For almost twenty years certificate-of-need (CON) regulations have protected existing hospitals from unrestricted competition in services. Although the explicit purpose of CON regulation was to prevent hospitals from duplicating services and investing in costly excess capacity, it has been unsuccessful in accomplishing this goal. On the other hand, CON policies have, we suggest, been pursued with the implicit aim of “cross subsidization,” that is, regulators have used their power to issue licenses and restrict competition in order to create an incentive to hospitals to provide high levels of care to the indigent population. Posner (1971) has noted that to achieve cross subsidization, entry into lucrative services must be restricted. We present evidence that CON licenses have been used to promote the internal subsidization of indigent care in probit analysis, based on data from Florida spanning the period 1983- 89. While this method of financing indigent care may be preferred by legislators who do not want to face the political consequences of raising taxes to pay for the service, it has troubling implications for the hospital provision of indigent care, especially in an era of CON deregulation.

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