Regulation, Market Structure, and Hospital Costs: A Comment on the Work of Mayo and McFarland

Keith B. Anderson
Working Paper:

This paper provides a critique of a recent paper in the Southern Economic Journal concerning the effectiveness of Certificate of Need (CON) regulation in controlling hospital costs. ("Regulation, Market Structure, and Hospital Costs," January 1989) The major problem with the paper is that CON only affects costs through the number of beds a hospital operates. In addition, the measure of CON stringency suffers from endogeneity problems and the analysis is restricted to a single state where all CON decisions are made by the same agency governed by the same law. When we reestimate the model using a dataset where variation in CON stringency can be observed and correcting for the other problems in their analysis, we find that CON regulation has not been effective in reducing hospital costs. We also examine CON effectiveness in reducing the amount of short run excess capacity in hospitals. We find no evidence that CON is effective in achieving this goal.