Granting Incumbent Hospitals a Competitor's Veto: Why Certificate-of-Need Laws Restrict Supply and Inflate Healthcare Costs

The binding constraint for any market to control prices is the threat of new competition. When an incumbent hospital charges exorbitant rates or allows wait times to stretch into months, a functional system relies on a rival opening across the street to absorb that unmet demand. Across 35 American states, that fundamental condition does not hold.[1][2]

Instead, state governments enforce a regulatory barrier known as a Certificate of Need. Before a doctor can purchase an MRI machine, open a birthing center, or build a new psychiatric ward, they must prove to a state board that the community requires the service.[5]

Crucially, the boards that adjudicate these applications rely heavily on the input of existing healthcare providers. This mechanism effectively grants incumbent hospitals a competitor's veto, allowing them to block new entrants by arguing that the market is already adequately served.[4][6]

The result is a structural restriction on medical supply that has drawn intense scrutiny from economists and antitrust regulators. The Federal Trade Commission and the Department of Justice have repeatedly warned that these laws stifle innovation and undercut consumer choice.[1][6]

Despite decades of federal opposition, the hospital industry defends the regulations fiercely. Trade groups argue that without Certificate of Need laws, boutique clinics would siphon off profitable procedures, leaving general hospitals unable to cross-subsidize emergency care for uninsured patients.[3]

That tension has sparked a wave of recent legislative battles and lawsuits. In 2024, Georgia and Tennessee passed reforms rolling back portions of their regulatory requirements, while North Carolina is on track to eliminate its program entirely by 2026.[4][5]

The Origins of a Failed Cost Control Experiment

The modern regulatory framework dates back to 1974, when Congress passed the National Health Planning and Resources Development Act. The federal government, alarmed by rising Medicare expenditures, offered states funding if they implemented boards to restrict unnecessary medical construction.[5]

The underlying theory assumed that excess hospital capacity drove up prices. Planners believed that if a hospital could not fill its beds, it would simply raise rates on the patients it did treat to cover fixed overhead costs.[6]

By 1980, every state except Louisiana had adopted a Certificate of Need program. However, the federal mandate was repealed in 1987 after it became evident that restricting supply was accelerating price inflation rather than containing it.[5]

Since the federal repeal, 15 states have eliminated their laws entirely. Yet 35 states and Washington, D.C., continue to operate these programs, regulating everything from the number of hospital beds to the deployment of linear accelerators.[5]

The application process itself serves as a formidable barrier to entry. In Alabama, the maximum filing fee for an application is $24,684, and the legal costs associated with defending a proposal against incumbent opposition can easily exceed hundreds of thousands of dollars.[6]

The Empirical Impact on Healthcare Costs

Decades of economic data demonstrate that these laws fail to achieve their primary objective of cost containment. According to research from the Mercatus Center, states with active programs experience healthcare prices that are 11 percent higher than states without such restrictions.[2]

The disparity is particularly stark in acute care. The Mercatus analysis found that the regulations are associated with 10 percent higher variable costs in general acute hospitals, and hospital expenditures run 20.6 percent higher per capita in regulated states.[2]

When states repeal these laws, prices reliably fall. Five years after a state eliminates its program, hospital charges drop by an average of 5.5 percent, and reimbursements for specific procedures like coronary artery bypass grafts decline significantly.[2]

Beyond direct costs, the regulations severely restrict physical access to care. States enforcing these laws maintain 30 percent fewer hospitals per 100,000 residents and offer 131 fewer hospital beds per capita compared to free-market states.[2]

This artificial scarcity forces patients to travel further and wait longer for essential diagnostics. Regulated states consistently report fewer MRI machines, fewer CT scanners, and longer delays for routine imaging and outpatient surgeries.[1][2]

The Antitrust Perspective and the Competitor Veto

Federal antitrust regulators view the framework as a state-sanctioned mechanism for monopolization. The Federal Trade Commission has explicitly stated that the laws create opportunities for existing competitors to exploit the regulatory process to thwart new entrants.[6]

Former Federal Trade Commission Chairman William Kovacic noted that the healthcare industry provides fundamental services at vulnerable times, and that vigorous competition is essential to promote greater access to cost-effective, high-quality care.[6]

The core structural flaw is the hearing process itself. When an entrepreneur applies for permission to build, incumbent hospitals are invited to testify on whether the new facility is necessary, effectively giving them a legal avenue to block their own competition.[4]

This dynamic played out recently in Georgia, where Katie Chubb spent years fighting to open a birthing center in Augusta. Despite the state acknowledging a local need for maternal care, local hospitals successfully blocked her application until the legislature intervened in April 2024.[4]

By shielding incumbents from market forces, the laws remove the incentive to innovate or improve patient satisfaction. Without the threat of losing patients to a newer, more efficient clinic, established hospitals can maintain higher margins on lower-quality service.[1]

The Hospital Industry Defense of the Status Quo

Incumbent healthcare systems argue that the regulations are essential to maintain the fragile economics of comprehensive medical care. They maintain that general hospitals operate under federal mandates to treat all emergency patients, regardless of their ability to pay.[3]

To fund this uncompensated care, hospitals rely on the margins generated by lucrative elective surgeries and advanced diagnostics. The Tennessee Hospital Association warns that repealing the laws would allow specialized clinics to cherry-pick these profitable patients.[3]

Wendy Long, M.D., president of the Tennessee Hospital Association, argued in March 2024 that proposed reforms would undermine the sustainability of local hospitals.[3]

"These changes could cause hospitals to reduce the types of services they provide and, in some cases, close their doors permanently," she stated.[3]

Hospital advocates contend that rural communities would suffer the most. They argue that without the geographic monopolies granted by the state, rural hospitals would lose the patient volume necessary to keep their emergency departments and labor wards operational.[3]

However, empirical evidence challenges this rural protection narrative. Medicare spending per rural beneficiary is actually $295 higher in regulated states, and rural patients in those jurisdictions frequently face longer travel times to reach specialized care.[2]

A Wave of Legislative Repeals and Legal Challenges

Mounting evidence of the laws' anticompetitive effects has triggered a renewed push for deregulation. In May 2024, Tennessee Governor Bill Lee signed legislation exempting ambulatory surgery centers, neonatal intensive care units, and freestanding emergency departments from the requirements.[5]

Georgia followed suit, passing House Bill 1339 to roll back restrictions on healthcare innovation. The reform specifically targeted the barriers that had prevented maternal care centers and rural clinics from opening without incumbent permission.[4]

North Carolina is currently executing a phased repeal, with full elimination scheduled for January 2026. The state has already exempted ambulatory surgical centers in populous counties, spurring immediate facility development in high-demand regions.[5]

Simultaneously, providers are challenging the constitutionality of the competitor's veto in court. Dr. Jay Singleton, a North Carolina ophthalmologist, has spent five years fighting a law that prevents him from performing surgeries at his own clinic because state planners projected no need for his services.[6]

In October 2024, the North Carolina Supreme Court issued a ruling that revived Singleton's lawsuit, leaving the fundamental constitutionality of the state's framework open to judicial review as the legislative repeal approaches.[6]

As more states dismantle these regulatory barriers, the healthcare market is providing a real-time test of the competitor's veto. Early data from states like Montana, which repealed its law in 2021, shows a 12.5 percent increase in outpatient surgical centers and addiction treatment facilities.[5]