FTC and DOJ Take Aim at State Certificate of Need Laws

Healthcare Alert

Client Alert

Earlier this year, the Federal Trade Commission (FTC) and the Antitrust Division of the Department of Justice (DOJ) released their formal recommendation that South Carolina repeal its certificate of need (CON) law regulating the establishment and modification of hospitals and other healthcare facilities.1 The recommendation is the latest in a trend toward more vocal criticism from federal agencies regarding CON laws and their impact on healthcare delivery and competition. With several state legislatures considering measures similar to South Carolina’s proposed repeal, these agency recommendations have more potential influence than ever.

New York developed the first CON program in 1964 out of concern that having too many hospital beds or services in a particular geographic area might lead health providers to overcharge patients to recover their investment and operation costs.2 Then, in 1974, the federal government passed the National Health Planning and Resources Development Act, which required states to pass CON legislation in exchange for federal funds in support of state health planning efforts.3 By 1978, all but one state had CON laws on the books.4 But the Act (and its related funding) was repealed in 1987, and over the following decade, several states eliminated their CON requirements. Today, 36 states still have an active CON program in one form or another, requiring healthcare providers to go through state regulators to establish, expand, or change their services.5

The FTC/DOJ joint recommendation on the South Carolina CON law comes in response to a letter from Gov. Nikki Haley requesting the agencies’ input on the state’s proposed House Bill (HB) 3250.6 South Carolina’s CON law applies to a wide range of healthcare providers and projects. At present, anyone from an acute care hospital to a narcotics treatment program has to apply for state approval of anything from new medical equipment to expansion of services. If passed, HB 3250 will immediately limit the CON program’s scope and streamline its approval process; by January 2018, it will end the program entirely.

The FTC and DOJ support the South Carolina legislature’s proposed repeal of the program. In their recommendation, the agencies highlighted several features of CON laws that they consider harmful to the healthcare marketplace. Contrary to the programs’ original cost-containment purposes, they commented, modern CON laws tend to create barriers to entry and expansion, which may actually suppress more cost-effective, innovative, and higher-quality healthcare options. “By interfering with the market forces that normally determine the supply of facilities and services, CON laws can suppress supply, misallocate resources, and shield incumbent healthcare providers from competition from new entrants,” the agencies explained.7 In particular, a robust CON law like South Carolina’s can raise the cost of entry and expansion for innovative market players, lowering the pressure on existing providers to innovate, improve services, and reduce prices.8

The FTC and DOJ also expressed concern that CON laws can be exploited by established healthcare providers seeking to retain their market share and protect revenues. Because the CON process allows existing providers to challenge proposed services in their area, established healthcare entities can use the law to delay or even prevent competitors from entering the market.9 Sometimes healthcare providers go a step further, using the threat of CON objections to support anticompetitive agreements in a given state.10

Finally, the agencies asserted that where anticompetitive agreements have been established, CON laws may prevent effective antitrust remedies. This last issue resurfaced in FTC v. Phoebe Putney Health System, a 2011 case wherein the FTC filed suit to block a health system merger in Georgia.11 The merger was completed while the case proceeded through the court system. Though the federal appeals court conceded that the merger “would substantially lessen competition or tend to create, if not create, a monopoly,”12 Georgia’s complex CON regime effectively rendered divestiture impossible, eliminating what in the eyes of the FTC was the best potential remedy for the antitrust concerns at issue.13

In light of this case and others, the FTC and DOJ have urged states to drastically reduce or repeal their CON programs. Since 2007 alone, the agencies have held hearings in and issued formal recommendations to lawmakers in Alaska, Florida, Georgia, North Carolina, and Virginia, among others.14 In each instance, the agencies have cited the same concerns as those in their recent South Carolina recommendation.15

As the Phoebe Putney case illustrates, the agencies’ recommendations are perhaps best targeted at state legislatures rather than regulatory agencies or the courts. In early 2016, a federal appeals court upheld Virginia’s CON program despite claims that the program is unconstitutional.16 Two healthcare providers sued the state in 2012 arguing that its CON requirements unlawfully reduced competition and discriminated against out-of-state healthcare providers in violation of the Constitution’s dormant commerce clause. The case made its way through the federal system, but the Fourth Circuit Court of Appeals ultimately rejected this argument, holding that while the program may not be “wise,” its restrictions did not rise to the level of unconstitutionality.17

In light of these developments, several state legislatures have been reconsidering their CON programs in recent years. Tennessee lawmakers are currently considering several proposals to update the state’s CON law, which has remained “largely untouched” for nearly 20 years.18 Motivated in part by a reduction in the fee-for-service model of healthcare delivery that once justified a stringent CON program and a renewed public interest in free market principles, the legislature held hearings in January 2016 regarding potential changes to the law. These changes may include loosening restrictions on physician practice purchases of certain medical equipment and eliminating or increasing the capital expenditure threshold currently in place for healthcare renovation projects in the state.

Tennessee may modify its CON law in 2016, but few believe there will be a full repeal of the program in the near future. And with 36 states still operating CON programs, it is likely that healthcare providers will be navigating this regulatory area for at least a little while longer.

1Federal Trade Commission and Department of Justice, Joint Statement on Certificate-of-Need Laws and South Carolina Bill 3250 (“ FTC/DOJ Statement on South Carolina”), January 11, 2016.
2Matthew Mitchell & Christopher Koopman, 40 Years of Certificate-of-Need Laws Across America, Mercatus Center at George Mason University, October 14, 2014, available at http://mercatus.org/publication/40-years-certificate-need-laws-across-america .
3Report of the Comptroller General to the Congress of the United States, Status of the Implementation of the National Health Planning and Resources Development Act of 1974 (“GAO Report”) at 1, November 2, 1978, available at http://www.gao.gov/assets/130/124716.pdf.
4In April 1978, the only hold-out was Missouri, which had neither a certificate of need program nor a health planning program for its Health, Education, and Welfare region. GAO Report at 3.
5National Conference of State Legislatures (NCSL), Certificate of Need: State Health Laws and Programs, January 2016, available at http://www.ncsl.org/research/health/con-certificate-of-need-state-laws.aspx .
6Letter from Marina Lao, Direct, Office of Policy Planning, FTC et al. to Governor Nikki R. Haley, January 11, 2016; FTC/DOJ Statement on South Carolina at 5.
7FTC/DOJ Statement on South Carolina at 6.
8Id. at 6-7.
9Id. at 8.
10Id . The agencies provide an example from 2006 in Charleston, West Virginia, where a hospital used the threat of an objection during the CON process to deter one of its competitors from requesting a CON permission to build a new facility in the hospital’s area. Id.
11Id. at 9. See also FTC v. Phoebe Putney Health Sys., 793 F. Supp. 2d 1356 (M.D. Ga. 2011), aff’d, 663 F.3d 1369 (11th Cir. 2011), rev’d, 133 S. Ct. 1003 (2013). The Supreme Court reversed the Eleventh Circuit Court of Appeals decision, holding that immunity under the state action doctrine did not apply to shield the merger from antitrust scrutiny.
12FTC v. Phoebe Putney Health Sys. , 663 F.3d 1369, 1375 (11th Cir. 2011).
13Statement of the FTC at 1, In re Phoebe Putney Health Sys., Inc., Dkt. No. 9348 (March 31, 2015), available at https://www.ftc.gov/system/files/documents/public_statements/634181/150331phoebeputneycommstmt.pdf . According to the FTC, Georgia’s CON requirements would have made divestiture virtually impossible because the geographic area in which the hospitals were located was deemed “over-bedded,” making it unlikely that any prospective buyer could obtain the necessary CON approval to operate an independent hospital. Any prospective buyer would have to “endure a lengthy legal battle with, at best, an uncertain outcome.” Id. at 3.
14FTC/DOJ Statement on South Carolina at FN 9.
15See FTC/JOJ, Joint Statement to the Virginia Certificate of Need Public Work Group, October 26, 2015, available at https://www.ftc.gov/system/files/documents/advocacy_documents/joint-statement-federal-trade-commission-antitrust-division-u.s.department-justice-virginia-certificate-public-need-work-group/151026ftc-dojstmtva_copn1.pdf; Letter from Marina Lao, Direct, Office of Policy Planning, FTC to Hon. Marilyn W. Avila, N.C. House of Representatives, July 10, 2015, available at https://www.ftc.gov/system/files/documents/advocacy_documents/ftc-staff-comment-concurring-comment-commissioner-wright-regarding-north-carolina-house-bill-200/150113ncconadv.pdf; Prepared Statement of the FTC Before the Florida State Senate on S.B. 2326, April 2, 2008, available at https://www.ftc.gov/sites/default/files/documents/advocacy_documents/ftc-prepared-statement-florida-senate-concerning-florida-certificate-need-laws/v080009florida.pdf; Prepared Statement of the FTC Before the Alaska House of Representatives on H.B. 337, February 15, 2008, available at https://www.ftc.gov/sites/default/files/documents/advocacy_documents/ftc-written-testimony-alaska-house-representatives-concerning-alaska-certificate-need-laws/v080007alaska.pdf; and Prepared Statement of the FTC Before the Georgia House of Representatives, February 23, 2007, available at http://www.justice.gov/atr/competition-healthcare-and-certificates-need.
16Colon Health Ctrs. of Am., LLC et al. v. Hazel , 2016 WL 241392, --- F.3d --- (4th Cir. 2016).
172016 WL 241392 at *11.
18Holly Fletcher, Certificate of Need Reform Focuses on Free Market, The Tennessean, January 27, 2016, available at http://www.tennessean.com/story/money/industries/health-care/2016/01/27/certificate-need-reform-focuses-free-market/79402486/.