Central Planning and Market Based Reforms: Evidence From Ohio’s Long-Term Care Market

The market for most health care services is heavily regulated in the United States. In the 1970s -- after the inception of Medicare and Medicaid -- most states adopted Certificate of Need (CON) laws that were designed to limit and manage the expansion of hospitals and other health care institutions. Under CON regulation, health care firms that wanted to expand their capacity required the permission of the CON regulatory board. CON boards were supposed to accept or reject proposed expansion by assessing the local communities need for more health services. Things have changed somewhat since the 190s. Some states have abandoned CON altogether, others have pursued a partial deregulatory measure of allowing for a tradable market in long-term care (LTC) beds.

In this paper, we study an interesting “cap and trade” model that the State of Ohio uses to allocate licensed LTC beds. We present a simple theoretical framework that clarifies the ways that centrally managed LTC bed markets may lead to an inefficient allocation of a fixed supply of licensed beds and makes simple predictions about the implications of allowing LTC facilities to trade buy and cell bed licenses. We use data on bed transactions in Ohio before and after Ohio allowed LTC facilities to trade beds first within counties and later between counties. Our empirical analysis suggests that relative to CON management, a cap and trade market for LTC beds: 1) improves the distribution of beds statewide; 2) likely leads to movement of beds from high-Medicaid facilities to low Medicaid facilities; 3) is unlikely to result in infrastructure investments or quality improvements for selling facilities; and 4) should be structured to encompass the largest geographic unit (ideally the entire state) rather than smaller geographic sub-units.