Occupational licensing and certificates of need limit the market’s ability to serve public need—especially during a pandemic.
Here are two problems resulting from the pandemic: extremely high unemployment rates and people postponing medical procedures either because they’re worried they’ll catch COVID-19 at the hospital or because hospitals are so crowded with COVID patients they don’t have room for anyone else.
The obvious solution to both problems would be to have more clinics outside hospitals where people can get routine procedures done. These clinics could put unemployed people to work and provide more options for patients who need to have procedures performed.
But then entrepreneurs run into another barrier: “certificates of need.” Also known as “certificates of necessity,” these regulations allow people in a business to block new competitors from starting their enterprises. Institute for Justice attorneys Renee Flaherty and Darryl James note the problems with certificates of need in this piece for Reason.
The problems caused by certificates of need are similar to those caused by occupational licensing in that both regulations are used by people who have jobs to block competitors from starting new enterprises. I noted in my earlier piece about certificates of need that they were created in the 1880s as a tool for railroads to prevent competitors from building track. Their most famous use came in the 1950s, when regulators used them to block Martin Luther King and his allies from starting a taxi service in Montgomery, Alabama to provide transportation to Blacks boycotting the city’s segregated bus system.
Flaherty and James say that the use of certificates of need in medicine came about in 1964 in the state of New York, where regulators claimed that the certificates would increase efficiency by eliminating wasteful duplication of services. The federal government decided to give grants to states that implemented certificates of need, and by the mid-1980s all the states except Louisiana had instituted certificates of need.
In 2004, the Federal Trade Commission and the antitrust division of the Department of Justice jointly issued a report on anticompetitive practices in the health care industry. The agencies concluded that medical certificates of need “are not successful in containing healthcare costs, and that they pose serious anticompetitive risks that usually outweigh there purported economic benefits.” The agencies concluded there was “considerable evidence” that medical certificates of need “can actually increase prices by fostering anticompetitive barriers to entry.”
After the 1980s the federal government cut off their program to support states implementing medical certificates of need. Since then 15 states have repealed their certificate of need mandates, and about 40 percent of Americans live in states without certificate of need laws. Matthew D. Mitchell of the Mercatus Center estimates that states without certificate of need laws tend to have more hospitals, more hospital beds, more hospices, and more dialysis centers than do states where certificates of need are imposed.
Mitchell cites a 2016 paper by George Mason University economist Thomas Stratmann and graduate student Matthew Wille where the authors used a database maintained by the Center for Medicare and Medicaid Services to compare states with certificate of need mandates to states that didn’t have them. They found no evidence that hospitals in states with certificates of need were better than states where the regulation didn’t apply. In one aspect certificates of need lowered quality; Stratmann and Wille found that patients who went to hospitals in certificate of need states were more likely to die from pneumonia, heart failure, heart attacks, and post-surgical complications after being discharged than they were in states that didn’t have a certificate of need rule.
During the pandemic, several states, including Connecticut, Georgia, and South Carolina, have suspended their certificate of need requirements during the emergency. But other states continue to require certificates of need, which have harmed the enterprises of two of the Institute for Justice’s clients.
One is Dr. Jay Singleton, an opthmatologist in New Bern, North Carolina. Dr. Singleton has the skills to perform surgery in his vision clinic, but he’s banned from performing operations there because certificate of need laws bar him from buying the equipment he needs to perform procedures. Instead, he must send patients to CarolinaEast, a billion-dollar hospital chain that maintains a monopoly on eye surgeries in the region. The hospital uses its monopoly to double or triple costs to patients over what Dr. Singleton would charge.
The Institute for Justice also represents Dipendra Tiwari, who wanted to open a home health care enterprise in Kentucky to serve his fellow Nepalis who often face a formidable language barrier when seeking treatment. The billion-dollar Baptist Healthcare System objected to Tiwari’s business, and Kentucky regulators upheld the hospital’s objections because of certificate of need laws. The giant hospital chain didn’t have to show they were better able to serve Nepali-speakers better than Tiwari can; the Institute charges that hospitals use certificate of need laws in Kentucky to crush potential competitors. Because of certificates of need, only six of Kentucky’s 120 counties approve licenses for new home health care providers.
One lesson the COVID-19 pandemic should teach is that our health care system needs to be flexible and adaptable to deal with future crises, and certificate of need laws ensure stagnation and decay.
Certificate of need mandates, Flaherty and James conclude, ensure “government-mandated restrictions, anti-competitive red tape, and monopolistic high costs”—and will make our health care system less prepared for future pandemics.