A century ago, only 5 percent of Americans were 65 or older. Today, that figure is about 17 percent, and it is projected to reach 23 percent by 2050. This demographic shift poses a two-headed challenge: How can our society provide health care access to a rapidly growing population of seniors with extensive and increasingly specialized health care needs without further straining an already unsustainable federal budget? Regulations pose many barriers. For example, certificate-of-need (CON) laws restrict the entry and expansion of health care facilities in 35 states. Since the 1980s, 15 states have either completely or partially eliminated their CON laws. However, CON laws for long-term care services have largely been kept in place, making it difficult for researchers to estimate the effects of these laws on long-term health care services and access to care.

One aspect of long-term care that states have deregulated is the entry of long-term acute care hospitals (LTACs). These are a unique type of health care institution not found outside the United States. Federal reforms in the 1980s introduced a new payment system in which health care facilities received reimbursements based on patients’ diagnoses rather than their length of stay. However, the reforms included an exemption that allowed hospitals with an average stay exceeding 25 days to retain the daily billing model, and LTACs qualified for this exemption. The presence of LTACs has since grown 10-fold, and their unique regulatory and institutional aspects have sparked research into provider incentives, strategic discharges, and health care waste.

Our research examines the staggered repeal of CON laws for LTACs in 10 states between 1984 and 2018. Our findings reveal that repealing CON laws increased the number of LTACs by 69 percent (about 6.3 facilities per million elderly residents) and added an average of 558 certified beds per million elderly residents (a 63 percent increase). Moreover, the expansions were largest in states such as Texas and Arizona, where policymakers had resisted adding additional entry barriers, such as hospital construction moratoriums, and where the broader economic climate was already conducive to investment and growth.

But while the effect of red tape on entry is clear, what is its effect on costs? After all, the United States already spends 50 percent more on health care than any other country in the Organisation for Economic Co-operation and Development. Several high-profile studies have demonstrated that patients who receive treatment in LTACs do not appear to have lower mortality rates compared with those treated in skilled nursing facilities (SNFs). These studies also demonstrate that some hospitals strategically discharge patients to LTACs to obtain more Medicare reimbursements. These findings could be interpreted as a compelling case to replace LTACs with skilled nursing facilities, or, stated differently, that LTACs are a case study in waste, costing taxpayers $5 billion per year with no discernible benefit.

Our research tests that interpretation by examining the effect of LTAC entry on key measures of patient well-being in nursing homes besides mortality. Our findings reveal that when LTACs entered the nursing home market, they decreased the rate at which SNF patients were rehospitalized by 5.9 percent, the number of patients who fell while in care by 5.3 percent, and the number of patients who were physically restrained to their beds by 13 percent. These findings suggest that LTAC entry relieves pressure on SNFs and other health care providers by offering options for patients with the most intensive care needs and by incentivizing existing long-term care providers to innovate, improve efficiency, and lower costs.

After half a century of failure, policymakers in states that continue to cling to CON laws should ask themselves: Will we double down on policies that have been shown not to work, or will we clear the way for a more competitive, innovative, and dynamic approach? Either way, the seniors are coming. 

NOTE
This research brief is based on Markus Bjoerkheim and Ali Melad, “The Impact of Deregulation on Long-Term Acute Care Hospitals: Evidence from Certificate-of-Need Repeals,” working paper, Mercatus Center, George Mason University, January 2025.