Certificate of Need Regulation and Hospital Behavior: Evidence from MRIs in North Carolina

Abstract

Certificate of Need (CON) regulations — restrictions on capital investment — are a key feature of the regulatory environment facing the US hospital industry, yet there is remarkably little evidence on how these regulations affect hospital investment and patient care in practice. In this paper, I use newly collected data on the magnetic resonance imaging (MRI) market in North Carolina and patient-level Medicare claims data to estimate the dynamic effects of marginal relaxations of CON restrictions on provider investment and patient care. Using a regression discontinuity approach that takes advantage of regulatory approval thresholds, I document two sets of key findings. First, CON regulations are a binding constraint on hospital investment. In response to this constraint, there is an active market for unregulated mobile MRI scanners that enable health care providers to mitigate the impact of CON restrictions. Second, CON rules affect not only hospital investment but also restricts utilization of MRI scans. In a specific case, CON regulations reduce the number of scans patients with low back pain receive, reducing medical spending by roughly $400. There is no evidence that this decrease in the intensity of care comes at the cost of increased future low back pain.