Can Empirical Demand Models Assist in CON Comparative Reviews? A Case Study in Florida


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Potential adverse effects of Certificate-of-Need (CON) programs for new hospital construction arise out of difficulties in the comparative review process for competing applications. We trace the problems to conflicts in evaluative criteria and other well-known special interest effects. At the same time, however, empirical analysis of revealed preferences using data on patient choices of hospitals can be useful in understanding the relative merits of competing proposals.

We adopt the Willingness-to-Pay (WTP) method that based on conditional logit models of patient choice of hospitals to estimate the additional contribution of a hospital to patients’ utility. Empirical results obtained provide measures of the net benefit of a hospital to the community.

We evaluate the set of competing CON applications in Clay County, Florida in 2005 to illustrate how the WTP method may be constructively incorporated in the review process. We then simulate the welfare effects of the proposed hospitals and predict how prices of hospital care would likely be affected by the choice of applicant. We show that the WTP method has its limitations, however; proposals cannot be uniquely ranked without more information on the efficiency of the proposed facilities and their quality of care.


Econometrics | Economics | Industrial Organization | Other Economics

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