Joint Statement of the Federal Trade Commission and the Antitrust Division of the U.S. Department of Justice Regarding Certificate-of-Need (CON) Laws and Alaska Senate Bill 62, Which Would Repeal Alaska's CON Program

DEPARTMENT OF JUSTICE 	FEDERAL TRADE COMMISSJON
Washington, DC 20530 	Washington, DC 20580
Joint Statement of the
Antitrust Division of the U.S. Department of Justice
and the Federal Trade Commission
on Certificate-of-Need Laws and Alaska Senate Bill 62
The Antitrust Division of the U.S. Department of Justice (the '' Division'')
and the Federal Trade Commission (the "FTC" or the "Commission") (together,
the "Agencies") welcome the opportunity to share our views on certificate-of
need ("CON") laws and Alaska Senate Bill 62 (the "Bill"), which would repeal
Alaska's CON program.1
CON laws,2 when first enacted, had the laudable goals of reducing health
care costs and improving access to care.3 However, after considerable
experience, it is now apparent that CON laws can prevent the efficient
functioning of health care markets in several ways that may undermin e those
goals. First, CON laws create barriers to entry and expansion, limit consumer
choice, and stifle inn ova tion. Second, incumbent firms seeking to thwart or
delay entry or expansion by new or existing competitors may use CON laws to
achieve that end. 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. Finally, the evidence
1 S.B . 62, 30th Leg., 1st Sess. (Alaska 2017).
2 Generally speaking, CON laws prevent firms from entering certain areas of the health care
market (e.g., building a new hospital) unless they can demonsb'ate to a state regulator that there
is an W1met need for the services. FED. TRADE COMM'N & U.S. DEP'T OF JUSTICE, IMPROVING
HEALTH CARE: A DOSE OF COMPETlTION, Ch. 8at1 (2004) [h ereinafter A DOSE OF COMPETITION] ,
https:/ I www.ttq~ov /sites/ def.rnlt/ files/ documentsI reports/ improving-health~art.>-dose
compebition-report-federa l-trade-contmission-and-deparhnenL-1ustice I 040723heaUJicaremlpdf
3 Iv.fost 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 Under provisions of that Act, repealed in 1986, states were required to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. WHITE ET AL,
ANTITRUST AND HEA LTHCARE: A COMPREHENSIVE GUIDE 527 (2013).

to date does not suggest that CON laws have generally succeeded in controlling
costs or improving quality. For these reasons, the Agencies historically have
suggested that states consider repeal or retrenchment of their CON laws, and, in
this case, respectfully suggest that Alaska repeal its CON program.
I. 	The Agencies' Interest and Experience in Health Care Competition
Competition is the core organizing principle of America's economy,4 and
vigorous competition among sellers in an open marketplace gives consumers the
benefits of lower prices, higher quality, and greater access to goods and services,
and innovation.s The Agencies work to promote competition through
enforcement of the antitrust laws, which prohibit certain conduct that harms
competition and consumers, and through competition advocacy (e.g.j comments
on legislation, discussions with regulators, and court filings).
Because of the importance of health care competition to consumers and
the economy as whole, this sector has long been a priority for the Agencies.6 The
Agencies have extensive experience investigating the competitive effects of
mergers and business practices by hospitals, insurers, pharmaceutical
companies, physicians, and other providers of health care goods and services.
The Agencies also have provided guidance to the health care community on the
antitrust laws, and have devoted significant resources to examining the health
care industry by sponsoring various workshops and studies.
In particular, the Agencies have examined the competitive impact of CON
laws for several decades. For example, staff from the FTCs Bureau of Economics
conducted several studies of CON laws in the late 1980s, both before and after
repeal of the federal law that had encouraged the adoption of CON laws across
q See, e.g., N.C. State Bd. of D enta l Exam 'rs v. FTC , 135 S. Ct. 1101, 1109 (2014) ("Federal antitrust
law :is a central safeguard for the Nation's free market sb'uctures."); Standard Oil Co. v. FTC, 340
U.S. 231, 248 (1951) (" Th e heart of our national economic policy has long been faith in the value of
competi tion.").
s See, e.g., Nat' I Soc'y of Prof'} Eng' rs v. United States, 435 U.S. 679, 695 (1978) (noting that the
antitrust Jaws reflec t'' a legislative judgment that ultimately competition will produce not only
lower prices, but also better goods and services .... The assumption that competition is the best
method of allocating resources in a free market recogni zes that all elements of a bargain-quality,
service, safety, and durability-and not just the immediate cost, are favorably affected by the fr ee
o pportunity to select among alternative offel's.").
6 A description of, and links to, the FTC's various health care-re lated activities can be found at
https: // wwv. .ft.c.govI tips-advice/ competition-guidance/i.ndustry-guidance /health-care . An
overview of the Division's health care-related activities is available at
http_/ I www _justice-govI ah /health-c.are.

the United States.7 In addition, the Agencies jointly conducted 27 days of
hear ings on health care competition matters in 2003, receiving testimony about
CON laws and market entry, as well as testimony on many other aspects of
health care competition pe rtinent to CON policy, such as the effects of ·
concentration in hospital markets.s In 2004, b ased on those hearings,
indepe n dent research, and a public workshop, the Agencies released a
substantial report on health care competiti on issues, including those related to
CON laws.9 Finally, through their competition advocacy programs, the Agencies
for many years have reviewed particular CON laws and encouraged states to
consider the competitive impact of those laws.JO
7 DANlELSHERMAN,FED. TRADECOMM'N, THEEFFECTOFSTATECERTIFICATE-OF-NEED LAWSON
HOSPITAL COSTS: AN ECONOMIC POLICY ANALYSIS (1988) (concluding, after e mpirical study of
CON programs' effects on h ospital costs using 1983-84 data on 3,708 hospitals, that strong CON
programs do not lead to lower costs but may actually increase costs); MONICA NOETHER, FED.
TRADE COMM'N, COMPETITION AMONG HOSPITALS (1987) (empirical study concluding that CON
regulation led to h igher prices and expenditures); KEITH B. ANDERSON & DAVID I. KASS, FED.
TRADE COMM'N, CERTIFICATE OF NEED REGULATION OF ENTRY INTO HOME HEALTH CARE: A MULTl
PRODUCT COST FUNCTION ANALYSIS (1986) (economic study finding that CON regulation l ed to
high er costs and that CON regulation did little to further economies of scale).
s Health Care and Competition Law and PoliCIJ Hearings, FED. TRADE COMM'N,
https:// www .ftc gov I news-events/ events-calendar/ 2003 / 02/health-care-competition-law
policy-hearings.
9 A DOSE OF COMPETITION, supra note 2, at Exec. Sum.m. at 22, ch. 8 at 1-6.
10 See, e.g., Joint Statemen t of the Federal Trade Commissi on and the Antitrust Division of th e U.S.
Deparbnent of Justice on Certificate-of-Need Laws and South Caroline House Bill 3250 Gan. 11,
2016), https.//www.justice.gov/atr/file/812606/download ; Joint Statement of the Federal Trade
Commission and the Antitrust Division of the U.S. Department of Justice to the Virginia
Certificate of P ublic Need Work Group (Oc t. 26, 2015),
htlps: //www.ftc.gov/system/files/ documents/ advocacy documents/ joint-statement-federal
trade-commission-antitrust-division-u.s.deparbnent-justice-virginia-certificate-public-need
work-group/151026ftc-dojstmtva copnl.pdf; Letter from Marina Lao, Dir., Office of Policy
Planning, Fed. Trade Comm' n, et al, to The Honorable Marilyn W. Avila, N.C. House of
Representatives Guly 10, 2015),
hltps://www.ftc.gov/system/files/documents/advocacy dotuments/ftc-staff-comment
concurring-comment-com.missioner-wright-regarding-north-carolina-house-bill
200/150113ncconadv.pdf; Prepared Statement of the Federal Trade Commission Before the
Florida State Senate (Apr. 2, 2008) [hereinafter FTC Florida Statement],
https://www.ftc.gov/sites/default/files/documents/advocacy documents/fie-prepared ~
statement-florida-senate-concerning-florida-certificate-need-laws/v080009florida.pdf; Statement
of the Antitrust Division, U.S. Deparbnent of Justice, Before the Florida Senate Committee on
Health & Human Services (Mar. 25, 2008), http://www.justice.gov/atr/comments-competition
healthcare-and-certificates-need; Prepared Statement of the Federal Trade Commission Before the
Standing Commi ttee on Health, Education, & Social Services of the Al aska House of
Representatives (Feb. 15, 2008) [hereinafter FTC Alaska Statement],
https://www.ftc.gov/sites/ default/files/ documents/advocacy documents/ftc-written
testimonv-alaska-house-representatives-concerning-aJaska-certif1Cate-need
3

II. 	Alaska's CON Program and Senate Bill 62
Alaska's CON program is intended to promote health care quality, access
to health care, and cost containment among other goals.11 Under the program, a
party must obtain a certificate of need before spendi.J:1:g $1.5 million or more to
construct a health care facility, alter the bed capacity of a health care facility, or
add a category of health services provided by a health care facility.12 Health care
facilities include hospitals, independent diagnostic testing facilities, skilled
nursing facilities, and ambulatory surgical facilities.13 A certificate of need is
granted "if the availability and quality of existing health care resources or the
accessibility to those resources is less than the current or projected requirement
for health services required to maintain the good health of citizens of [the]
state."14
A party seeking a certificate of need must submit an application, along
with an application fee ranging from $2,500 to $75,000, depending on the value of
the project, to the Department of Health and Social Services (the
"Departrnent'').15 No later than 30 days after receipt, the Department will notify
the party whether the application is complete.16 The Department holds a public
meeting and solicits written comments from the public concerning the
application.17 The Department must submit a recommendation to the
Commissioner of Health and Social Services (the "Commissioner") within 60
days of notifying a party that its application is complete.JS The Commissioner
laws/v080007alaska.pdf; Sta tement of the Antitrust Division, U.S. Department of Justice, Before a
Joint Session of the Health and Human Services Committee of the State Senate and the CON
Special Committee of the State House of Representatives of the General Assembly of the State of
Georgia (Feb. 23, 2007), hltp ./!www. justice gov atr/competition-heallhcare-and-certifLCates
need .
11 C,ertificate of Need (CON) Program Summartj, ALASKA DEP'T HEA LTH & SOC. SERVS.,
http://dh..'isalaska.govI dhcs/Pages/Cert1fic'ateOtNeed/ defauJtaspx (last visited Mar. 16, 2017).
u Alaska Stat. § 18.07.031 (2016).
t3 Alaska Stat § 18.07.111(8) (2016).
14 Alaska Stat. § 18.07.041 (2016). A separate standard governs requests related to nursing homes
and residential psychiatric treatment centers. Alaska Stat § 18.07.43 (2016).
15 Alaska Stat. § 18 .07.035 (2016); Alaska Ad.min. Code tit. 7, §07.079 (2016).
16 Alaska Adm in. Code tit. 7, §07.050 (2016).
17 Alaska Ad.min. Code tit. 7, §07.052 (2016).
18 Alaska Stat. § 18 .07.045(a)(2) (2016); Alaska Adm.in. Code tit. 7, §07.060 (2016). The Department
may defer commencement of its review for a period not to exceed 60 days in order to receive
co mpeting applications. Alaska Stat. § 18.07.045(a)(l) (2016). Additionally, the period may be
4

then has 45 days to decide whether to grant or deny the certificate of need.19 A
member of the public substantially affected by activities authorized by a
certificate of need may initiate an administrative proceeding concerning the
Commissioner's decision and, ultimately, seek judicial review.20
The Bill would repeal Alaska's CON program effective July 1, 2019.21
III. 	Analysis of the Likely Competitive Effects of Alaska's CON Program
Competition in health care markets can benefit conswners by containing
costs, reducing prices, improving quality, and encouraging innovation.22 Indeed,
competition generally xesults in lower prices for, and thus broadei· access to,
health care p roduc ts and services, while non-price competition can promote
higher quality care and encoui-age innovation. CON laws may suppress these
substantial benefits of competition by limiting the availability of new or
expanded health care services.
A. 	CON Laws Create Barriers to Entry and Expansion, '1\'hich May
Suppress More Cost-Effective, Innovative, and Higher Quality
Health Care Options
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 interferi ng with the market forces that
normally determine the supp ly of facilities and services, CON laws can suppress
supply, misallocate resources, and shield incumbent health care providers from
competition from new entrants.23 Specifically, CON laws can tend to do the
following:
extended by 30 days in order to ena ble the Department to complete its recommendation. Alaska
Stat. § 18.07.045(b) (2016).
19 Alaska Admin. Code tit. 7, §07.070(c) (2016).
20 Alaska Stat. § 18.07,081 (2016); Alaska Stat § 44.62.560 (2016); Alaska Adroin. Code tit. 7,
§07.082 (2016); Alaska AdnUn. Code tit. 7, §07.072 (2016); see also Alaska Stat.§ 18.07.091 (2016) (a
member of the public substantially and adversely affected by a violation of CON statutes or
regulations may seek injunctive relief from a court of competent jurisdiction).
n S .B. 62, 30th Leg., 1st Sess. (Alaska 2017).
22 A DOSE OF COMPETITION, supra note 2, at Exec. Su.mm. at 4.
23 See A DOSE OP COMPETITION, supra note 2, 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).
5

• 	raise the cost of entry and expansion - by adding time, uncertainty, and
the cost of the approval process itself -for firms that have the potential to
offer new, lower cost, more convenient, or higher quality services;
• 	remove, reduce, or delay the competitive pressures that typically
incentivize incumb ent firms to innovate, improve existing services,
introduce new ones, or moderate prices;24 and
• 	prohibit entry or expansion outright, in the event that a CON is denied.
We urge Alaska to consider that its CON law may generate these results,
to the detriment of health care consumers, and to consider the benefit to both
patients and third-party payors if new facilities and services could enter the
market more easily. 11us new entry and expansion - and the threat of entry or
expansion-could restrain health care prices, improve the quality of care,
incentivize innovation in the delivery of care, and improve access to care.
B. 	The CON Process May Be Exploited by Competitors Seeking to
Protect Their Revenues and May Facilitate Anticompetitive
Agreements
Incumbents may exacerbate the potential competitive harm by taking
advantage of the CON process- and not merely its outcome-to protect their
revenues. For instance, an incumbent firm may file challenges or comments to a
potential competitor's CON application to thwart or delay competition. As
noted in an FTC-DOJ report, existing firms can use the CON process "to forestall
competitors from entering an incumbent's market."25 This use of the CON
24 See id.; Joint Statement of the Antitrust Division of the U.S. Department of Justice and the
Federal Trade Commission Before the Illinois Task Force on Health Planning Reform 6 (Sept. 15,
2008) [hereinafter DOJ-FTC Illinois Testimony],
https://www.ltc.gov/sites/defauJt/files/documents/ advocacy documents/ ftc-and
department-jushce-"'rilten-tesllmonv-illinois.-task-force-heallh-planning-retorm
concerning/ ,•08U018ilkonlaws.pdf.
25 A DOSE OF COMPETITI ON, supra note 2, 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 shaxe - either geographic or by service
line - and block competitors").
6

process by competitors can cause more than delay :26 	it can divert scarce
resources away from health care innovation as potential entrants incur legal,
consulting, and lobbying expenses responding to competitor challenges (and as
incumbents incur expenses in mounting such challenges).27 Repeal of Alaska's
CON program would eliminate the opportunity for this type of exploitation of
the CON process.
CON programs also have facilitated anticompetitive agreements among
competitors. For example, in 2006, a hospital in Charleston, West Virginia, used
the threat of objection duri ng the CON process to induce another hospital to
refrain from seeking a CON for a location where through expansion it would
have been able to compete to a greater extent with the existing hospital's
p rogram.2s In a separate but similar case, informal suggestions by state CON
officials led a pair of closely competing West Virginia hospitals to agree that one
hospital would seek a CON for open heart surgery, while the other would seek a
CON for cancer treatment.29 While the Division secured consent decrees
prohibiting these agreements between competitors to allocate services and
territories, 30 such conduct L11dicates that CON laws can provide t..11.e opportunity
for anticompetitive agreements.
C. 	CON Laws Can Impede Effective Antitrust Remedies
As the FTCs recent experience in FTC v. Phoebe Putney demonstrates,
CON laws can entrench anticompetitive mergers by limiting the government's
ability to implement effective structural remedies to consummated transactions.
Phoebe Putney involved a challenge to the merger of two hospitals in Albany,
26 See, e.g., Policyy or Politics, supra note 25, at 5 ("CONs for new technology may take upward of
18 months, delaying fa cilities from offering the most-advanced equipment to patients and staff.'').
27 What makes this conduct more concern.mg is the fact that, even if exclusionary and
anticompetitive, it is shielded from federal antibust scrutiny to the extent it involves protected
petitioning of the state government. See DOJ-FTC Joint Illinois Testimony, supra note 24, at 6-7;
FIC Florida Statement, supra note 10, at 8-9; FI'C Alaska Statement, supra note 10, at 8-9.
28 United States v. Charleston Area Med. Ctr., Inc., No. 2:06-0091 (S.D. W.Va. 2006).
29 United States v. Bluefield Reg'! Med. Ctr., Inc., No. 1:05-0234 (S .D. W.Va. 2005).
so See also Press Release, U.S. Dep't of Justice, Department of Justice Statement on the Closing of
the Vermont Home Health Investigation (Nov. 23, 2005),
h ttp://w~\-nv iustice. &ov/archrve/opa/p r /2005/November/05 at 629.html (home health
agencies entered into territorial market allocations, which were facilitated by the state regulatory
program, to gjve each other exclusive geographic markets; without the state's CON laws,
competitive entry might have disciplined this cartel behavior).
7

Georgia.31 Seeking a preliminary injunction in federal court, the FTC alleged that
the merger would create a monopoly in the provision of inpatient general acute
care hospital services so ld to commercial health plans in Albany and its
surrounding areas. The district court dismissed the suit, finding that the merger
was protected from antitrust scrutiny by the "state action doctrine."32 The U.S.
Court of Appeals for the Eleventh Circuit affirmed the district court's dismissal
on state action grounds, although finding that "the joint operation of [the two
hospitals] would substantially lessen competition or tend to create, if not create, a
monopoly." 33 The Supreme Court reversed, holding that ''state action
immunity" did not apply.34 Howeve r, the merging parties consummated the
transaction while appeals were pending, and Georgia's CON regime precluded
structural relief for the anticompetitive merger .35 As the Commission explained,
"[w]hile [divestiture] would have been the most appropriate and effective
remedy to restore the lost competition in Albany and the surrounding six-county
area from this merger to monopoly, Georgia's [CONJ laws and regulations
unfortunately render a divestiture in this case virtually irnpossible. ''36
The Cow.mission concluded that the case ''illustrates how state CON laws,
despite their original and laudable goal of reducing health care facility costs,
often act as a barrier to entry to the detriment of competition and healthcare
consumers."37 Moreover, because CON laws can limit the supply of competitors,
and not just the supply of health care facilities and services, they can foster or
preserve provider market power. Thus, Alaska's CON laws could prevent
divestiture as an effective tool to remedy anticompetitive mergers in appropriate
cases.
31 See generally In re Phoebe Putney Health Sys., Inc., Dkt. No. 9348,
https: I I wv.~·.ftc.gov I enforcem~nl/ ca.ses-prnt~edings/ 111-0067 / phoebe-putnev-lwatth-svswm
inc-phoehe-putney-memorial.
3z FTC v. Phoebe Putney Health Sys., 793 F. Supp. 2d 1356, 1361-62 (M.D. Ga. 2011).
33 FfC v. Phoebe Putney Health Sys., 663 F.3d 1369 (11th Or. 2011).
M FTC v. Phoebe Putney Health Sys., 133 S. Ct. 1003, 1007 (2013).
35 The Eleventh Circuit affirmed the district cou rt's dismissal of the case on state-action grounds
and dissolved the stay that had prevented the parties from consummating the merger. With the
stay dissolved, the parties had consummated their merger before the sta te-action question was
resolved by the federal courts. See FTC V'. Phoebe Putne y Health Sys. Inc., 133 S. Ct. at 1011.
36 Statement of the Federal Trade Commission at 1, Jn re Phoebe Putney Health Sys., Inc., Dkt.
No. 9348, (Mar. 31, 2015),
htfps./ I""""""° ftc.gov /~ystem/files/ documents/ public statements/ 634181 /15033lphoebepuh\e
ycommstml. pdf .
37 Id. at3.
8

IV . 	Evidence on the Impact of CON Laws
States originally adopted CON programs over 40 ye ars ago as a way to
conh·ol h ealth care costs and mitigate the incentives created by a cost-based
health care reimbur se ment system. 38 Although that reimbursement system has
changed significantly, CON laws remain in force in many states, and CON
proponents continue to raise cost control as a justification for CON programs .
CON proponents also argue that CON laws positively affect th e quality of health
care services and that CON programs have enabled states to assw·e access to
h ealth care services. As described below, however, the evidence on balance
suggests that CON laws have failed to produce cost savings, higher qual ity
health care, or greater access to care, whe ther for the indigent or in underserved
areas.
A. 	CON Laws Appear to Have Failed to Control Costs
Pr oponents of CON programs contend that CON laws contain heal th care
costs by prev e nting "ove rinvestment'' in capital-intensive facilities, services, and
equipment. Th ey claim that normal market forces do not discipline investment
in th e health care sector given, in many cases, the disconnect between the party
selecting a provider (the patient) and the party paying all or most of the bill (the
insurer), and the information asymmetries among provider, patient, and insurer.
They therefore call for a regulatory regim~e requiring prea pproval for health care
investmen ts.39
However, CON laws are likely to increase, rather than constrain, health
care costs. First, the CON regime imposes the legal and regulatory costs of
preparing an applicati on and, then, seeing that application through the approval
process and potential third-party challenges. Such costs represent inves tments in
an administrative process; not the construction of health care facilities or the
de livery of health care services. They are, moreover, investments made at risk, to
the extent that the res ult of a CON application is uncertain during the months or
years that the application, or a challenge to it, is pending. The costs of the CON
process - the inv es tment, the time, and the risk - add to the costs of new,
expanded, or improved health care facilities.
38 See A D OSE OF COMPETTTTON, supra note 2, ch. 8 at 2; WHITE, supra note 3, at 527.
:!9 See CON Background, AM. H EALTB PLANNING Ass'N, http: I Iv. wv. .ahpaneLorg/ t0pnahpa html
("The rationale for imposing market entry controls is that regulations, ground ed in community
based planning, will result in more appropriate allocation and distribution of h ealth care
resources and , thereby, help assure access to care, maintain or improve quality, and help control
health care capital spending.").
9

Second, those regulatory costs also can work as a barrier to entry, tending
to discourage some would-be providers from entering certain health care
markets, and tending to discourage some incumbent providers from expanding
or innovating in ways that would make business sense, but for the costs imposed
by the CON system. Further, even for providers willing to incur those
regulatory costs, CON requirements stand as a hard barrier to entry in the event
that a CON application is denied. Hence, CON laws can diminish the supply of
health care facilities and services, denying consumers options for treabnent and
raising the prices charged for health care.
Empirical evidence on competition in health care markets generally has
demonstrated that consumers benefit from lower prices when provider markets
are more cornpetitive.40 Agency scrutiny of hospital mergers has been
particularly useful in understanding concentrated provider markets, and
retrospective studies of the effects of provider consolidation by Agency staff and
independent scholars suggest that" increases in hospital market concentration
lead to increases in the price of hospital care."41 Furthermore, both the FTC and
the Division have engaged ir1 significant enforcement efforts to prevent
anticompetitive conduct in health care provider markets because the evidence
40 See, e.g., Martin Gaynor & Robert Town, Tlze Impact of Hospital Consolidation - Update, ROBERT
WOOD JOHNSON FOUNDATION: THE.SYNTHESIS PROJECT (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 HANDBOOK OF HEALTH ECONOMICS. 499, 637 (2012). Martin Gaynor et al., The Industrial
Organization of Health-Care Markets, 53 J. ECON.2 L'fT8RATURE 235, 284 (2015). (critical review of
empirical and theoretical literature regarding markets in health care services and insurance).
41 Gaynor & Town, Impact of Hospital Consolidation, supra note40, atl (citing, e.g., Deborah Haas
Wilson & Christopher Garmon, Hospital Mergers and Competitive Effects: Two Retrospective Analyses,
18 IN. J. ECON. Bus. 17, 30 (2011) (post-merger review of Agency methods applied to two hospital
mergers; data "strongly suggests" that large price increases in cJiallenged 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. & ECON. 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 HEALTH AFFAJRS 175, 179
(2004) ("Overall, our results do not support the argument that efficiencies from consolidations
among competing hospitals lead to low er prices. Instead, they are broadly consistent with the
opposing view that consolidations among co mpeting 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 REY. INDUS. ORG. 369 (2009) (mergers between not-for-profit hospitals can resuJt m
substantial anticompetitive price mcreases).
10

suggests that consumers benefit from competition.42 The Agencies strongly
believe that competition can work in health care markets. 43
The best empirical evidence suggests that greater competition incentivizes
providers to become more efficient.44 Recent work shows that hospitals faced
with a more competitive envirorunent have better management practices.45
Consistent with this, there is evidence suggesting that repealing or narrowing
CON laws can r educe the per-patient cost of h ealth care.46
Finally, the Agencies have found no empirical evidence that CON laws
have successfully restricted "over-investment."47 CON laws can, however,
42 Supra note 6.
43 Indeed, similar arguments made by engineers and lawyers in defense of anticompetitive
agreements on price - that competition fundamentally does not work in certain markets, and in
fact is hatmful to public policy goals- have been rejected by the courts, and private restraints on
competition have been condemned . See, e.g., FTC v. Superior Court Trial Lawyers Ass'n, 493 U.S.
411, 424 (1990); Nat' l Soc'y of Prof'] Eng' rs v. United States, 435 U.S. 679, 695 (1978).
44 Furthermore, recent marketp lace developments may undermine further the case for CON laws .
Proponents of CON programs generally assume that provide rs are incentiv::ized 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 arid away from volu m e
based payment structures .
4S See, e.g., Nicholas Bloom et al., The Impact of Competition on Management Quality: Evidence from
Public Hospitals, 82 REV. ECON. STUDIE.5457,457 (2015) ("We find that high er competition results in
higher· management qu ality.").
46 See, e.g., Vivian Ho & Meei-Hsiang Ku-Goto, State Deregulation and Medicare Costs for Acute
Cardiac Care, 70 MED. CAREREs. & REV. 185, 202 (2012) (finding an association between the lifting
of CON l aws 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 Czrtificate of Need Regulation on Hospital Costs, 36 J. HEALTH CARE FIN. l, 11
(2010) (finding a pos i tive 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 costs1' 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, Tize Association of Hospital Cost -lnefficiencywith Certificate-of-Need
Regulation, 71 MED. CARE RFs. &REv. l, 15 (2014) (finding "a plausible association between CON
regulation and greater hospital cost-efficiency"), with Gerald Granderson, Tfze lmpacts of Hospital
Alliance Mernbe ·rship, Alliaiice Size, and Repealing Certificate of Need Regulation on Cost Efficiency of
Non-profit Hospitals, 32 MANAGE. D ECIS. ECON. 159, 167-68 (2011) ("[R]epealing state CON
programs contributed to an improvement in hospital cost efficiency.").
47 Some papers find that CON laws are associated with l ower 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 resu lt of preventing over-investment or restricting beneficial
J1

restrict investments that would benefit consumers and lower costs in the long
run. Because CON laws raise the cost of investment for all firms, they make it
less likely that beneficial investment will occur. '1'he CON application process
directly adds to the cost of investment for both incumbents and po tential
entrants. In ad dition, CON laws shield incumbents from competitive incentives
to invest.
B. 	Quality of Care Arguments Should Not Preclude CON Reform
Proponents also ha ve argued that CON laws improve th e quality of health
care services. Specifically, they contend th at providers performing higher
volumes of procedures have better patient outcomes, particularly for more
complex procedures.48 Hence, by concentrating services at a limited number of
locations, CON laws could increase the number of pr ocedures performed by
particular providers and reduce the frequency of adverse o utcomes.
Such arguments do not fully consider the relev ant literature or the effect
of competition on clinical quality. First, the most pronounced effect of volume
on quality outcomes may be limited to certain relatively complicated
procedures.49 Second, even for services where certain studies have s hown a
volume/ outcome relationship (e.g., coronary artery bypass graft s ur geryso),
evidence suggests that these volume effects may no t offset the other effects of
investment. See, e.g., Paul L. Delamater et al., Do More Hospital Beds Lead to Higher Hospitalization
Rates? A Spatial Examination ofRoemer's Law, 8 PLOS ONE e54900, 13-14 (2013) (fin ding ''a
positive, significant association between hospital b ed availability and hospital utilization rates'');
Fred J. Hellinger, The Effect of Certificate-of Need Laws on Ho spital s Beds and Healthcare Expenditures:
An Empirical Analysis, 15 AM.]. M ANG. CARE 737 (2009) (finding that CON laws "have reduced
the number of hospital beds by ab out 10%").
48 This relationship between the volume of surgical procedures and quality has been stu died in
numerous settings, and is often supported by the evidence. See, e.g., Martin Gaynor et al., T11e
Vo lume- Outcome Effect, Scale Economies, and Leaming-by-Doing, 95:2 AM. ECON. REV. 243, 245 (2005)
("Like the prior literature, we find a large volume-o utcome effect.").
49 See Ethan A H alm et al., ls Volume Related to Outcome in Health Care? A Systematic Review and
Methodological Critique of the Literature, 137.6 ANNALS lNTERNAL MED. 511, 514 (2002) ("We found
the most consistent and striking dilierences in mortality rates between high- and low-volume
providers for sever al high-risk procedures and conditi011s, including pancreatic cancer,
esophageal can cer, abdominal aortic ane urysms, pediatric cardiac problems, and treatment of
AIDS. The magnitude of volume-outcome relationships for more common procedu res, such as
[coronary artery byp ass graft surgery ], coronary angioplasty, and carotid end arterectomy, for
w hich selective referral and regionalization policies have been proposed , was much more
modest.").
50 See Gaynor et al., Volume-Outcome Effect, supra note 48, at 244 .
12

CON programs on quality.51 The volume/ outcome relationship is just one
mechanism by which CON laws can affect health care quality, so this literature
provides only a partial picture. Studies that directly analyze the impact of
changes in CON laws on health ou tcomes provide a more complete picture. The
weight of this research has fow1d that repealing or narrowing CON laws is
generally unlikely to lower quality, and may, in fact, improve the quality of
certain types of care .52 Moreover, additional empirical evide nce suggests that,
"[a]t least for some procedures, hospital concentration red uces quality."53
C. 	More Targeted Policies May Be Mo re Eff ective at Ensuring
Acce ss to Care and Wo uld N ot Inflict Antic ompetitive Co sts
Another argument advanced by proponents of CON programs is that the
programs enable states to increase access to care for their indigent residents and
in medically underserved areas. The general argument is tha t, by limiting
competition, CON laws allow incumbent health care providers to earn greater
profits-through the charging of higher prices and the preservation of their
vol ume of lucrative procedures- than they would earn i..'1. a competitive
environment. According to this argument, these incumbents can then use those
exb·a profits to cross-subsidize their provision of care to the indigent.
Additionally, proponents maintain that regulators can use CON laws to restrict
entry into well-served areas and encou r age it in medically un de rserved areas.
s1 See, e.g., Vivian Ho et al., Certificate of Need (CON) for Cnrdinc Care: Controversy over the
Omtributions of CON, 44:2 HEALTH SERVS. REs. 483, 483 (2009) (''States that dropped CON
experienced lower [coronary artery bypass graft surgery] mortality rates relative to sta tes that
kept CON, although the differential is not permanent.").
s2 See Suhui Li & Avi Dor, How Do Hospitals Respond to Market Entry? Evidence from a Deregulated
Market for Cardiac Revascularization, 24 HEALTH ECON. 990, 1006 (2015) (finding that repeal of
Pennsyl vania's CON program improved "the match between underlying medical risk and
treatment intensity"); Ho & Ku-Goto, supra, no te 46, at 199 (finding association between lifting of
CON laws and shorter lengths of stay and fewer strokes during admission for coromuy ar tery
bypass patients, finding no significant association between lifting CON laws and three ot her
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.: ECON.
POLI CY 51, 52 {2010) (finding that new entry after repeal of Pennsylvania's CON program " had a
salutary effect on t he market for cardiac surgery by directing more volume to be tter doctors and
increasing access to treatment").
53 Gaynor & Town, Impact of Hospital Consolidation, supra note 40, at 3; see also Patrick Romano &
))avid J. Balan, A Retrospective Analysis of tlze Clinical Quality Effects of the Acquisition of Highland
Park Hospital btj Evanston Northwestern Healthcareare, 18 INr' LJ. ECON. Bus. 45, 64 (2011).
13

Although the Agencies appreciate the importance of ensuring access to
health care for the indigent and in medically underserved areas, we urge Alaska
lawmak ers to consider whether there are more effective or narrowly tailored
ways in which to accomplish this public policy goal. We note, first, that the
charity-care rationale is at odds with the cost-control rationale. That is, the
notion that CON-protected incumbents will use their market power and profits
to cross-subsidize charity care supposes that those 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.
Moreover, as described in Section III.A ., above, because CON programs
impede entry and expansion, they can impede access to care for all patients,
including the indigent and other low-income patients. Although advocates of
CON laws might seek to promote indigent 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.54 In addition, some empirical evidence contradicts the notion that
dominant providers use their market power to cross-subsidize charity care. For
example, one empirical study of the relationship between competition and
charity care found a "comp lete lack of support for the 'cross-subsidization
hypothesis': that hospitals use increased market power to fund more charity care
or, s tated in the negative, that increased competition will harm patients who rely
on charity care."ss
Finally, CON programs are a blunt tool for accomplishing the specific goal
of providing care to the indigent and in medically underserved areas. They tend
to sweep broadly, limiting competition for a wide v~ety of health care services.
Although the Agencies do not endorse any particular mechanism for funding
indigent care, we note that solutions more narrowly tailored to a state's
recognized policy goals may be substantially less costly to consumers, and
54 Cutler, supta n ote 52, at 63 (finding that, following Tepeal of Pennsylvania's CON program,
incumbent hospitals "were not put in a precarious position by the elimination of CON " ); THE
LEWIN GROUP, AN EvALUATION OF lLLINOis' C ERTlFICATE OF NEED PROGRAM: PREPARED FOR THE
STATE OF ILUNOIS COMMJSSION ON GOVERNMENT 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 stro n ger in CON
states than other states.'}
ss Christopher Garmon, Hospital Competition and Charity Care, 12 FORUM FOR HEALTH ECON. &
POL'Y 1, 13 (2009) ~
14

ultimately more effective at achieving the desired social goals, than a CON
regime.56
V. 	Conclusion
The Agencies recognize that states must weigh a variety of policy
objectives when considerin.g health care legislation. But, as described above,
CON laws raise considerable competitive concerns and generally do not appear
to have achieved their intended benefits for health care consumers. For these
reasons, the Agencies historically have suggested that states consider repeal or
retrenchment of their CON laws. We respectfully suggest that Alaska repeal its
CON laws .
56 See, e.g., LEWIN GROUP, supra note 54, at 29 (discussing various financing options for
charity care i.n Illinois); DOJ-FTC Illinois Testimony, supra note 24, at 9; Joint Comm.'n on
Health Care, A Plan to Eliminate the Certificate of Public Need Program Pursuant to Senate
Bill 337 22 (2000),·
http://\lvww.vdh.state.va us/Administration/documents/COPN/Prior%20Virginia%2.0Stu
dies/ !CHC%20COPN%20DereguJahon%20Plan%20SB337%20of%20%202000 pd( (plan to
eliminate Virgjnia's COPN program included "several provisions to help cushion hospitals
and the AHCs from the impact of being less able to cost-shift and subsidize indigent care,
low revenue-generating services, and undergraduate medical e ducation").
15