Statement of the Federal Trade Commission to the Alaska Senate Committee on Health & Social Services on Certificate of Need Laws and SB 1

Statement of the Federal Trade Commission
to the Alaska Senate Committee on Health & Social Services
on Certificate of Need Laws and SB 1
March 27, 2019
Chairman Wilson, and Members of the Committee, my name is Daniel Gilman,
an Attorney Advisor in the Federal Trade Commission’s Office of Policy Planning. With
me today is David Schmidt, Assistant Director of the FTC’s Bureau of Economics.
Thank you for this opportunity to present the views of the FTC on Certificate of Need
laws, often called “CON laws” for short.
Our prepared remarks review recent statements on the effects of CON laws issued
jointly by the two federal competition authorities, the FTC and the Antitrust Division of
the U.S. Department of Justice (collectively “the Agencies”). In particular, in April 2017,
the Agencies commented on Alaska SB 62,1 discussing both our general views on CON
laws and the likely impact of SB 62 on Alaska health care competition. In February
2018, we summarized those comments and the FTC’s continued concerns about CON in
a statement to the Alaska State Senate Committee on Labor & Commerce.2 We have
continued to follow the economic and policy literature on CON laws since then, and we
remained concerned about the impact of CON laws on health care competition, and
health care consumers.
These prior statements reflect the Agencies’ extensive experience with health care
competition – including several decades of law enforcement, research, and policy
experience regarding the effects of provider concentration generally and CON laws in
particular.3 Any additional comments we might make, including responses to clarifying
questions, are our own, and do not necessarily reflect the views of the FTC, any
individual Commissioner, or the Department of Justice.

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CON laws,4 when first enacted, had the laudable goals of reducing health care
costs and improving access to care.5 However, after considerable experience, it has
become apparent that CON laws do not provide the benefits they originally promised.
Worse, in operation, CON laws can undermine some of the very policy goals they were
originally intended to advance.
Over the years, there have been many efforts to study CON laws empirically, to
determine whether their claimed benefits have materialized. The empirical literature does
not generally suggest that CON laws have succeeded in controlling costs, improving
quality, or increasing access.
We have identified at least three serious problems with CON laws. First, CON
laws create barriers to entry and expansion, which can increase prices, limit consumer
choice, and stifle innovation. Second, incumbent firms can use CON laws to thwart or
delay otherwise beneficial market entry or expansion by new or existing competitors.
Third, as illustrated by the FTC’s experience in the Phoebe Putney case, CON laws can
deny consumers the benefit of an effective remedy following the consummation of an
anticompetitive merger.
For these reasons, last year, we respectfully suggested that Alaska repeal its CON
laws, and we are here today to reiterate that suggestion.
I. 	CON Laws Create Barriers to Entry and Expansion, Potentially Depriving
Consumers of the Benefits of Health Care Competition.
CON laws, such as Alaska’s, require new entrants and incumbent providers to
obtain state-issued approval before constructing new facilities or offering certain health
care services. By interfering with the market forces that normally determine the supply
of facilities and services, CON laws can suppress increases in supply and misallocate
resources. They also shield incumbent health care providers from competition from new
entrants and innovations in health care delivery, which means consumers lose these
benefits.6
We urge you to consider all of these ways that CON laws may harm health care
consumers. We also urge you to consider how consumers – including patients and both
public and private payers – might benefit if new facilities and services could enter the

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market more easily. Entry and expansion – and often even just the credible threat of
entry or expansion – typically restrains health care prices, improves the quality of care,
incentivizes innovation, and improves access to care.
Entry restrictions, on the other hand, tend to raise costs and prices. They also
limit opportunities for providers to compete not just on price, but also on non-price
aspects – like quality and convenience – that may be particularly important to patients.
Impeding new entry into health care markets can be especially harmful in rural or other
underserved areas. CON laws may delay or block the development of facilities and
services where they are needed most and, potentially, reinforce market power that
incumbent providers may enjoy in already-concentrated areas.
II. 	Incumbent Providers May Exacerbate the Competitive Harm From These
Entry Barriers by Taking Advantage of the CON Process – and not Merely
its Outcome – to Protect Their Revenues.7
The strategic use of the CON process by competitors can cause more than delay.8
It can divert scarce resources away from health care innovation and delivery, as potential
entrants incur legal, consulting, and lobbying expenses responding to competitor
challenges, and as incumbents incur expenses in mounting such challenges.9 Moreover,
as the FTC’s recent experience in FTC v. Phoebe Putney shows,10 CON laws can
entrench anticompetitive mergers by limiting the ability of antitrust enforcers to
implement effective structural remedies to consummated transactions.
III. 	The Evidence Does Not Show that CON Laws Have Achieved Their Goals
States originally adopted CON programs over 40 years ago as a way to control
health care costs and mitigate the incentives created by a cost-plus based health care
reimbursement system.11 Although this type of reimbursement system has mostly gone
away, CON laws remain in force in a number of states, and CON proponents continue to
raise cost control as a justification. Proponents also argue that CON laws improve health
care quality while increasing access. The evidence suggests otherwise:
• 	Empirical evidence on competition in health care markets generally has
demonstrated that more competition leads to lower prices.12 FTC scrutiny of

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hospital mergers has been particularly useful in understanding concentrated
provider markets; and retrospective studies of provider consolidation by FTC staff
and independent scholars consistently indicate that “increases in hospital market
concentration lead to increases in the price of hospital care.”13
• 	The best empirical evidence also suggests that greater competition incentivizes
providers to become more efficient.14 Recent work shows that hospitals faced
with a more competitive environment have better management practices,15 and
that repealing or narrowing CON laws can reduce the per-patient cost of health
care.16
• 	We have found no empirical evidence that CON laws have successfully restricted
so-called “over-investment.”17 CON laws can, however, limit investments that
would lower costs in the long run.
• 	Several studies directly analyze the impact of changes in CON laws on health
outcomes, and the weight of this research has found that repealing or narrowing
CON laws is unlikely to lower quality – it may, in fact, improve the quality of
certain types of care.18
• 	CON proponents concede that CON laws allow incumbent providers to earn
greater profits than they would in a competitive environment. They argue that, in
theory, incumbents can then use those extra profits to cross-subsidize charity care.
We appreciate the importance of providing charity care, but we urge you to
consider whether there are less costly and more effective ways to do it.
o 	Keep in mind that the charity-care rationale is at odds with the cost-control
rationale. If the idea is that CON-protected incumbents will use their market
power and profits to cross-subsidize charity care, that implies providers will
charge supra-competitive prices for non-charity care. Such supra-competitive
pricing might harm many Alaska health care consumers, including low-
income or under-insured patients who are ineligible for charity care.
o 	Also, because CON programs impede entry and expansion, they can impede
access to care for all patients, including the indigent and other low-income
patients.

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o 	Although advocates of CON laws might seek to promote charity care, the
evidence does not show that CON laws advance that goal. In fact, there is
some research suggesting that safety net hospitals are no stronger financially
in CON states than in non-CON states;19 and there is some empirical evidence
contradicting the notion that dominant providers use their market power to
cross-subsidize charity care.20
In Conclusion: The FTC recognizes that states must weigh a variety of policy objectives
when considering health care legislation. But CON laws raise considerable competitive
concerns and generally do not appear to have achieved their intended benefits for health
care consumers. In brief, CON laws have failed to demonstrate success at delivering on
their policy goals over the course of 40-plus years. We respectfully suggest that the
legislature consider whether Alaska’s citizens are well served by its CON laws and, if
not, whether they would benefit from the repeal of those laws.
1 Joint Statement of the Antitrust Div. of the U.S. Dep’t Justice and the Fed. Trade Comm’n on Certificate-
of-Need Laws and Alaska Senate Bill 62 (2017) [hereinafter, “Joint Statement”],
https://www.ftc.gov/news-events/press-releases/2017/04/ftc-doj-support-reform-alaska-laws-limit-
competition-health-care.
2 Statement of the Fed. Trade Comm’n to the Alaska Senate Comm. on Labor & Commerce on Certificate-
of-Need Laws and SB 62 (Feb. 6, 2018),
https://www.ftc.gov/system/files/documents/advocacy_documents/statement-federal-trade-commission-
alaska-senate-committee-labor-commerce-certificate-need-
laws/p859900_ftc_testimony_before_alaska_senate_re_con_laws.pdf.
3 For a brief summary of FTC and DOJ research, enforcement, and policy analysis regarding health care
competition, including provider concentration and CON laws, see Joint Statement at 1-3.
4 Generally speaking, CON laws prevent firms from entering certain areas of the health care market (e.g.,
building a new hospital) unless they can demonstrate to a state regulator that there is an unmet need for the
services. FED. T RADE COMM ’N & U.S. D EP’ T OF J USTICE , I MPROVING H EALTH C ARE : A D OSE OF
COMPETITION, Ch. 8 at 1 (2004) [hereinafter A D OSE OF COMPETITION],
https://www.ftc.gov/sites/default/files/documents/reports/improving-health-care-dose-competition-report-
federal-trade-commission-and-department-justice/040723healthcarerpt.pdf.
5 Most CON programs trace their origins to the National Health Planning and Resources Development Act
of 1974. Under provisions of that Act, repealed in 1986, states were required to adopt CON legislation to
avoid losing certain federal funding. See CHRISTINE L. W HITE ET AL., ANTITRUST AND H EALTHCARE : A
COMPREHENSIVE G UIDE 527 (2013).

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6 See A D OSE OF C OMPETITION, supra note 4, at ch. 8 at 4 (discussing examples of how CON programs
limited access to new cancer treatments and shielded incumbents from competition from innovative
newcomers).
7 A D OSE OF COMPETITION, supra note 4, Exec. Summ. at 22; see also Tracy Yee et al., Health Care
Certificate-of-Need Laws: Policy or Politics? 2, 4 (Research Br. No. 4, Nat’l Institute for Health Care
Reform May 2011) [hereinafter, Policy or Politics?] (interviewees stated that CON programs “tend to
be influenced heavily by political relationships, such as a provider’s clout, organizational size, or
overall wealth and resources, rather than policy objectives,” that, in Georgia, “large hospitals, which
often have ample financial resources and political clout, have kept smaller hospitals out of a market
by tying them up in CON litigation for years,” that the CON process “often takes several years before
a final decision,” and that providers “use the process to protect existing market share – either
geographic or by service line – and block competitors”). This can cause more than delay. Policy or
Politics?, at 5 (“CONs for new technology may take upward of 18 months, delaying facilities from
offering the most-advanced equipment to patients and staff.”). It can divert scarce resources away
from health care delivery and innovation, as potential entrants incur legal, consulting, and lobbying
expenses responding to competitor challenges.
8 See, e.g., Policy or Politics?, supra note 7, at 5 (“CONs for new technology may take upward of 18
months, delaying facilities from offering the most-advanced equipment to patients and staff.”).
9 What makes this conduct more concerning is the fact that, even if exclusionary and anticompetitive, it is
shielded from federal antitrust scrutiny to the extent it involves protected petitioning of the state
government. See Fed. Trade Comm’n and U.S. Dep’t Justice, Written Testimony Before the Illinois Task
Force on Health Planning Reform Concerning Illinois Certificate of Need Laws, 6-7 (2008),
https://www.ftc.gov/sites/default/files/documents/advocacy_documents/ftc-and-department-justice-written-
testimony-illinois-task-force-health-planning-reform-concerning/v080018illconlaws.pdf; Prepared
Statement of the Fed. Trade Comm’n Before the Florida State Senate, 8-9 (2008),
https://www.ftc.gov/sites/default/files/documents/advocacy_documents/ftc-prepared-statement-
florida-senate-concerning-florida-certificate-need-laws/v080009florida.pdf.
10
https://www.ftc.gov/system/files/documents/public_statements/634181/150331phoebeputneycommstmt.pdf
11 See A D OSE OF C OMPETITION, supra note 4, ch. 8 at 2; W HITE ET AL., ANTITRUST AND H EALTHCARE : A
COMPREHENSIVE G UIDE , supra note 5, at 527.
12 See, e.g., Martin Gaynor & Robert Town, The Impact of Hospital Consolidation – Update, ROBERT
W OOD J OHNSON FOUNDATION : T HE SYNTHESIS P ROJECT (2012) [hereinafter Impact of Hospital
Consolidation] (synthesizing research on the impact of hospital mergers on prices, cost, and quality and
finding that hospital consolidation generally results in higher prices, hospital competition improves quality
of care, and physician-hospital consolidation has not led to either improved quality or reduced costs);
Martin Gaynor & Robert J. Town, Competition in Health Care Markets, 2 H ANDBOOK OF H EALTH
E CONOMICS. 499, 637 (2012). Martin Gaynor et al., The Industrial Organization of Health-Care Markets,
53 J. ECON.2 L ITERATURE 235, 284 (2015) (critical review of empirical and theoretical literature regarding
markets in health care services and insurance).
13 Gaynor & Town, Impact of Hospital Consolidation, supra note 12, at 1 (citing, e.g., Deborah Haas-
Wilson & Christopher Garmon, Hospital Mergers and Competitive Effects: Two Retrospective Analyses, 18
I N. J. E CON. B US. 17, 30 (2011) (post-merger review of Agency methods applied to two hospital mergers;
data “strongly suggests” that large price increases in challenged merger be attributed to increased market
power and bargaining leverage); Leemore Dafny, Estimation and Identification of Merger Effects: An
Application to Hospital Mergers, 52 J. L. & E CON. 523, 544 (2009) (“hospitals increase price by roughly 40
percent following the merger of nearby rivals”); Cory Capps & David Dranove, Hospital Consolidation
and Negotiated PPO Prices, 23 H EALTH A FFAIRS 175, 179 (2004) (“Overall, our results do not support the
argument that efficiencies from consolidations among competing hospitals lead to lower prices. Instead,
they are broadly consistent with the opposing view that consolidations among competing hospitals lead to

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higher prices.”)); see also, e.g., Joseph Farrell et al., Economics at the FTC: Retrospective Merger Analysis
with a Focus on Hospitals, 35 REV. I NDUS. O RG. 369 (2009) (mergers between not-for-profit hospitals can
result in substantial anticompetitive price increases).
14 Recent marketplace developments may undermine further the case for CON laws. Proponents of CON
programs generally assume that providers are incentivized to provide a higher volume of services. But this
assumption may be undermined as policy reforms and market developments encourage a move toward
value-based payments and away from volume-based payment structures.
15 See, e.g., Nicholas Bloom et al., The Impact of Competition on Management Quality: Evidence from
Public Hospitals, 82 REV. ECON. STUDIES 457, 457 (2015) (“We find that higher competition results in
higher management quality.”).
16 See, e.g., Vivian Ho & Meei-Hsiang Ku-Goto, State Deregulation and Medicare Costs for Acute Cardiac
Care, 70 M ED. CARE RES. & REV. 185, 202 (2012) (finding an association between the lifting of CON laws
and a reduction in mean patient costs for coronary artery bypass graft surgery, and finding that these cost
savings slightly exceed the fixed costs of new entrants); Patrick A. Rivers et al., The Effects of Certificate
of Need Regulation on Hospital Costs, 36 J. H EALTH C ARE F IN. 1, 11 (2010) (finding a positive relationship
between the stringency of CON laws and health care costs per adjusted admission and concluding that the
“results, as well as those of several previous studies, indicate that [CON] programs do not only fail to
contain [hospital costs], but may actually increase costs as well” (emphasis in original)). While other
studies evaluate the impact of repealing CON laws (with varying results), many of these studies are less
persuasive because they do not account for preexisting cost differences between the states. Compare
Michael D. Rosko & Ryan L. Mutter, The Association of Hospital Cost-Inefficiency with Certificate-of-
Need Regulation, 71 MED. CARE RES. & REV. 1, 15 (2014) (finding “a plausible association between CON
regulation and greater hospital cost-efficiency”), with Gerald Granderson, The Impacts of Hospital Alliance
Membership, Alliance Size, and Repealing Certificate of Need Regulation on Cost Efficiency of Non-profit
Hospitals, 32 M ANAGE . D ECIS . E CON. 159, 167-68 (2011) (“[R]epealing state CON programs contributed
to an improvement in hospital cost efficiency.”).
17 Some papers find that CON laws are associated with lower utilization of hospital beds. These studies,
however, do not address the critical question of whether the lower bed utilization in states with CON laws
is a result of preventing over-investment or restricting beneficial investment. See, e.g., Paul L. Delamater et
al., Do More Hospital Beds Lead to Higher Hospitalization Rates? A Spatial Examination of Roemer’s
Law, 8 PLOS ONE e54900, 13-14 (2013) (finding “a positive, significant association between hospital bed
availability and hospital utilization rates”); Fred J. Hellinger, The Effect of Certificate-of-Need Laws on
Hospitals Beds and Healthcare Expenditures: An Empirical Analysis, 15 AM . J. M ANG. C ARE 737 (2009)
(finding that CON laws “have reduced the number of hospital beds by about 10%”).
18 See Suhui Li & Avi Dor, How Do Hospitals Respond to Market Entry? Evidence from a Deregulated
Market for Cardiac Revascularization, 24 H EALTH E CON. 990, 1006 (2015) (finding that repeal of
Pennsylvania’s CON program improved “the match between underlying medical risk and treatment
intensity”); Ho & Ku-Goto, supra, note 16, at 199 (finding association between lifting of CON laws and
shorter lengths of stay and fewer strokes during admission for coronary artery bypass patients, finding no
significant association between lifting CON laws and three other complications during admission for
coronary artery bypass graft patients, and finding no significant associations between lifting of CON laws
and length of stay or need for coronary artery bypass graft surgery for percutaneous coronary intervention
patients); David M. Cutler et al., Input Constraints and the Efficiency of Entry: Lesson from Cardiac
Surgery 2:1 AM . ECON. J.: E CON. P OLICY 51, 52 (2010) (finding that new entry after repeal of
Pennsylvania’s CON program “had a salutary effect on the market for cardiac surgery by directing more
volume to better doctors and increasing access to treatment”). Additional empirical evidence suggests that,
“[a]t least for some procedures, hospital concentration reduces quality.” Gaynor & Town, Impact of
Hospital Consolidation, supra note 12, at 3; see also Patrick S. Romano & David J. Balan, A Retrospective
Analysis of the Clinical Quality Effects of the Acquisition of Highland Park Hospital by Evanston
Northwestern Healthcare (Fed. Trade Comm’n Bureau of Econ., Working Paper No. 307, 2010),

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https://www.ftc.gov/reports/retrospective-analysis-clinical-quality-effects-acquisition-highland-park-
hospital-evanston.
19 Cutler, supra note 18, at 63 (finding that, following repeal of Pennsylvania’s CON program, incumbent
hospitals “were not put in a precarious position by the elimination of CON”); T HE LEWIN G ROUP, AN
E VALUATION OF I LLINOIS ’ CERTIFICATE OF N EED P ROGRAM : P REPARED FOR THE STATE OF I LLINOIS
COMMISSION ON G OVERNMENT FORECASTING AND ACCOUNTABILITY ii, 27-28 (2007),
http://cgfa.ilga.gov/Upload/LewinGroupEvalCertOfNeed.pdf (“Through our research and analysis we
could find no evidence that safety-net hospitals are financially stronger in CON states than other states.”).
20 Christopher Garmon, Hospital Competition and Charity Care, 12 FORUM FOR H EALTH E CON. & P OL’Y 1,
13 (2009).