If You (Re)Build It, Will They Come? Evidence from California

Presenter: Zach Levin, Federal Trade Commission Discussant: Ian McCarthy, Emory University and NBER

MHEC, September 7, 2023


Research Question

What happens after construction of a new hospital?

  • Utilization at focal hospital versus other hospitals in the market
  • Quality changes, clinical and non-clinical

Relevant Literatures

  1. Entry and competition in hospital markets
  2. Patient preferences for clinical quality versus amenities
  3. Non-profit hospitals and incentives for overuse?

1. Entry and Competition

  • Mid 1960s: Increasing concern about hospital costs and excess capacity, duplicative services and facilities
  • 1964: New York State enacts the first certificate of need (CON) program
  • 1974: National Health Planning and Resources Development Act requires all states to have CON programs
  • 1980: CON laws in place for all states except Louisiana

Enacted during cost-plus reimbursement, where hospitals had little incentive to control costs

1. Entry and Competition

  • 1986: Congress repeals the National Health Planning and Resources Development Act
  • 1990s: Many states repeal or weaken CON laws
  • Today: 35 states and the District of Columbia still have some form of CON laws, 14 states have CON laws that apply specifically to hospitals

As a binding barrier to entry, CON often cited as part of the hospital pricing problem

2. Patient Preferences

  • Strong evidence that patients value non-clinical quality
  • Construction implies shiny new buildings, private rooms, etc.

3. Non-profit Hospitals

  • Possible to link construction with NFP status?
  • Reinvesting profits back into system (as necessary for NFP status) may over-incentivize construction
  • Policy implications re NFP status if such construction is “wasteful”
  • Potential call for more oversight of tax benefits

What does this paper do?

Basic Idea

  • 2006: California enacts SB 1953, requiring all hospitals to meet seismic safety standards by 2030
    • 90% of hospitals did not meet these standards in 2006
  • 2009-2015: 41 non-ED expansions or rebuilds

Empirical Strategy

Stacked difference-in-differences

  • Treatment: hospital in California that expands or rebuilds in 2009-2015
  • Control: hospitals in other markets (20+ miles away) that do not expand or rebuild
  • Time: pre- and post-construction


  • Construction projects yield 10%+ increase in admissions
  • Patients more likely to recommend hospitals after construction
  • No evidence of changes in clinical quality

Some Conceptual Questions

Implications for CON Laws?

  • In what ways are CON laws binding?
    • Own-hospital expansion? (seems unlikely)
    • Entry by new hospitals? (seems more likely)

Implications for Amenities?

  • Large capital investments imply investment in amenities
  • Can this be measured directly?
  • Is “room always quite” or “always respond quickly” an amenity?

Some Empirical Questions

Why did the hospitals expand or rebuild?

…though I am unable to differentiate whether this growth is a response to unmet needs.

Things to consider:

  • Pre-construction occupancy to identify capacity constrained vs. unconstrained hospitals (by admission category)
  • Admission or procedure codes before/after construction to identify services that expanded

Treated vs. Control

  • Treated hospitals appear very different than control hospitals
  • Bigger, higher occupancy, less Medicaid, less for-profit, more teaching hospitals

Things to consider:

  • Reweighting on pre-expansion size, occupancy, etc.
  • Not-yet-treated as controls in stacked setup



Potential Solution

Final Thoughts

My Takeaways

  • Great data, well suited to study effects of hospital construction
  • Decomposing additional admissions into expansion versus unmet need is important here
  • Consider reframing on NFP status and policies rather than CON laws or amenities

Thank You!

Ian McCarthy, Emory University & NBER