Do Hospital Employees Gain from a CON law

A Certificate of Need (CON) law requires hat health care organizations receive permission from a state agency before building a new facility or purchasing expensive diagnostic and therapeutic equipment. Health economists have long questioned if a CON law exists because of a public or special interest motivation. A public interest motivation can improve efficiency by eliminating the duplication of health care resources. Duplication of resources can occur, according to the public interest theory because of a medical arms race resulting from an inelastic demand for acute care, fee-for-service medicine, rational consumer ignorance, and a predominance of nonprofit hospitals.

In contrast, the special interest theory suggests that a CON law can worsen efficiency by creating an entry barrier. If a CON law does act as an entry barrier, as this special interest model suggests, entrenched health care organizations may respond by raising prices and/or by operating with some X-inefficiency, with both types of behavior resulting in economic rents for hospitals and their employees.

Most studies have focused on whether a CON law results in fewer or more health care facilities and beds, yet results from studies such as those are unable to address if CON laws result in more efficient or inefficient outcomes. Our study takes a different apporach and uses a large data set of different types of employees over the 1973 to 2012 period to test how the existence of a CON law influences the compensation of various types of hospital workers. Higher (lower) wages resulting from a CON law would signal a special (public) interest motivation.The empirical test capitalizes on the fact that every state but Louisiana possessed a CON law by 1980 but that a sizeable number of states eliminated their CON laws after 1987 when Federal support for CON waned. To eliminate any underlying systematic trends in the wage data across employees in the various states with and without a CON law, a triple difference in difference model is used in the empirical analysis. More specifically the earnings of all hospital employees are compared to the earning of all state employees in states that dropped and continued their CON law within this triple difference in difference framework. In addition, the wages of nurses are compared to the wages of teachers and accountants and the earnings of physicians are compared to those of judges and lawyers in states that dropped to those who continued their CON laws within the triple difference in difference framework. Numerous controls are specified for various types of worker, job, and demographic characteristics as well as a number of location variables.

The empirical results suggest that hospital employee wages, particularly those for nurses, are lower in states with a CON law. The findings also reveal that the wages for nurses fall once a CON law is lifted. Both of these results are consistent with a public interest motivation behind the implementation of a CON law. Consequently, the results suggest that CON laws may prevent the duplication of health care resources within a state and improve efficiency.