Statement of the Federal Trade Commission to the Alaska Senate Committee on Labor & Commerce On Certificate-of-Need Laws and Alaska Senate Bill 62

Statement of the Federal Trade Commission
to the Alaska Senate Committee on Labor & Commerce
on Certificate-of-Need Laws and SB 62
February 6, 2018
Chairman Costello, Senator 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. In particular, in April 2017, the Agencies specifically
commented on SB 62.1 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.2
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.
CON laws,3 when first enacted, had the laudable goals of reducing
health care costs and improving access to care.4 However, after considerable

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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 April 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

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incumbent health care providers from competition from new entrants and
innovations in health care delivery, which means consumers lose these
benefits.5
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 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.6
The strategic use of the CON process by competitors can cause more
than delay.7 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

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expenses in mounting such challenges.8 Moreover, as the FTC’s recent
experience in FTC v. Phoebe Putney shows,9 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.10 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.11 FTC
scrutiny of 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.”12
13
14
15
• 	The best empirical evidence also suggests that greater competition
incentivizes providers to become more efficient. 	Recent work shows
that hospitals faced with a more competitive environment have better
management practices, 	and that repealing or narrowing CON laws
can reduce the per-patient cost of health care.

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• 	We have found no empirical evidence that CON laws have
successfully restricted so-called “over-investment.”16
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.
• 	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.
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

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are no stronger financially in CON states than in non-CON
states;18
19
and there is some empirical evidence contradicting the
notion that dominant providers use their market power to cross-
subsidize charity care.
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 For a brief summary of FTC and DOJ research, enforcement, and policy analysis regarding health care
competition, including provider concentration and CON laws, see id. at 1-3.
3 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.

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4 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).
5 See A D OSE OF C OMPETITION, supra note 3, 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).
6 A D OSE OF COMPETITION, supra note 3, 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. [DUPLICATED BELOW IN FN 8]
7 See, e.g., Policy or Politics?, supra note 6, at 5 (“CONs for new technology may take upward of 18
months, delaying facilities from offering the most-advanced equipment to patients and staff.”).
8 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.
9
https://www.ftc.gov/system/files/documents/public_statements/634181/150331phoebeputneycommstmt.pdf
10 See A D OSE OF C OMPETITION, supra note 3, ch. 8 at 2; CHRISTINE L. W HITE ET AL., ANTITRUST AND
H EALTHCARE : A COMPREHENSIVE G UIDE , 527 (2013).
11 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).
12 Gaynor & Town, Impact of Hospital Consolidation, supra note 11, 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

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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
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).
13 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.
14 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.”).
15 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.”).
16 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%”).
17 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 14, 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,

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“[a]t least for some procedures, hospital concentration reduces quality.” Gaynor & Town, Impact of
Hospital Consolidation, supra note 11, 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),
https://www.ftc.gov/reports/retrospective-analysis-clinical-quality-effects-acquisition-highland-park-
hospital-evanston.
18 Cutler, supra note 17, 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.”).
19 Christopher Garmon, Hospital Competition and Charity Care, 12 FORUM FOR H EALTH E CON. & P OL’Y 1,
13 (2009).