Virginia Certificate of Need - Backgrounder

Litigation Backgrounder

CON Job:

How A Virginia Law Enriches Established Businesses by Limiting Your Medical Options, and How IJ Is Going to Stop It.

 

The Issue in a Nutshell

Ordinarily, if you want to start a new business or offer a new service there is a simple test to find out whether your new business is needed: You open the doors and tell the world. If people need your business, you will have customers. If they don’t, you won’t. That experience—of learning what people need and how new types of services can fit in—is familiar to anyone who has ever been an entrepreneur. Indeed, it is familiar to anyone who has ever been a customer.

It is also an experience that the state of Virginia turns entirely on its head for people who want to offer new healthcare services. If you want to offer new healthcare services, even something as routine as opening a private clinic, you have to obtain special permission from the state government. And permission is not easy to come by: Would-be service providers have to persuade state officials that their new service is “necessary”—and they have to do so in a process that verges on full-blown litigation in which existing businesses (their would-be competitors) are allowed to oppose them. Not surprisingly, this process can be incredibly expensive, and it frequently results in new services being forbidden to operate at all.

To be clear, this requirement (called a certificate-of-need or CON program) has nothing to do with public health or safety. Separate state and federal laws govern who is allowed to practice medicine and what kind of medical procedures are or are not permitted. Virginia’s CON program only regulates whether someone is allowed to open a new office or purchase new equipment; it is explicitly designed to make sure new services are not allowed to take customers away from established healthcare services.

In short, Virginia’s CON program is nothing but a government permission slip to compete. It ensures that more money flows into the pockets of established, politically connected businesses, and it accomplishes this by trampling entrepreneurs’ economic liberty and reducing Virginians’ choices for medical care.

But patients and doctors—not state officials—are in the best position to decide what healthcare services are needed. That is why Colon Health Centers of America, headed by Dr. Mark Baumel, MD, and Washington Imaging Associates Maryland, LLC, headed by Dr. Mark Monteferrante, MD, have joined forces with the Institute for Justice to challenge Virginia’s protectionist CON program. The Constitution protects individuals’ right to earn an honest living free from unreasonable government interference, and it prevents states from putting up unnecessary barriers to interstate commerce. The Virginia CON program does both, and that is why the federal courts should strike it down.

 

Introduction

Across the country, state regulations are stifling the ability of licensed healthcare professionals to offer cost-effective and innovative healthcare without first obtaining permission from unelected government bureaucrats and established competitors.  The culprit:  so-called “certificate of need” (or CON) programs which require state agency approval before licensed healthcare providers can establish or expand a healthcare facility.  In 36 states, it is illegal to open new medical facilities or even purchase certain types of medical equipment without special permission from the government.
 

One of the worst offenders is Virginia, whose CON requirement applies to a whole host of medical services, including things as minor as opening a private clinic, which can be freely established in many states.

These CON requirements result in fewer opportunities for entrepreneurs and fewer choices for patients and their doctors—all in the name of funneling more money into the pockets of politically connected businesses.  The Institute for Justice and its clients are teaming up to fight for the simple principle that patients and doctors—not state officials—are in the best position to decide what kinds of medical services are “necessary.”

 

What Is a CON Program?

Certificate of need or CON programs for medical services exist in 36 states.[1]  At bottom, a CON requirement is just a government permission slip to compete—unlike nearly every other aspect of the economy, it is illegal to offer new services or purchase new equipment when they are governed by a CON program.  Instead, a would-be entrepreneur is required to first prove that the new service or equipment is “necessary.”

To be clear, CON requirements have nothing to do with public health or safety.  Every state already has laws governing who is licensed to actually practice medicine, and both federal and state laws, including regulations promulgated by the Food and Drug Administration, regulate what treatments may actually be used.  CON requirements only apply when someone wants to offer a service that would otherwise be perfectly legal under state law.  In other words, when a CON program blocks a new healthcare service or prevents the purchase of new equipment, the government has no objection to doctors offering that service or operating that equipment.  It just wants them to do so by working for an already-established business instead of owning their own practice.

While different states apply their CON requirements to different things, Virginia stands out as one of the very worst offenders.  Although the original idea behind CON requirements was to limit major publicly funded construction projects like hospitals, Virginia’s CON requirement applies to purely private projects and even to small private clinics.

To open a new office or purchase new equipment, a would-be healthcare entrepreneur must first file a letter of intent with the State Health Commissioner, fill out an extensive application form, and pay an average fee of $20,000.[2]  Within the next 60 days, the Regional Health Planning Agency for the relevant part of the state (or the Department of Health itself) will hold a public hearing on the proposed new service.[3]  Then, the Department may or may not hold a fact-finding conference—a determination that, as a practical matter, frequently hinges on whether established businesses have intervened to dispute the “need” for the proposed business.[4]  If absolutely nothing goes wrong, no established business intervenes and no fact-finding hearing is necessary, the whole process takes at least six months.  But things are rarely that simple, and it frequently takes much, much longer.

Worse yet, there is no way to predict whether an applicant will actually end up receiving a certificate of need.  The State Health Commissioner is supposed to consider a list of over 20 factors in determining whether an applicant qualifies for a certificate—but, since no one factor is controlling, this amounts to almost complete discretion over whether an application is granted or denied.[5]

For many would-be entrepreneurs, then, the state’s CON requirement acts as an absolute barrier to entry.  Doctors who want to offer new services can go to work for an existing business, they can spend years and thousands of dollars pursuing a certificate of need (which they have no way of predicting whether they will actually get), or they can stay out of Virginia altogether.  Unfortunately for patients in the state, many doctors seem to choose that third option.

 

The Legal Argument 

Virginia’s CON program is not just bad policy—it is unconstitutional.  The law violates the Constitution in two different, but equally important ways.

First, the program is not applied evenhandedly.  The Fourteenth Amendment of the Constitution guarantees the “equal protection of the laws,” a provision that forbids state and local governments from imposing legal burdens arbitrarily.[6]  But instead of adopting a CON requirement across the board, Virginia law picks and chooses, applying the law to some fields while exempting favored fields (like nuclear cardiac imaging) from any CON restrictions whatsoever.[7]  This kind of arbitrary cherry-picking violates the Constitution.  Moreover, this arbitrary exemption just underscores the underlying irrationality of the CON requirement:  The only reason the government can afford to randomly exempt certain specialties is that the CON requirement itself does not achieve any legitimate government ends.  It exists only to protect favored in-state economic interests, a purpose courts have held is forbidden by the Fourteenth Amendment.[8]

Second, federal courts have long recognized that the Commerce Clause of the United States Constitution does not just authorize Congress to regulate “interstate commerce.”  To preserve a national marketplace, it also prevents states from interfering with interstate commerce by passing laws designed to hurt out-of-state interests for the benefit of in-state interests.[9]

That, however, is exactly what Virginia’s CON requirement does.  It protects established businesses from competition, and it does so at the expense of unrestricted interstate commerce.  Not only does the CON requirement impose burdens on out-of-state doctors who want to offer new services to Virginians, it places a huge burden on the interstate market in medical equipment.  If a state-licensed radiologist in Maryland wants to purchase a new MRI machine, he can simply purchase that machine from any of the competing manufacturers.  But if a state-licensed radiologist in Virginia wants to purchase an identical machine, he must first prove that the new machine will not significantly reduce the clientele of anyone with an existing machine.[10]  Restricting interstate commerce like this simply to protect an in-state business is unconstitutional.

And the evidence makes clear that CON programs like Virginia’s are nothing but protectionism run amok.  While proponents of CON requirements make various claims about the usefulness of these requirements, such as claiming that they are needed to reduce healthcare costs, there is simply no real evidence that they have any effect beyond the obvious one:  protecting politically connected businesses from competition.  Indeed, a joint report from the Department of Justice and the Federal Trade Commission found no reliable evidence that CON programs achieve any public benefits—a situation the report found troubling in light of the clear evidence that the laws grant anticompetitive benefits to protected business interests.[11]

Simply put, the government cannot impose burdens like this on healthcare entrepreneurs and patients for no good reason.  Patients and doctors—not state officials—are in the best position to decide which healthcare services are “needed,” and the Constitution gives them the right to do exactly that.

 

Where Do CON Programs Come From?

If CON programs are so terrible that the federal government agrees they should go, how did they get on the books in the first place?  The origins of CON programs rest in a long-since-repealed federal government mandate. 

The earliest CON requirements applied only to large facilities like hospitals or nursing homes:  In 1964, New York enacted the first statute prohibiting the construction of any new hospital or nursing home unless a state agency first determined there was a need for the proposed facility.[12]  Recognizing the financial benefit that this kind of prohibition provided to existing hospitals by insulating them from competition, the American Hospital Association began a national lobbying campaign to pass CON programs in other states.[13]

The federal government took note and began offering states money to adopt CON programs.  At the time, Medicare and Medicaid reimbursed for services based on a hospital’s actual expenditures—a system that led to inefficient services and increased costs.  By requiring new facilities to show they were needed by the community before getting federal dollars, Congress believed it could minimize those inefficiencies and control costs.  The lure of federal funding led every state but Louisiana to adopt CON programs.  However, in every other respect—that is, as measured by its ability to actually generate any public benefits or control costs—it was an utter failure.  After revising the Medicare and Medicaid reimbursement system to a fee-for-service model under which hospitals received a fixed amount for each patient regardless of the hospital’s actual expenditures, Congress stopped funding state CON programs, ending the federal CON experiment in 1986.[14]

Subsequently, fourteen states also discontinued their CON programs.  However, lobbying efforts by protected businesses have been successful in maintaining at least some form of medical CON program in 36 states, as well as the District of Columbia and Puerto Rico.

 

The Plaintiffs

The plaintiffs in IJ’s lawsuit challenging Virginia’s CON program illustrate the real costs the law has for patients all across the state.  In some cases, innovative treatments that are widely accepted elsewhere are all but banned in Virginia.  In others, patients’ options for medical care are sharply restricted simply to benefit large local businesses.

Dr. Mark Baumel, of Colon Health Centers for America, is an example of the kind of medical innovation Virginians need.  Dr. Baumel saw an opportunity to help increase the rate of screening for colon cancers.  Colon (and other colorectal) cancer kills over 50,000 Americans each year—1,300 of them in Virginia.[15]  The true tragedy, though, is that most types of colon cancer are eminently treatable if caught early; the cancer is simply not getting noticed until it is too late.  As many as 90 percent of colon-cancer deaths are preventable through proper screening, but fewer than 50 percent of the people at risk for these cancers get screened at all.[16]

Part of the problem is that screening can be unpleasant.  There are two basic ways to screen for colon cancer.  The first, “optical” colonoscopy, involves giving the patient anesthesia and then physically inserting an approximately four-to-six foot tube that allows doctors to view the inner lining of a patient’s colon.  This is not just unsettling to think about; the procedure has real health risks including adverse reactions to the anesthesia, infection, severe bleeding, or in rare cases tearing of the colon, which would require an immediate operation.  The second, “virtual” colonoscopy, involves using a computed tomography scanner (CT scanner) to get three-dimensional images of the patients internal organs without any invasive procedures.  Virtual colonoscopy makes screening less burdensome, but when done in a traditional medical facility, there is one drawback:  Nearly 20 percent of patients who are screened will have abnormalities requiring the invasive colonoscopy, which must be done by a gastroenterologist, typically in a different office at a different time.  This means a second appointment and going through the ordeal of preparing for the procedure a second time (a process involving laxatives and fasting to purge one’s bowels). 

Enter Dr. Baumel’s innovation:  Integrated Virtual Colonoscopy.  With Integrated Virtual Colonoscopy, state-licensed gastroenterologists partner with Colon Health Centers of America.  Colon Health Centers help the gastroenterologist purchase a CT scanner and set up an office.  Patients then have to make only one appointment:  They come into the gastroenterologist’s office for a virtual colonoscopy, their CT scan is immediately sent electronically and then read by off-site, Virginia-licensed radiologists working with Colon Health Centers, and (if those radiologists detect any abnormalities) the gastroenterologist can immediately perform the necessary procedure, without requiring a second appointment and preparation.  It is designed to be the best of both worlds, and thereby, to increase the number of people who are screened for colon cancer.  And, based on Dr. Baumel’s experience at his flagship center in Delaware, it works.

Or, at least, it works in Delaware.  It does not work in Virginia, because it is not allowed to work.  When Dr. Baumel and his partners sought the state’s permission to buy new CT scanners, it denied them a certificate of need.  The state’s decision was based on the fact that there were other businesses nearby that already owned CT scanners and, regardless of whether those businesses actually offered Integrated Virtual Colonoscopies, they could in theory provide the same kind of service.  As a consequence of the government’s decision, for most Virginians, Integrated Virtual Colonoscopy is an exciting innovation they can only read about—not an exciting innovation that can help save their lives.

While Dr. Baumel has been stymied in his efforts to provide new services to Virginia, the doctors at Progressive Radiology are being prevented from offering the same services they have offered to patients in Virginia for the past 25 years.  Dr. Mark Monteferrante, the head of the practice group, has firsthand experience with Virginia’s CON process.  For years, Progressive Radiology provided all of the professional radiological services for a radiology center in Northern Virginia.  In 2003, Dr. Monteferrante and his partners assisted the owners of that center in their attempt to add a second MRI machine to its busy office—a decision that would require a certificate of need from the state.  That process, which simply sought permission to add capacity to an existing successful facility, involved two separate denials, took fully five years, and cost roughly $175,000 in filing fees, consultant fees and attorney expenses before the center was allowed to purchase a second MRI machine.

When that radiology center was sold to Inova Health Systems, an enormous healthcare conglomerate based in Virginia, Progressive Radiology decided to start a center of their own to further serve patients in Northern Virginia.  Its doctors are licensed to practice in Virginia and they believe they can provide high-quality service by investing their money to build a state-of-the-art facility.  What they are unwilling to do, however, is spend another five years fighting over whether they will be given permission to buy an MRI machine, particularly when there is no way of knowing in advance whether that permission will be granted.

Whether it is being applied to keep out new healthcare innovations or simply to bar licensed doctors from continuing their practice, Virginia’s CON requirement operates in the same way.  It protects existing businesses from competition while hurting real patients and violating the basic economic liberty of would-be entrepreneurs.  That is not just wrong, it is unconstitutional—and the doctors and practice groups working with the Institute for Justice will not stop until it is struck down.

 

The Litigation Team

Robert McNamara, Darpana Sheth, and Larry Salzman represent Colon Health Centers of America and Progressive Radiology.

 

The Institute for Justice:  A History of Protecting Economic Liberties

The Institute for Justice is a public-interest law firm that brings challenges nationwide in support of fundamental individual liberties.  IJ has successfully challenged restrictions on economic liberty across the nation including the following cases:
  • Chauvin v. Strain—In 2010, as a result of IJ’s civil rights lawsuit, the Louisiana Legislature abolished the demonstration portion of the florist licensing exam, while leaving in place (for now) a short written exam that presents no serious obstacle to would-be florists.  The bill passed both houses of the Louisiana legislature by wide margins.
  • Swedenburg v. Kelly—On May 16, 2005, IJ won a major victory for economic liberty when the U.S. Supreme Court struck down discriminatory laws that existed only to protect the monopoly power of large, politically connected liquor wholesalers.  Vintner entrepreneurs Juanita Swedenburg and David Lucas joined wine consumers and IJ in filing this federal lawsuit challenging the ban on direct interstate wine shipments in New York.  The case raised issues of Internet commerce, free trade among the states, and regulations that hamper small businesses and the consumers they seek to serve.
  • Diaw v. Washington State Cosmetology, Barbering, Esthetics, and Manicuring Advisory Board—In March 2005, after being sued by the Institute for Justice Washington Chapter just seven months earlier, state bureaucrats exempted hairbraiders from discriminatory cosmetology licensing requirements.
  • Clutter v. Transportation Services Authority—In 2001, the Institute for Justice defeated Nevada’s Transportation Services Authority and its entrenched limousine cartel that had stifled competition in the Las Vegas limousine market.
  • Cornwell v. California Board of Barbering and Cosmetology—In 1999, the Institute for Justice defeated California’s arbitrary cosmetology licensing requirement for African hairbraiders.
  • Ricketts v. City of New York—The Institute for Justice successfully defended commuter van entrepreneurs in 1999 in a fight against the government bus monopoly that would not allow any commuter van entrepreneurs to provide service to consumers in underserved metropolitan neighborhoods in New York City.

The Institute for Justice is based in Arlington, Virginia.  IJ has state chapters in Arizona, Florida, Minnesota, Texas, and Washington, as well as a Clinic on Entrepreneurship at the University of Chicago Law School.

 

For more information, contact:

Bob Ewing

Director for Communications

Institute for Justice

901 North Glebe Road, Suite 900

Arlington, VA 22203-1854

Phone:  (703) 682-9320

bewing@ij.org



[1] Robert James Cimasi, The U.S. Healthcare Certificate of Need Sourcebook (2005).

[2] 12 VAC 5-220-180(A) and (B).

[3] 12 VAC 5-220 230(A).

[4] 12 VAC 5-220-230(A).

[5] Va. Code Ann. § 32.1-102.3(B) (2012).

[6] U.S. Const. amend. XIV.

[7] Va. Code Ann. §32.1-102.1(2012).

[8] See, e.g., Metro. Life Ins. Co. v. Ward, 470 U.S. 869 (1985); Craigmiles v. Giles, 312 F.3d 220 (6th Cir. 2002).

[9] See, e.g., City of Philadelphia v. New Jersey 437 U.S. 617 (1978); Hunt v. Washington State Apple Advertising Comm., 432 U.S. 333 (1977).

[10] See Va. Code Ann. §32.1-102.3.

[11] Improving Health Care: A Dose of Competition: A Report by the Federal Trade Commission and the Department of Justice (July 2004).

[12] Herbert Harvey Hyman, Health Planning: A Systematic Approach (1982), p. 253; National Conference of State Legislatures, Certificate of Need: State Health Laws and Programs, available at http://www.ncsl.org/default.aspx?tabid=14373.

[13] Id.

[14] 29 U.S.C. §1161 (1986).

[15] United States Department of Health and Human Services, Centers for Disease Control and Prevention, National Program of Cancer Registries, United States Cancer Statistics, available at http://apps.nccd.cdc.gov/uscs/ .

[16] American Cancer Society, Colorectal Cancer Early Detection, at 26 (2011) available at http://www.cancer.org/acs/groups/cid/documents/webcontent/003170-pdf.pdf.


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