The Effects of Certificate of Need

Regulation on Hospital Costs

Patrick A. Rivers, Myron D. Fottler, and Jemima A. Frimpong

This study examines the impact of Certificate of Need Regulation (CNR) on hospital costs (HC). Sec-
ondary data from multiple sources were used for the analysis. A panel representing 2,168 short-term
general, nonfederal US hospitals operating during the period 1999–2003 was analyzed. Results of our
analysis indicate that the existence of a CNR program was not related to HC; however, the stringency of
the CNR program was positively and significantly related to HC. Implications from these results include
the inability of CNR to contain HC as assumed or expected, and the possibility that CNR may actually
increase HC, while reducing competition. Keywords: Certificate of Need Regulation (CNR), hospital
costs (HC), HC per adjusted admissions, hospital competition.

T
he Certificate of Need Regulation as an alternative instrument to controlling
(CNR) emerged in the early 1960s the increase in hospital capital expenditures
as a practice to contain health costs and the state Medicaid budgets.1
(HC) in American hospitals. The overarch- From a historic perspective, the first CNR
ing rationale was to regulate capital expen- law was enacted by New York State in 1964.
ditures of health care providers by requiring New York was then followed by Rhode
providers to obtain specific certification Island and Maryland in 1968 and California
showing the need for services and expendi- and Connecticut in 1969. In 1972, the US
tures. As a result of the CNR, prior approval Congress modified the Social Security Act
of health care investments over certain dol- (SSA) by enacting a Public Law (Public Law
lar limits became mandatory, though the No. 92–603) to resonate with the CNR. The
threshold varies from state to state. In an SSA reinforced the orientation of various
increasingly global competitive world econ-
omy, the necessity of containing HC cannot
be overemphasized. However, assumptions
and practices on how HC are contained Patrick A. Rivers, PhD, MBA, is a Professor and the
merit a critical examination. Through such Director of Health Care Management at the College
an examination, health policy makers and of Applied Sciences & Arts, Southern Illinois Univer-
administrators in the health care industry sity, Carbondale, Illinois.
are likely to become more informed and Myron D. Fottler, PhD, MBA, is a Professor and
Executive Director of Health Administration Pro-
adaptive to the ever-changing economic grams at The University of Central Florida, Depart-
environment of health care. ment of Health Professions, College of Health and
The CNR reflects one response to the ris- Public Affairs, in Orlando, FL. He can be reached at
ing cost of medical care and the existence of fottler@mail.ucf.edu.
excess capacity within the US health care Jemima A. Frimpong, PhD, MPH, is an Assistant
system, which are some of the major con- Professor in the Heilbrunn Department of Popula-
cerns of health care policy makers. As a tion and Family Health, Mailman School of Public
Health at Columbia University. She can be reached
result of these concerns, state governments at jf2584@columbia.edu.
have been compelled to become actively
engaged in regulating health care expendi- J Health Care Finance 2010;36(4):1–16
tures. Indeed, the CNR has been embraced © 2010 Aspen Publishers

1
2 JOURNAL OF HEALTH CARE FINANCE/Summer 2010

state CNR proposals by prohibiting the use the anticompetitive effect of such denial”
of monies allocated for Medicare, Medic- is absent from most state CNR policies. In
aid, and maternal and child health programs addition, the CNR programs necessitate that
to make “unnecessary capital expenditures” a legally authorized government agency
by the health care facilities or health main- offer written substantiation that a change for
tenance organizations (HMOs).2 The CNR service or project is needed.
laws require that state regulatory agencies The “need,” often based on the require-
approve both the entry of new hospitals ments of the public for an institution or
and “large” capital expenditures by exist- for a service over a preset period of time,
ing hospitals. By 1979, almost all states had may be difficult to quantify. Furthermore,
enacted these laws. There is some empirical the review process that certifies “need” also
evidence that hospitals began some capi- varies from state to state. For example, some
tal projects in anticipation of CNR.3 Once states require two while other states require
enacted, CNR laws plausibly would have three reviews each by different bodies of
greater effects after they had been in place the review board. There is also an appeal
for a number of years. By 1999, most CNR process for institutions that want to appeal
state laws had been in effect for at least the decisions of the review board. The struc-
13 years. ture of CNR legislation adopted by a state
As of 2002, 36 states were active partici- also depends on the economic situation of
pants of the CNR program or had passed the state and the relations between politi-
some form of CNR legislation. Although the cal bodies such as legislators, government
laws governing the administration of CNR regulators, planners, providers, and con-
differ from state to state, they generally cover sumers.7 Each of these entities undoubtedly
hospitals, nursing homes, ambulatory facili- holds a distinct purpose and objective in the
ties, and laboratories.4 As a norm, the state CNR process.
CNR laws require agencies that regulate the This article presents the results of an
health care providers within states to approve empirical study on the effectiveness of CNR
the investments over a certain dollar amount as a hospital cost containment practice in the
made toward the construction of new facili- US hospital industry. The study examines
ties and additional beds, investments in new prior research on CNR and HC, investigates
services and equipment, and expenditures CNR and HC in light of more recent data,
towards restoration and equipment to sustain and addresses the implications of the current
existing services.5 study findings on public policy and future
However, the current normative imple- research.
mentation of the CNR in various states has
been criticized by some researchers. For Literature Review
example, Campbell and Fournier 6 maintain
Research Streams on CNR
that “a clear, economic, and legal standard
to distinguish between an action to deny Since the introduction of CNR as a mech-
an applicant in order to prevent invest- anism for cost containment in health care,
ments that would raise costs by unneces- there have been numerous studies in the
sary duplication, and actions motivated by health care domain concerning the impact
 The Effects of Certificate of Need Regulation on Hospital Costs 3

of CNR efforts. Most studies published in care and have negatively affected the health
the 1980s and 1990s have analyzed data care industry by reducing competition. Ex-
from the 1970s and 1980s. This literature amination of CNR’s failure to control cost
has examined the relationship within three has been based largely on the performance
streams: of programs during the early years of their
enactments.15
1. Between CNR and quality of health Some authors claim that the performance
care;8 of many CNR programs has improved over
2. Between CNR and access;9 and time.16 Donahue et al.17 acknowledged the
3. Between CNR and health care system importance of early evaluation of the per-
costs.10 formance of CNR programs but concluded
that the CNR programs generally have little
Although we have seen some progress impact on overall cost inflation of hospitals.
in understanding the nature of CNR in the These authors pointed out that some suc-
field of health care and its impact on health cesses have been experienced in states that
care—related outcomes from the above have cost control as the primary function of
studies, the results have been quite mixed.11 CNR programs. Sloan18 came to a similar
For example, results from the first research conclusion when he found that CNR laws
stream (CNR and quality) suggest that no reduced cost per patient. However, his find-
clear conclusion concerning the impact of ing did not conclude that CNR laws have
CNR on hospital quality is possible since considerable impact.
data are old and results mixed. Results from Lanning, Morrisey, and Ohsfeldt19 found
the second stream (CNR and access) suffer contrary results associated with the pres-
from the same limitations. However, while ence of CNR. According to these authors,
the impact of CNR on quality and access the presence of a CNR increased hospital
are important topics, the present research spending by 20.6 percent, personal serv-
focuses on the third research stream (i.e., the ices by 13.6 percent, and other health care
impact of CNR on HC) where current stud- expenditures by 9 percent. In other cases,
ies suggest inconsistent results. the absence of a CNR program is reported to
have a negative effect on HC. For example,
Research on CNR and HC
using time series data to assess the effects
Empirical studies have shown different of eliminating CNR, Conover and Sloan20
and mixed impacts of CNR on HC. Data found that there is a 5 percent long-term
gathered from the early 1980s suggest that decrease in acute care spending per capita
CNR programs did little to contain cost.12 as a result of eliminating mature CNR pro-
Although most of the past studies on CNR grams. In addition, these authors found no
focused on hospital expenditures, CNR has significant change in total per capita spend-
been used by many states to plan and regu- ing. However, they also found that after the
late facilities despite the apparent inability elimination of CNR, there was no increase
of CNR programs to lower costs.13 Burda14 in the acquisition of facilities or costs, and
states that CNR programs have not been there was a 2 percent reduction in bed sup-
instrumental in controlling the cost of health ply. Finally, Younis, Rivers, and Fottler 21
4 JOURNAL OF HEALTH CARE FINANCE/Summer 2010

also found a positive relationship between CNR as a hospital cost containment practice
the existence of CNR and HC. in the US hospital industry.
While most studies have failed to clearly In addressing the limitations of previous
delineate the usefulness of CNR regu- research on CNR and HC, this study takes
lations in containing hospital and other a different, more sophisticated approach to
health care costs, the case for deregulation looking at the relationship between CNR
seems strong to some researchers.22 Some and HC. National data (1999–2003) encom-
researchers believe that deregulation is passing all states in the United States were
necessitated by the anti-competitive CNR used to assess the impact of CNR on HC.
impact of protecting existing providers The impact of both existence and strin-
from competition.23 Although assessment gency of CNR in the states where it exists
of CNR programs does not show a signifi- was included in the analysis. The study
cant impact on hospital expenditures, poli- also advances our knowledge base of CNR
cymakers in many states are not inclined and extends the literature by controlling for
to abolish CNR laws. Their prime con- a number of environmental, market, and
cern is that eliminating the CNR program institutional variables, which have not been
would result in increased health care capi- controlled in previous research. The study
tal expenditures and operating expenses hypothesis examines the relationship of both
despite data to the contrary. The motivat- the existence of CNR and the stringency of
ing factor is that for a CNR program to be the regulation on HC:
effective, it has to put restrictions on both Hypothesis: The existence of a Certifi-
existing hospitals and those looking to cate-of-Need Regulation and the stringency
enter the industry. of CNR will both negatively impact HC,
The review of the literature reflects an after controlling for environmental, market,
ambiguity regarding the impact of CNR on and institutional characteristics.
HC. Previous research suffers from a lack
of recent data, failure to differentiate the Methodology
various impacts of CNR (i.e., on HC versus
other impacts), inadequacies of the meas- Sources, Definitions, and Measures
of Variables
urement of CNR, insufficient research on
CNR impact on HC, failure to control for the This study integrates data from different
effects of managed care and other environ- but related sources and datasets to test the
mental or market variables, and the lack of study hypothesis. The datasets used were
national data in most of the earlier studies drawn from the databases of the Ameri-
conducted. can Hospital Association Annual Survey
While the question of CNR effectiveness (AHA),24 American Health Planning Associ-
remains an area of public policy debate and ation (AHP),25 Area Resource File (ARF),26
an area that warrants the attention of health Centers for Medicare & Medicaid Services
service researchers, it has been at least a dec- (CMS),27 CMS Case-Mix Index (CMI), and
ade since research in this area has been done. InterStudy Data (ISD).28 The AHA dataset
The purpose of the present study is to present contains data on an annual survey of non-
a focused examination of the effectiveness of federal short-term general hospitals in the
 The Effects of Certificate of Need Regulation on Hospital Costs 5

United States. The analysis included data on using 1980s data. Finally, by 1999, the
surveys conducted in 1999–2003. The AHA, effects of the Medicare’s Prospective Pay-
AHP, ARF, CMS, and CMI datasets provided ment System and the Balanced Budget Act
measures for capital investment, financial of 1997 should have also stabilized, thereby
factors, and operational characteristics while minimizing extraneous sources of variation
the ISD dataset provided HMO penetration in the data.
rate. The measures were used to obtain oper- CNR is defined as the primary independ-
ational and market characteristics, and only ent construct with two variables:
hospitals located in metropolitan statistical
areas (MSAs) in 1999–2003 were included 1. The existence of CNR law in the state
in the analysis. where the hospital is located; and
While defining a hospital’s market can 2. The stringency score for the CNR pro-
be problematic,29 for this study, a hospital’s gram of each state used.
market is defined by the MSA for urban hos-
pitals, and by county for non-MSA hospitals The stringency score is measured by the
since rural hospitals may be in communities number of CNR-regulated services multi-
too small to be included in an MSA. MSA plied by a weight based on reviewability
is defined by the US Bureau of Census30 to thresholds. For the two CNR variables, (1)
include central cities and their associated CNR laws are defined as 1 if hospital is
suburbs. The use of only those hospitals located in a state that has a CNR law, and 0
operating in MSAs is valuable in that the otherwise; and (2) for CNR stringency (1 if a
definitions of hospital markets and HMO state has the most stringent CNR thresholds,
markets are reasonably clear, and enhance and 0 otherwise).
the validity of hospital and HMO penetra- The states having the most stringent CNR
tion measures. are Maine, Connecticut, West Virginia,
The impact of CNR on HC was investi- Georgia, Alaska, Vermont, South Carolina,
gated with the hospital as the unit of analy- and Missouri. If CNR programs are effective
sis. Data 1999–2003 determined if current in containing cost, then it is expected that the
findings will refute or substantiate findings regression coefficients for each of the two
from earlier studies that used data from the CNR independent predictor variables will be
1980s. In addition to using more recent negative and significant (see the analytical
hospital data, this study takes into con- approach in next section).
sideration the stabilization of the hospital The study defines the dependent construct
industry in the implementation of CNR in with one variable, HC per adjusted admis-
the United States. Those states that enacted sion. Previously, measures of HC have been
CNR have not seen significant changes in cost per day or cost per case. In some cases,
these laws between the early 1990s and both of these indicators have been used.31 In
2000. The period selected for this study is the present study, costs-per-adjusted admis-
also particularly advantageous since there sion was used to measure HC. Since the
were significant changes in both the number expense data on the AHA Annual Survey of
of HMOs and enrollment in HMOs than Hospitals included both the inpatient and out-
what would have been captured in studies patient expenses, the admission was adjusted
6 JOURNAL OF HEALTH CARE FINANCE/Summer 2010

to summarize the inpatient and outpatient for rural facilities.35 This study also meas-
use into a single utilization measure. The ured the level of managed care penetration
AHA calculated adjusted admissions attrib- in each market defined as the percent of the
uted to outpatient services by multiplying population enrolled in HMOs. Market vari-
admissions by the ratio of outpatient revenue ables also include per capita income and per-
to inpatient revenue. centage of non-Whites in the market area.
The HC measure was calculated in this The institutional control and operating
study as operating expense or costs divided variables include percentages of Medicare
by adjusted admissions. This choice of and Medicaid discharges from the hospital
variable was conceptually consistent with as well as patient acuity [derived from CMS
the goals of hospitals in the environment data on Medicaid and Medicare discharges],
of increasing dominance of fixed payment bed size, system affiliation, staffing intensity,
reimbursement. Fixed payment reimburse- ownership status, occupancy rate, staffing
ment caused hospitals to have as their objec- index, teaching status, and Medicare wage
tive the minimization of the cost per episode index (i.e., cost of hospital labor).
of care. Operating expense or cost was calcu-
lated as the total facility expense minus non- Empirical Specification
operating expenses including depreciation, and Analytic Approach
interest, and other non-operating losses.32
All variables used in the study are defined The analytic approach addresses several
and listed in Figure 1. For all constructs Fig- important issues absent from any earlier
ure 1 lists the variables, measures, means, single study. First, from the theoretical fram-
and standard deviations of the variables and ing of the CNR program, HC are assumed
data sources. to differ only in the values of the measured
The specific market environmental, mar- attributes included as explanatory variables
ket, and control variables were identified and control variables. However, there exists
through a review of previously cited litera- the possibility that hospitals have unmeas-
ture regarding CNR regulation and HC,33 ured attributes that may affect HC. It is
as well as the impact of these variables on often believed that these hospital-specific
HC.34 The control variables included the variables are correlated with the variables
models’ per capita income and percentage of of interest, and thus their exclusion leads
non-White in the market as proxies for socio- to omitted variables bias problems.36 Sec-
economic status. To examine the effect of ond, there might be year-specific effects.37
market competition on HC, the Herfindahl- Third, while market variables are assumed
Hirschman index (HHI), defined as the sum as strictly exogenous, that is, uncorre-
of squares of the market shares of all facili- lated with the error term in all time peri-
ties in the market, is used. Hospital market ods, hospital-level variables are not strictly
share is measured by the hospital’s acute- exogenous.38
care patient days divided by total acute-care Fourth, there is the possibility of “feedback
patient days for the MSA in which the hos- effects” which are most easily thought of as
pital was located for urban hospitals, and a type of endogeneity across time periods.
total acute-care patient days in the county For example, a change in HC in period [t]
 The Effects of Certificate of Need Regulation on Hospital Costs 7

Figure 1. Variables, Measurement, Descriptive Statistics, and Data Source: 1999–2003

Std.
Variable Measure Mean Deviation Source

Dependent Variable
Hospital Costs Operating expense or costs divided 6,187.515 2554.44 AHA
by adjusted admissions
Independent Variables
Certificate of Need 1, existence of CNR law; 0 otherwise 0.660 0.474 AHP
Regulation (CNR)
CNR Stringency 1, if a state has most stringent CNR 0.085 0.278 AHP
thresholds; 0 otherwise
Market Variables
HMO Penetration % HMO enrollment as % of total 0.309 0.157 ARF
MSA population
HMO Competition Market shares based on distribution 0.681 0.206 Interstudy
MSA of enrollees’ market (i.e., 1- value of
HMO Herfindahl Index)
Squared sum of (acute-care patient 0.819 0.185 ARF/CM
days/total acute-care patient days
in the market)
Per Capita Income Log of per capita income in the market 27,775.020 7352.318 ARF
% Non-White % Nonwhite population in the market 0.314 0.178 ARF
Operating Variables
For Profit 1, for profit; 0, otherwise 0.192 0.394 AHA
Bed Size Number of staffed beds 229.886 189.659 AHA
Teaching Status 1, for teaching; 0 otherwise 0.105 0.306 AHA
Occupancy Rate Inpatient days/(staffed beds* 365) 0.571 0.171 AHA
Staffing Intensity Health care workers full-time 13.691 5.567 AHA
equivalents (FTEs) per 1,000
adjusted patient days
Wage Index Cost of health care labor (i.e., ratio of 1.013 0.154 CM
adjusted average hourly wage to mean
of adjusted average hourly wage)
System Affiliation 1, system affiliated; 0 freestanding 0.723 0.448 AHA
% Medicare Medicare discharges/total discharges 0.412 0.129
Discharges
% Medicaid Medicaid discharges/total discharges 0.139 0.101 CMS
Discharges
Case-Mix Index Medicare case-mix index 1.394 0.253 CM

Notes: AHP = American Health Planning Association; ARF = Area Resource File; AHA = American
Hospital Association; CMS = Centers for Medicare & Medicaid Services; CM = CMS Case-Mix Index;
ISD = InterStudy Data
8 JOURNAL OF HEALTH CARE FINANCE/Summer 2010

may feed back to changes in bed size in where i is used to index the hospital
period [t+1]. Such feedback effects violate and t is used to index the year (N = 2,168
the typical assumption of strict exogeneity. and T = 5 in our case). yit equals log of
In this study, feedback effects are allowed hospital i’s costs per adjusted admis-
by making the weaker assumption that hos- sion at year t, α is constant, X1 it equals
pital-level regressors are predetermined: the CNR, X2 it equals CNR stringency, X3 it
error term is uncorrelated with current and equals environmental/market variables, X4
past values of the predetermined regressors it equals operating variables, λi is unob-
but potentially correlated with future values servable hospital-specific effect which is
of regressors. constant across time, ηt is an time-specific
To address the foregoing problems, a effect which varies across time, and uit
fixed effects model is employed to remove equals unexplained residual variation. α,
the influence of such hospital heterogeneity β1, β2, β3, and β4 are coefficients needed
and year-fixed effects. Although one of the to be estimated, and they are estimated by
commonly applied methods for fixed-effects applying the IV estimation to the following
models is the within-group transformation first-differenced equation:
in which the ordinary least squares (OLS)
Δyit = β1ΔX1 it + β2ΔX2 it + β3 ΔX3 it +
estimator is applied to data transformed by
β4 ΔX4 it + Δηt +Δuit; i=1,2,…,N;
taking deviations from time-series means for
t=1,2,…,T,
each cross-sectional unit, the within-group
transformation yields inconsistent parameter where Δ denotes the difference operator.
estimates if the model does not include
strictly exogenous variables.39
Thus, the current study applies first- Results
difference transformation with the instru-
Preliminary Tests
ment variable (IV) estimation. After apply-
ing the first-difference transformation to First, the study checked correlations
eliminate the fixed effects, the dependent among the study variables. While most had
variable is regressed on the first differences low correlations, some correlations coef-
of the regressors. As consistent estimates ficients were higher than others. However,
may be obtained by using past values of the dropping one or more of the independent
strictly exogenous regressors as instruments, variables in an effort to reduce multicolline-
a two-year lagged value of the endogenous arity could lead to omitted variable bias.40
variable and one-year lagged values of the Since the study variables are properly cho-
predetermined regressors are used as the sen based on theory and previous literature,
instruments. all the variables were included in the subse-
More specifically, the regression model is quent analyses.
given below: Also important is the question of serial
correlation. Serial correlation was tested
yit = α + ß1X1 it + ß2X2 it + ß3X3 it + without strictly exogenous regressors. First,
ß4X4 it + λi +ηt +uit; i=1,2,…,N; the simple OLS regression of the depend-
t=1,2,…,T, ent variable on the independent variables
 The Effects of Certificate of Need Regulation on Hospital Costs 9

was run; and the OLS residual value was normality assumption of regression.41 We
obtained. Second, the residual was regressed analyzed the data to test the hypothesis of
on the lagged residual and all of the independ- the relationship between CNR construct
ent variables. Finally, a heteroskedasticity- variables and HC performance variables (as
robust version of the test was used to check indicated above). The results of the analysis
the significance of the coefficient for the of CNR on health system performance
lagged residual. Since no significant results (i.e., HC per adjusted admission) are dis-
were obtained, there is no evidence that the cussed below. The estimates of the coeffi-
data have serial correlation problems. cients and standard errors from OLS results
of the model regressions are presented in
Descriptive Findings Figure 2.
From the analysis, the adjusted R2 for
Figure 1 displays the mean values and the model is 0.48. CNR stringency is
standard deviations for all variables included significantly and positively associated
in the analysis of the 2,168 (36 percent of with costs per adjusted admission at the
total number of hospitals) nonfederal short- .05 level. There was no significant relation-
term care general hospitals in the sample. ship between CNR laws and HC. The esti-
Nineteen percent were for-profit organiza- mated coefficient for the CNR law variable
tions, the average number of staffed beds is 0.009. The positive signs indicate that all
were 229, the occupancy rate was 57 per- else being equal, HC per adjusted admis-
cent, and 10 percent were teaching hospitals. sion increase if the hospital is located in a
HMO penetration in the market averaged state that has CNR law. Our findings con-
30.9 percent in 1999–2003 and on average; cur with a number of studies conducted
the hospitals were located in more com- with data from 1970s and 1980s, which
petitive markets. In 1999–2003, 41 percent concluded that the CNR did not decrease
of hospital discharges showed Medicare as HC in the 1970s.42 Our findings are also
payer and 13.9 percent showed Medicaid as in agreement with two other studies which
payer. The mean of costs per adjusted admis- showed that CNR is associated with only
sion was $6,187.52. a modest increases in HC in the 1980s.43
Even though previous results separately
Regression Results
examined the 1970s and 1980s, these
A regression model was used to determine results for 1999–2003 data are consistent
the impact of CNR on costs per adjusted with those earlier studies.
admission in hospitals. The model contained The results also showed that there are
all the hospitals in MSAs in the sample. The several other variables that have a signifi-
existence of CNR laws and CNR stringency cant impact on HC. Higher costs were found
were used as independent variables. to be associated with hospitals with major
The dependent variable used in the teaching functions, larger size, higher occu-
regression is the natural logarithm (LOG) pancy rates, higher staff intensity, higher
of HC per adjusted admission. The LOG percentage wage intensity, higher percent-
is used to provide normal distributions of age of Medicare and Medicaid discharges,
the dependent variable in order to meet the higher case-mix, and location in high income
10 JOURNAL OF HEALTH CARE FINANCE/Summer 2010

Figure 2. OLS Regressions with Robust Standard

Errors—Dependent Variable: Log of Hospital Costs

Variables Coef. Std. Err. t

Intercept 5.808 0.284 20.450 **
Certificate of Need Regulation (CNR) 0.009 0.013 0.750
CNR stringency 0.049 0.021 2.370 *
HMO penetration 0.050 0.042 1.190
HMO competition MSA -0.038 0.032 -1.160
Hirschman-Herfindahl Index -0.082 0.038 -2.140 *
Log [per capita income] 0.141 0.030 4.750**
% Non-Whites 0.123 0.039 3.130 **
For profit -0.050 0.015 -3.390 **
Bed size 0.000 0.000 7.220 **
Teaching status 0.221 0.021 10.410 **
Occupancy rate 0.101 0.040 2.530 *
Staffing intensity 0.005 0.001 4.510 **
Wage index 0.457 0.049 9.330**
System affiliation -0.021 0.012 -1.720
% Medicare discharges 0.276 0.053 5.170 **
% Medicaid discharges 0.343 0.060 5.730 **
Case-Mix Index 0.040 0.029 15.390 **

Adjusted R-square = 0.48

F-value = 40.70
* Significant at 0.05 level
**Significant at 0.01 level

areas and/or areas with a higher percentage 1. Contrary to expectation, the existence
of non-Whites. HC were lower for hospitals of CNR law has no statistically signifi-
located in more competitive hospital markets cant impact on HC per adjusted admis-
as defined by the market share variable and sions for all hospitals; and
HMO penetration. 2. Contrary to expectation, CNR strin-
gency has a positive statistically signif-
Discussion icant relationship with HC per adjusted
admissions for all hospitals.
The purpose of this study was to inves-
tigate the impact of CNR on health care Previous health services research on
organizational performance, as measured by the impact of CNR on HC has tended to
HC. The main findings of this study can be either use data that pre-dates the imple-
summed up as follows: Based on the hypoth- mentation of the prospective payment sys-
esis investigated: tem (PPS) in 1984 or predates the rise of
 The Effects of Certificate of Need Regulation on Hospital Costs 11

managed care during the 1990s. This has it is important to note that each state has
made the generalizability of these previous different regulations and operates in dif-
results to the current health care environ- ferent markets that are unique to the par-
ment questionable. The present study went ticular state. A similar statistical analysis
beyond previous research in a number of of all 50 states by Conover and Sloan47
ways. The CNR effects on HC were exam- reported that removing CNR did not have
ined after establishing more sophisticated any overall effect on per capita health care
controls for possible intervening environ- spending.
mental, market, and institutional variables. Examining the impact of CNR, we con-
In the current study, cost per adjusted trolled for all things being equal and the
admission was used as a measure for HC. estimated coefficient showed a positive sign,
HC were calculated in this study as oper- which illustrates that HC per adjusted admis-
ating expense or costs divided by adjusted sion increase if the hospital is located in a
admission. state that has a CNR law. Our findings are
Our results, as well as those of several pre- substantiated by previous studies. Lanning,
vious studies, indicate that CNR programs do Morrisey, and Ohsfeldt48 also measured the
not only fail to contain HC, but may actually effects of CNR on hospital expenditures and
increase costs as well. Our results, together also found it to be positive and significant.
with those of previous research, heighten the The most significant increase was for hos-
debate whether CNR will ever be an effec- pital expenditure where CNR appeared to
tive HC containment approach, and coun- increase per capita hospital expenditure by
ter arguments that CNR programs could be 20.6 percent. They also found that CNR
more effective after they have been in place raised hospital prices and they attributed
for a period of time. this finding to the restraining of competi-
Numerous studies, as referenced in this tion by CNR laws. Similar to our findings,
research, have made evident the ineffec- Sloan and Steinwald49 found no evidence of
tiveness of the CNR program in containing CNR impact on for-profit hospitals. After
HC. Studies conducted in the 1980s showed CNR repeal, for-profit hospitals did not
that CNR programs were not successful significantly increase their costs or market
in controlling hospital expenditures.44 The presence.
findings of our study are consistent with
several studies conducted during the 1980s Limitations
as well as some studies published in the
1990s.45 There are a number of limitations inherent
Our findings, together with results from in this study. Similar to studies that defined
previous studies, raise the question of the hospital and HMO markets in the research
impact of the abolishment of CNR on process,50 this study by definition excluded
HC. To determine the impact of the abol- some hospitals. Hospitals that operate out-
ishment of CNR programs, Mendelson side of an MSA were not included in this
and Arnold46 reported that there was no study. Organizational strategy is another
increase in cost in 12 states that abolished limiting factor; by using a geographic defi-
CNR programs. Considering this finding, nition of the market, this study tends to
12 JOURNAL OF HEALTH CARE FINANCE/Summer 2010

overestimate the competitiveness of markets HC. These findings when combined sug-
if segmentation is part of the market strat- gest CNR laws constrain competition more
egy. That is, hospitals and HMOs may be than the lowering of hospital expenditures.
located in the same MSA, yet due to market Similar to Conover and Sloan,52 these study
segmentation, they may appear not to com- results refute the argument that the ending
pete with others in that MSA since they cater of CNR laws will increase HC or costs of
to different populations (e.g., young families other health care services. The goals for
versus older adults, white collar versus blue cost containment, in addition to increasing
collar). access and quality sought by most CNR laws
There are some issues that may be of con- do not achieve that end result, and may be
cern but were not addressed in the design counterproductive. A recent study by Short,
of this study. HMO enrollment data do not Aloia, and Ho53 examined how Certificate
delineate which portions of the enrollees of Need (CON) influences cardiac mortal-
are located within the MSA. Also, the study ity rates and reported that states that dropped
data do not capture how the HMOs reim- CON had relatively lower rates for Coronary
burse. The data do include the total number artery bypass graft (CABG) surgery, with no
of enrollees and the service area (usually association between CNR and higher quality
by county) of the HMO, requiring that the of care.
enrollment for HMOs with service areas State goals for enhancing consumer access
overlapping MSA and non-MSA counties and quality could be better achieved through
be estimated. other programs such as provider or insurer
Second, like all cross sectional studies, report cards.54
this study demonstrates only association The results indicate that CNR strin-
and leaves open the question of causality. gency has a positive statistical relationship
Third, by defining a market at the MSA to urban HC within the period 1999–2003.
level, only a fraction of hospitals were Since the purpose of CNR legislation is
included in the analysis. Hospitals located to contain or reduce such HC, we con-
outside of defined MSAs would not be clude that CNR policies did not achieve
captured by the measure. This biases the their stated objectives during the study
sample toward urban areas and larger size period. As a consequence of the inability
hospitals.51 Fourth, of the hospitals stud- of CNR laws to contain HC, many states in
ied, the mean case-mix index is 1.34. This the United States are attempting to refine
figure contrasts poorly with the nation as their CNR to better address the nature and
a whole with a mean of 1.00. This differ- causes of HC inflation. Future research
ence could also bias the results of this study. should evaluate these initiatives in order
Not withstanding the foregoing limitations, to determine which approaches are most
this study provides further insight into CNR effective in achieving state objectives,
and spurs further research that will seek to with particular attention to rural hospi-
address these shortcomings. tals that experience a higher percentage
From the current study and the findings of Medicare and Medicaid discharges,
of several earlier studies, it appears that higher case-mix, and higher percentage of
CNR may stifle competition and increase non-Whites.
 The Effects of Certificate of Need Regulation on Hospital Costs 13

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