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The Impact of State Regulations on Hospital Capacity Adjustment Decisions

In many states, hospitals must apply to a state health board before making large investments to demonstrate that there is need for the proposed expenditure. Capacity increases are among these regulated investments and I use a dynamic model to estimate if the presence of the regulations impacts hospital capacity decisions. My results indicate that, controlling for demand and competitive conditions, hospitals are more likely to increase capacity when no regulations are in place. I run simulations that estimate the long term effect of implementing the regulations in states where they do not exist, and discontinuing the regulations where they are currently in place. The simulations estimate that the regulations’ decrease long term total hospital capacity and most significantly impact smaller and for-profit hospitals. In addition, hospitals are more likely to turn patients away due to overcrowding when the regulations are present. I also estimate patient utility parameters in my empirical model which allows me to predict the total patient demand for each facility. Applying the hospital capacity parameters to the simulations for each regulatory environment and using the patient demand parameters to estimate utility indicates that the regulations decrease total patient welfare. To make patients indifferent between the two policies, the distance traveled when regulations are present would have to decrease by 5.1 percent. I also investigate whether hospitals turn patients away randomly by investigating whether their patient composition changes as they become more crowded. My results indicate that as a hospital turns away more patients, the fraction of mental health patients and minority patients decreases. This result suggests that there may also be distributional concerns to the regulations because they increase hospital turnaway probabilities.