In 1974, Congress passed the Health Planning Resources Development Act, which required states to create (if they didn't have them already) planning boards with veto power over health care providers' business decisions.
To comply, states adopted Certificate of Need (CON) laws, which the American Hospital Association had been pushing for—purportedly to lower health care costs and improve quality of care by avoiding the duplication of services and overinvestment.
The federal mandate was repealed in 1987, but in the 36 states (and D.C.) that retain CON regulations, state agencies can (to varying degrees) prevent hospitals, outpatient clinics, and long-term care facilities from building or expanding facilities, offering new services, or purchasing equipment according to the National Conference of State Legislatures.
Now that 14 states have deregulated (to varying degrees), however, researchers can compare outcomes in states with CON laws and those without them. Lead author Vivian Ho, an economics professor at Rice University and the Baylor College of Medicine has done just that, finding that, for heart bypass surgery:
states that removed Certificate of Need regulations experienced a 4 percent decrease in the average cost of patient care. These regulations are designed to prevent hospitals that do not treat a minimum prescribed volume of patients from offering open-heart surgery.
… Deregulation led to more hospitals building new facilities to perform open-heart surgery, which raises costs. However, the cost savings from lowering average costs per patient outweighed the additional costs of these new facilities.
Ho speculated that cost savings result from deregulation because competition encourages hospitals to deliver higher quality care. "The desire to attract more patients in a competitive market leads hospitals to offer higher quality care," Ho said. "It may sound counterintuitive, but recent studies show that higher quality surgery lowers costs because costly hospital complications are avoided when one improves care."
The study was supported by a grant from the National Heart, Lung and Blood Institute at the National Institutes of Health.
See the Medical Care and Research Review for the full study, which relied on data from Medicare beneficiaries age 65 and older (gated).
According to a 2011 study by National Institute for Health Care Reform, a nonprofit founded by the Big Three automakers and the United Autoworkers union, "the CON approval process can be highly subjective and tends to be influenced heavily by political relationships rather than policy objectives."