Conning the Competition

A certificate of need (CON) is a government permission slip that is required to enter certain industries.

Imagine you came up with the perfect hamburger recipe and wanted to start a new restaurant. But before you could, you had to prove that your town “needed” a new hamburger restaurant. And to prove this, you had to show that your restaurant would not take away customers from any of the existing fast food chains in town—even though, of course, the whole reason you want to start your restaurant is to provide customers with something different and better.

Now imagine the application to open costs thousands of dollars. On top of that, the only way to prove there is a “need” for a new hamburger restaurant is to engage in full-blown litigation against the existing chains that have plenty of money to oppose your application. Do you risk it and apply? Or do you give up and go into a different business? And even if you’re lucky and get a CON, a year later if an appliance breaks in your kitchen, you may find yourself going through the same process just to buy a replacement.

This is how CONs function in the healthcare market. Predictably, restricting the supply of healthcare facilities and services harms patients and would-be providers. CONs reduce access to medical services, raise healthcare costs and stifle innovation. The only winners are existing providers who benefit from decreased competition.

This report paints a broad picture of the complex and varied nature of CON laws in the healthcare industry. It is one thing to hear that CON laws fail to increase access to healthcare, reduce costs or increase quality of care, ¹ but it is quite another to see, compiled and standardized, the full maze of red tape that providers must wade through simply to open new facilities or offer new services. And CON laws do not ensure quality or safety—other laws and regulations exist for that purpose.

Today, 35 states and the District of Columbia maintain CON laws. Another three states enforce quasi-CON requirements. That means 39 jurisdictions purposely restrict the growth of healthcare facilities and services. Across these jurisdictions, entrepreneurs and medical providers are required to apply for and receive a government permission slip before taking hundreds of actions—from big-ticket expenditures such as opening a surgery center, to small items such as changing a room from single occupancy to double occupancy. In West Virginia, a hospital must go through the entire CON process just to add ventilator services.

Consider this example from Kentucky. ² Louisville is home to a Nepali-speaking population that numbers in the thousands. In 2018, Nepali immigrants and entrepreneurs Dipendra Tiwari and Kishor Sapkota noticed their community had a need for Nepali-speaking home healthcare services. So they decided they would open a home health agency to fill that need.

Unfortunately for Dipendra and Kishor, the Kentucky Cabinet for Health and Family Services uses a crude, “one-size-fits-all” formula to determine whether a county needs additional home health agencies—a formula that required the Cabinet to deny their CON application. Still, a $2 billion healthcare conglomerate stormed in and further objected to the application to ensure it would not have a new competitor. Unsurprisingly, the Cabinet denied the application. As a result, Dipendra and Kishor cannot start their business and their community is left without home health aides that speak their language.

What happened in Kentucky is all too common. Thirty-four jurisdictions allow competitors to intervene in the application process to object to applications. Hospitals and existing healthcare providers know that CON programs give them a competitive advantage by allowing them to block competitors from ever offering new services. That’s why they fight to keep CON laws on the books.

Unfortunately, patients are the ones who suffer most. Per capita, patients in CON states have access to fewer hospitals, hospital beds, dialysis clinics, ambulatory surgical centers, medical imaging centers and hospice facilities. ³ Thus, as lawmakers, healthcare advocates or individuals concerned with their own healthcare options consider how to increase access to needed medical services, repealing CON laws should be their top priority.

CON Laws in Practice

Across the country, CON laws apply to over 100 types of facilities, healthcare services and equipment. In most cases, submitting a CON application begins with filling out a lengthy application. Applications can be tens or hundreds of pages long. Often an applicant must hire an expert to prove there is a “need” for a new medical service.

These applications are costly. Flat application fees range from $100 dollars in Arizona up to $250,000 in Maine. In Hawaii, applicants pay a percentage of the proposed project cost with no statutory maximum. In New Jersey, applicants pay a flat fee plus a percentage of the proposed project cost with no maximum. In those states, the more expensive the project, the more expensive the application.

Cost is not the only burden—applicants must also deal with delays that can stretch out for months or years. For example, many states review CON applications within two to four months, but the application process in Arizona lasts 450 days—the longest in the country.

In other states, the reviewing agency considers applications infrequently. Indiana, for example, reviews CON applications only once annually. Virginia reviews applications twice annually. And that’s nothing compared to Ohio’s review of applications to relocate long-term care beds to a county with fewer long-term care beds than needed—that review is only conducted once every four years.

To make matters worse, 34 of the 39 jurisdictions with CON programs allow an applicant’s would-be competitors to object to CON applications. In many instances, this means a direct competitor can intervene in the application process to argue that the state should deny the application. In Minnesota, applicants must specify in their initial applications whether their direct competitors support or oppose their project.

In most states that allow objections, direct competitors are allowed to present testimony as to why a new service is not needed or why an application should be denied. This often amounts to full-blown litigation and leads to further costs and delays. Once a competitor intervenes in the application process, an applicant usually needs to hire an attorney to counter the intervenors’ arguments. If the applicant cannot afford to hire an attorney, he or she may have to abandon the application altogether.

Even if an applicant succeeds in getting a CON, more troubles can arise. In states like Mississippi and Oklahoma, for example, competitors can appeal a CON decision, forcing the applicant to face more hearings and delays. It’s no surprise that some medical entrepreneurs see how few CONs are actually granted each year and give up on their dreams without applying at all.

The process, it seems, is not built to prioritize the needs of patients or encourage innovation in healthcare. Instead, the process protects incumbents and creates a massive web of red tape for entrepreneurs.

Origin of CON Laws

Basic economic theory predicts that supply is inversely correlated with cost. That is, if you increase the availability of a good or service, prices fall. If you restrict the supply of a service, prices rise. CON laws, then, attempt to contradict this basic logic. They restrict the supply of healthcare facilities and services in hope of controlling costs and increasing access to care.

The original theory behind CON laws—which has since been debunked—says that, in the healthcare arena, supply drives demand. ⁴ The flawed thinking was that reducing the supply of healthcare would reduce overall healthcare expenditures. In 1964, New York enacted the nation’s first statewide CON law. ⁵

Hospitals quickly realized that they benefitted from the reduced competition. To protect its members’ financial interests, the American Hospital Association (AHA) began lobbying to convince other states to enact CON laws. ⁶ The AHA’s campaign was successful. By 1978, 36 states had done so. ⁷

Congress took notice of the growing popularity of CON laws and, in 1974, enacted the National Health Planning and Resources Development Act (NHPRDA) to reduce federal healthcare spending. ⁸ The Act explicitly required states to enact CON laws to receive certain federal reimbursements. Unsurprisingly, by 1978, 42 states and the District of Columbia had CON laws. ⁹ At one point, every state except Louisiana had a CON law.

CON laws were intended to lower healthcare costs, prevent the unnecessary duplication of services and increase access to quality care. ¹⁰ But the experiment with CON laws failed. ¹¹ To its credit, Congress eventually realized that CON laws did not achieve their purported goals.

In 1986, Congress repealed NHPRDA because it “failed to control healthcare costs and was insensitive to community needs.” ¹² Since that time, in a rare admission of a policy failure, the federal government has continued to disavow CON laws. ¹³

Current Regulatory Landscape

Since the 1980s, 15 states have successfully repealed their CON programs. Although Arizona, Minnesota and Wisconsin are among the 15 states that repealed their CON programs, they maintain quasi-CON programs today. Thus, a dozen states, containing 40% of the population, ¹⁴ have no CON laws at all.

Patients in the remaining states continue to suffer because of outdated CON laws. They pay more for medical services, ¹⁵ and per capita, patients in CON states have access to fewer hospitals, hospital beds, dialysis clinics, ambulatory surgical centers, medical imaging centers and hospice facilities. ¹⁶

Instead of rushing to repeal CON laws, many states have done the opposite, allowing CON programs to expand for decades—often at the bidding of hospitals and other incumbents. This haphazard growth has led to inconsistent, outdated or contradictory CON provisions.

States implement CON requirements inconsistently. In Nevada, only hospitals in rural areas need CONs to open. Just the opposite, Alabama, Florida, Kentucky, Oregon and Washington apply their CON requirements in urban areas while exempting rural areas.

Likewise, most states require CONs for hospice services or facilities, but Connecticut and Maine do not. These types of examples, which abound throughout the state profiles, strongly suggest that CONs are driven less by the government’s perception of what will improve patient health and more by lobbying efforts of powerful insider groups within each state.

In other instances, CON requirements are outdated and sometimes use downright offensive language. The tables within the report simply reproduce terms as used in state law and regulation, but this should give lawmakers another reason to reconsider CON laws.

Some state profiles reveal contradictory CON laws. In North Carolina, a statute requires a CON for air ambulances. N.C. Gen. Stat. § 131E-176(16)(f1)(1). Further research, however, reveals that in 2013, the North Carolina Department of Health and Human Services repealed the coordinating regulation. The Department has confirmed that it no longer requires a CON for air ambulances. ¹⁷

But simply reading the state’s statutes would not make that clear. Many states maintain dozens of exceptions. In those states, it is easy to see how various lobbying efforts achieved carve-outs for certain facilities while being careful to leave the overarching structure of the CON program in place.

On top of the myriad individual CON requirements that apply to every type of medical equipment or procedure, some states apply CON requirements to any healthcare project that exceeds a specific expenditure limit. This can happen in two ways. Sometimes a CON requirement is not triggered unless an applicant will spend above the minimum expenditure.

For example, none of Alaska’s 40 CON requirements are triggered unless an applicant’s project will cost more than $1.5 million. This approach allows existing providers some freedom to expand where necessary without having to get permission each time.

Other states, however, use expenditure minimums as “catch-all” CONs. For example, Kentucky requires CONs for 16 specific types of facilities. In addition, Kentucky maintains a catch-all facility CON for facilities that will cost more than $3.3 million, as updated annually.

This means a CON is required for any project over that amount, even if it is not one of the 16 facilities already contemplated by the CON program. It is hard to see how this requirement benefits patients. It is easy to see how it benefits existing facilities.

CON Laws and COVID-19

In early 2020, the rapid spread of COVID-19 created an unprecedented demand for healthcare services. At the time of publication, more than 2.5 million COVID-19 infections had been reported in the U.S., resulting in over 150,000 deaths. ¹⁸

This report does not pretend to offer a solution for the pandemic. The pandemic has, however, exposed the preexisting problems with CON laws. In fact, as of May 15, 2020, 25 jurisdictions had suspended or loosened CON requirements. ¹⁹ Thus, two-thirds of CON jurisdictions promptly recognized that healthcare providers required greater flexibility to respond to the pandemic.

The states’ responses were varied. Some, like Georgia and Tennessee, broadly suspended CON requirements for the duration of the state of emergency. Others, like the District of Columbia, claimed to be processing emergency CON applications to allow existing facilities to expand, though this process was never announced publicly. Thus, providers may not have known the District was processing temporary CON applications and the public has no way of knowing how many temporary applications were granted.

Included in these 25 states are those with existing emergency CON regulations. Emergency regulations allow providers to apply for temporary CONs in specific situations. Yet providers should not be burdened with paperwork and application fees during emergencies.

Tennessee had the most practical response. It broadly waived CON requirements and clearly explained that it had done so. This allowed providers to expand capacity without being subjected to additional regulatory burdens.

Now, states should make their temporary CON law waivers permanent. The burdens associated with CON laws—higher healthcare costs, diminished quality and decreased access—exist both during and outside a pandemic. States that want to provide better healthcare options for their citizens and be better prepared for future emergencies must seriously consider repealing CON laws.

How to Read this Report

It was the intent of the authors to provide a comprehensive picture of the remaining healthcare CON regimes. It is one thing to study the near-universal consensus of government officials, academics and lawmakers concluding CON laws have failed to produce any positive outcomes. It is another thing entirely to read, line by line, the existing CON requirements around the country.

Alternatively, the report is just as useful for those who want to learn about their home state and compare its CON program to a neighboring state. Each state profile can be read alone, as a straightforward snapshot of how a state’s CON program functions.

Each profile: (1) introduces the state; (2) explains whether the state suspended its CON laws in response to COVID-19 by May 15, 2020; and (3) describes the state’s application process, including how long the application process takes and how much it costs. This information allows for uniform comparisons across these areas.

Next, each state page has an identical Types of CONs table. Again, to allow for broad comparisons, this table classifies CONs into six broad categories—hospital beds, beds outside hospitals, equipment, facilities/buildings, services and emergency medical transport. Eight states maintain CONs across all six broad categories. Eighteen of the 39 CON jurisdictions maintain CONs across five categories. Because there is a high degree of variation within each category, the table also clarifies how many types of CONs a state requires within each category.

1. Hospital beds. Hospitals are required to get CONs for many types of beds, such as swing beds, hospice beds, psychiatric beds or neonatal intensive care beds (sometimes called bassinets). In some states, CONs are required for adding beds at specialty hospitals like a tuberculosis care hospital, but not general care hospitals or a state-run hospital. Thirty-two states maintain at least one CON in this category.
2. Beds outside hospitals. This category includes CONs for adding beds in nursing homes, intermediate care facilities or ambulatory surgical centers. Many states take a piecemeal approach to this category, picking and choosing which facilities require CONs and which do not. Thirty-six states maintain at least one CON in this category.
3. Equipment. This category includes devices and machines such as imaging scanners or radiation therapy equipment. This is a common place to find minimum expenditure requirements. Twenty-seven states maintain at least one CON in this category where a CON is required for any type of equipment that costs over a predetermined amount.
4. Facilities/buildings. This category includes freestanding buildings like dialysis centers, hospice centers or mental health facilities. Even remodeling a facility sometimes requires a CON. Like the equipment category, facilities and buildings are sometimes subject to catch-all CONs that apply whenever a provider will spend more than a predetermined amount on a project. Thirty-six states maintain at least one CON in this category.
5. Services. This category includes the most varied types of CONs, ranging from specialties like open heart surgery and organ transplants to primary care and pediatric services. Even established providers must continue to get CONs to offer their patients new services. Thirty-one states maintain at least one CON in this category.
6. Emergency Medical Transportation. This category applies to ground and air ambulances and is the least utilized CON category. Overall, 10 states maintain at least one emergency medical transport CON.

A note about moratoria. Twelve states maintain moratoria. Moratoria are more dangerous than CONs—they completely prohibit new facilities or services. Although most CON processes allow for the possibility that new facilities could open if certain conditions are met, moratoria do not even allow an applicant to prove a need exists. Moratoria apply most commonly to specific facilities or specific types of beds.

The last piece of information given for each state is the CON Exceptions table. This table lists all the state’s exceptions to its CON laws. Some states have only a few enumerated exceptions, while other states, like Kentucky and New Jersey, maintain dozens of exceptions. States with a high number of exceptions should consider whether broadly repealing CON laws would be an easier way to regulate the healthcare industry.

Conclusion

There is no debate—CON laws must go. For patients, they are all burden and no benefit. To give patients the greatest access to medical care, this report recommends repealing all CON programs in their entirety, as 12 states have done. Alternatively, lawmakers should:

1. Make all temporary CON suspensions permanent.
2. Repeal all moratoria or allow them to expire.
3. Sunset CON laws, as Florida did in 2019. Sunsetting laws gives providers time to adjust to a new landscape.
4. Repeal some CON requirements without repealing the entire program. Repeals should prioritize CONs that apply to low-cost beds, equipment and services.
5. Raise expenditure minimums across all CON categories, as Alaska has done. This would mean CONs are never required unless an applicant proposes a high capital expenditure, such as $10 million or $20 million.
6. Reduce CON application burdens by lowering costs, prohibiting competitors from objecting to applications and requiring agencies to decide pending CON applications within 30 days.

Learn More

For more information about how IJ is working with policymakers to reform CON laws and other regulations that restrict economic liberty around the country visit https://2021initiative.com/.

For additional information on CON laws, please visit the Mercatus Center and Pacific Legal Foundation.