Why Are Nursing Homes so Heavily Regulated? The Effects and Political Economy of Certificate-of-Need Laws

Certificate-of-Need (CON) laws restrict the quantity of health services by requiring providers to convince a government board that there is a “need” for a given service in their region. Nursing home CON regulations are the most prevalent and often the most restrictive CON regulation. This paper explores why this regulation is so widespread by developing a model where firms compete for a mobile nursing home consumer. The model shows that repealing CON leads to an increase in the quantity of nursing home services and expenditures. I also find that inter-state competition incentivizes state politicians to impose nursing home CON restrictions that are higher than they would be otherwise. I support these predictions by analyzing the effect of this regulation on Medicaid and the quantity of nursing home beds. Applying a synthetic difference in differences analysis, I find that the repeal of nursing home CON laws led to an increase in Medicaid expenditures of $1.32 billion and $334 million in Pennsylvania and Indiana, respectively, while the estimated effect in North Dakota is not reliable due to a lack of evidence for parallel trends. This repeal also caused an increase in the quantity of nursing homes, nursing home beds, specialized beds, and total expenditure in all three states