Imagine if your state had a regulation explicitly limiting the number of hotels in a local area. Rather than letting the market dictate the supply of hotel beds, the number of beds would be set by a regulatory body. One does not need a degree in economics to quickly see that this bed constraint would distort competition. As demand grew in a local market, new hotels could not easily open, resulting in higher hotel occupancy and fewer beds available for consumers. Because existing hotels could get customers regardless of the quality they offer, there would be little incentive to invest in good service or make big capital improvements to the facility. Hotels would also be able to charge higher prices even in the context of lower quality.
This type of rule for hotels is unfathomable, yet many states still have such a rule for nursing homes in the form of a “certificate-of-need” law. Certificate of need constrains bed growth by employing a need-based evaluation of all applications for new construction. Some states even go further by implementing a construction moratorium that effectively prevents any market expansion.
The policy rationale for these regulations is that lower capacity ultimately results in lower public expenditures, but like the hotel example, it actually benefits providers and harms consumers. This regulation diminishes quality of care and reduces bed availability in nursing homes, while raising prices. It is time for states to repeal this pernicious policy.
Certificate of need is an oft-used strategy to constrain health care spending. It rests on what is termed “Roemer’s law,” which states “a built bed is a filled bed is a billed bed.” The logic goes something like this: if a state can hold the total number of nursing home beds down, then it will constrain the number of Medicaid beneficiaries in those beds, which ultimately lowers overall state Medicaid spending on nursing homes.
The rationale underlying this regulation has always struck me as somewhat dubious. I have been studying nursing homes for two decades, and I am still waiting to meet the individual who wants to enter a nursing home. Roughly one in three older adults report they would rather be dead than enter a nursing home. Even the most generous state Medicaid eligibility policies have not attracted additional individuals into nursing homes. Most families will exhaust every option before placing a loved one in a nursing home. The notion that public nursing home spending would greatly increase in the absence of a bed constraint simply does not make sense.
Research has been fairly clear: nursing home certificate-of-need laws lower access and quality of care, while increasing private-pay prices. Certificate of need has even distorted the size of nursing homes. The average number of beds in a nursing home is roughly 110 in states without a certificate-of-need law and 131 in states with a law.
Despite evidence against them, 34 states still have certificate-of-need laws on the books. One reason why states have maintained these laws is their incredible popularity with nursing homes. If a system is lucky enough to have a regulated monopoly, it will not give that monopoly up easily. Nursing homes have argued that certificate of need allows them to keep sufficient occupancy levels to cover their costs. This guaranteed occupancy is a boon for nursing homes, but hurts consumers. If a nursing home cannot maintain sufficient occupancy without certificate of need, it is likely a sign that the nursing home is not providing adequate quality.
Fourteen states, including most recently New Hampshire in 2016, have discontinued their certificate-of-need law. Florida is currently proposing to repeal its certificate-of-need law for hospitals and other health care providers (HB 7). However, in a recent change approved by the Florida House Health & Human Services Committee, nursing homes and hospice were excluded from this planned repeal.
Certificate-of-need laws discourage innovation in a sector badly in need of modernization. Many recent culture change quality initiatives, such as the Green House and other small house models, have highlighted the importance of capital investments towards improving nursing home quality of care. Although data on the capital stock in the nursing home industry are sparse, one estimate suggests the average age of nursing home structures is about 30 years. Many older nursing homes lack private rooms and have an institutional, less home-like environment.
A number of innovative nursing home models are being piloted all over the country. If you have to move a family member to a nursing home, you want a nursing home that provides person-centered care in the most homelike setting possible. Yet, certificate of need impedes this innovation and provides existing nursing homes with too much market power at the expense of the very people they care for.
Moving forward, states should repeal their certificate-of-need law for nursing homes to encourage greater innovation in the care of older adults. This will lead to better access to services and improved quality and price competition in the market for nursing home services.