expenditures.

Nicole Aiken-Shaban, a partner at the law firm Reed Smith, said these states are trying to develop new mechanisms to regulate healthcare providers without affecting access, and provider consolidation can affect access.

For example, according to KFF data, rural hospitals that merge with other hospitals are more likely to stop offering obstetric services. Additionally, KFF notes that increased hospital market concentration may lead to lower Medicaid admission rates and higher charity care income thresholds, making it harder for vulnerable populations to access treatment.

Policymakers' concerns about provider consolidation "are not going away; it's just that the mechanisms by which states achieve their goals are changing," Aiken-Shaban said.

Why CON laws often regulate nursing homes

CON laws often regulate long-term care facilities, sometimes exclusively, due to nursing home bed shortages and ongoing reimbursement issues.

According to a recent report from the American Health Care Association and the National Center for Assisted Living, despite rising demand for nursing home beds, the U.S. is facing a growing shortage of nursing homes and staff. Many nursing homes are limiting admissions, downsizing, or closing.

During the pandemic, nursing home bed and staff shortages made it difficult for many hospitals to discharge patients, leading to longer hospital stays, increased staff workloads, and lower profit margins. In many cases, even when nursing homes had empty beds, they could not accept patients due to understaffing.

Many policymakers believed that relaxing conditions for adding beds could ease pressure on the system, so multiple states suspended CON requirements for nursing homes during the pandemic. However, according to a study published in Inquiry in September, retaining CON requirements for long-term care facilities may not affect bed capacity.

"In the case of nursing homes, we find that CON deregulation was relatively ineffective in alleviating supply issues during the pandemic," the study said.

Nevertheless, CON laws in many states still make building nursing homes or adding beds challenging.

Aiken-Shaban said this may be because long-term care facilities care for vulnerable populations and often face more scrutiny than other providers. She noted that states typically have "stricter licensing requirements" for long-term care facilities, and Medicare and Medicaid now require nursing homes to disclose ownership.

"Long-term care remains one of the few providers subject to certificate of need, and I'm not surprised," Aiken-Shaban said. "I think it's because it serves a vulnerable population and has considerable political influence."

Kara Friedman, a healthcare attorney at the law firm Polsinelli, said low reimbursement rates and limited payers may also make it difficult for nursing homes to earn excess revenue, leading long-term care facility owners to seek regulatory protection against competition. According to KFF data, as of July 2023, Medicaid (which has lower reimbursement rates) was the primary payer for 62% of nursing home residents.

"Owners are very aggressive in protecting their franchises," Friedman said.