Why does North Carolina’s Certificate of Need Law Matter? It depends who you ask

The debate surrounding North Carolina’s Certificate of Need (“CON”) Law is not new, nor has a clear winner ever been declared.  That may be about to change.  A 2018 lawsuit filed by a Winston Salem surgeon will potentially set the stage for courts to declare a winner.  North Carolina’s CON law requires healthcare providers to obtain approval from the state (a CON) prior to expanding their facilities or purchasing certain types of equipment.  Dr. Gajendra Singh, the surgeon behind the 2018 lawsuit, wants to purchase a Magnetic Resonance Imaging Machine (“MRI”) but cannot without a CON.  In his lawsuit, Dr. Singh claims that North Carolina’s CON law is unconstitutional and deprives him of his economic liberty.  This stance does not necessarily mean Dr. Singh’s lawsuit is going to settle the debate, but it might.  Dr. Singh’s claims could give courts an opportunity to balance the significance of Dr. Singh’s economic liberties against the intent of the statute, and ultimately decide whether CONs play an important enough role in controlling healthcare costs to outweigh Dr. Singh’s interest in providing “safe, quality, affordable” MRI scans in Forsythe County.

Given that the competitive makeup of the North Carolina healthcare market is at stake, along with billions of dollars, it is unlikely that a clear winner of the CON debate will be declared any time soon.  A protracted legal battle is far more likely, pitting the state’s hospital systems against Dr. Singh.  In the context of the ongoing CON debate, and Dr. Singh’s lawsuit, the two Winston Salem hospital systems that already have CONs for the seventeen MRI’s in Forsythe County are Goliaths, and Dr. Singh is David.

North Carolina’s first CON statute was passed in 1971[4] , but was repealed by the legislature after the 1973 North Carolina Supreme Court decision in In re Certificate of Need for Aston Park Hospital, Inc.  found the statute unconstitutional.  The Court reasoned that the state’s denial of Aston Park Hospital’s CON application represented a “deprivation of liberty without due process of law, in violation of Article I, Section 19 of the Constitution of North Carolina insofar as it denies Aston Park the right to construct and operate its proposed hospital except upon the issuance to it of a certificate of need.”  This decision is also part of the basis for Dr. Singh’s lawsuit.

As of this writing, North Carolina remains among the thirty-six states that have some form of CON law. The current CON law also ranks as the fourth most restrictive in the country, according to a study by the John Locke Society.  North Carolina’s current CON statute was enacted in 1977 after the passage of the National Health Planning and Resources Development Act of 1974, which conditioned the payment of certain federal healthcare funds on states passing CON statutes.   Notably, the current version of North Carolina’s CON law has been consistently upheld by North Carolina courts, including in HCA Crossroads Residential Ctrs., Inc. v. N.C. Dep’t of Human Res. in 1990 and Hope–A Women’s Cancer Ctr., P.A. v. State in 2010.  In those cases, the North Carolina Supreme Court and Court of Appeals held that the revised statute did not violate the constitution, primarily because it included“detailed explanations as to how the requirement of a CON based on need determinations promotes the public welfare . . . [and] the purposes behind the CON law and the effect it has on individual property rights.”

According to a study by the Mercatus Center at George Mason University, the original intent of federally-mandating CON laws under the National Health Planning and Resources Development Act of 1974 was to control healthcare costs by “reducing over-investments in facilities and equipment.”  The Mercatus Center study also identified North Carolina as one of 36 CON states that justifies its CON law by requiring healthcare providers to “cross-subsidize healthcare for the poor.”  The Mercatus Center study summarizes this ‘cross-subsidizing’ concept in terms of a quid pro quo arrangement between the state government and healthcare providers.

The Mercatus Center stated in its study that under these quid pro quo arrangements, the state grants limited monopolies to healthcare providers via CONs, knowing that CONs “restrict competition, increasing the cost of healthcare for some.”  In exchange for their monopolies, healthcare providers agree (they are required by the CON law) that they will use some of their “enhanced” profits from the monopoly to provide uncompensated care for indigent patients.  The Mercatus study theorizes that because providers face less competition when they have a CON, they can use this advantage to “charge higher prices than would be possible under competitive conditions,” which allows them to realize greater profits that they can use to offset the cost of providing more uncompensated care.

Notwithstanding the cost-shifting requirement of North Carolina’s CON law, the North Carolina Department of Health and Human Services (NC DHHS) states that the primary purpose of the CON law is to allow NC DHHS to control healthcare costs by restricting “unnecessary duplication” of healthcare facilities and equipment.  More specifically, NC DHHS states on its website that North Carolina’s CON law, like all CON laws, “prohibits health care providers from acquiring, replacing, or adding to their facilities and equipment, except in specified circumstances, without the prior approval of [NC DHHS].”

The Parties on each side of the CON debate have been unwavering in their respective positions on the overall effectiveness and fairness of CON laws. Depending on which side of the debate one stands, CON laws are either a mechanism to ensure better access to healthcare and control costs, or CON laws are merely forms of anti-competitive domestic protectionism meant to preserve the monopolies of existing healthcare providers, particularly hospitals.

The North Carolina Healthcare Association (“NCHA”), the advocacy and lobbying organization that represents the state’s hospitals, contends that the CON law is both necessary and effective. Julie Henry, Vice President of Communications and Public Relations for the NCHA, stated in a 2018 Carolina Journal article that “North Carolina’s certificate of need law has been an effective tool to ensure access to care, and prevent underutilization and duplication of services that can lead to higher health-care costs.”  Steve Lawler, President of NCHA, emphasized NCHA’s position on the advantage of the CON law’s cross-subsidizing requirement, by stating in a WRAL article that the CON law is necessary to ensure care for everyone because “. . . it creates a level playing field for those that are required by law to care for everyone who walks through the door.”

On the other side of the debate, providers like Dr. Singh argue that the CON law serves no purpose other than to unfairly protect the state’s incumbent providers from competition.  Dr. Singh wants to purchase a MRI scanner for his imaging center, Forsythe Imaging Center, but the CON law requires that he first apply for and obtain a CON from the state (i.e., “prior approval”).  Backed by the Institute for Justice, a charitable law firm that advocates for libertarian-focused issues like economic liberties, Dr. Singh is suing NC DHHS and its Secretary, Mandy Cohen, Governor Roy Cooper, and the legislature’s leadership in their official capacities to enjoin NC DHHS from further applying or enforcing the CON law.  Dr. Singh’s lawsuit claims that the CON law is unconstitutional on its face and as applied because it violates the Anti-Monopoly, Exclusive Emoluments, Substantive Due Process, and Equal Protection clauses of Article I of the North Carolina Constitution.

Joshua Windham, Attorney for the Institute for Justice, stated in a recent email interview that “[t]he only reason Dr. Singh can’t buy an MRI scanner is that the hospital across the street already has one. That’s unconstitutional. The North Carolina Constitution expressly forbids the government from granting special privileges or monopolies to favored market players.” Windham also stated that “CON laws vary from state to state, but their core principle is always the same: ban new providers from the healthcare market to protect existing providers from competition. [The Institute for Justice] rejects that principle. We reject it because it’s wrong—because individual doctors and patients, not state bureaucrats, are in the best position to decide which new healthcare services are needed. And we reject it because it’s unconstitutional—because neither state constitutions nor the U.S. Constitution permit the government to pick winners and losers in the marketplace.”

The NC DHHS process used to determine which new facilities and equipment are needed each year has been a consistent rubbing point in the CON debate.  It is also one of the main points of contention in Dr. Singh’s lawsuit.  In practice, NC DHHS uses the CON law and its CON program to limit new healthcare equipment and services to only those that are “needed” for each county in the state.  NC DHHS’s annual determinations for new equipment and services are published in the State Medical Facilities Plan, which according to NC DHHS is prepared “for the Governor’s approval by [NC DHHS] and the North Carolina State Health Coordinating Council (“SHCC”), an advisory body consisting of 25 members appointed by the Governor.”  Also according to NC DHHS, the Medical Facilities Plan “. . . contains policies and methodologies used in determining need for new healthcare facilities and services.”  For a new MRI,these “policies and methodologies” generally assess the community need for the additional equipment based on the population of the “service area,” the number of MRI’s already approved for the service area, as well as the number of MRI scans performed in the previous year.

Those who argue against the CON law, like Dr. Singh, claim that NC DHHS’s need determination process perpetuates the anti-competitive nature of the law because it unfairly favors incumbent providers and because the annual need determinations do not reflect the actual community needs.  Dr. Singh specifically claims in his lawsuit that he has turned patients away because he does not own a MRI.  On the other hand, CON advocates claim that the need determination process is a fair, thorough, and necessary part of controlling costs in the healthcare market.  NCHA Vice President Julie Henry reinforced this position in a Carolina Journal article, when she stated “[t]he law is actively managed by a regulatory panel of health-care industry experts that make policy and need recommendations.”

The other consistent rubbing point in the CON debate, and a focus of Dr. Singh’s lawsuit, is the CON application and appeals process. The CON law allows “affected parties” (other applicants and incumbent providers) to contest each CON application. The process for reviewing a “contested” CON application can include multiple steps, including a public hearing, a hearing before an administrative law judge, and culminating with a review of the administrative court’s ‘final decision’ by the North Carolina Court of Appeals.  Should Dr. Singh apply for a CON, this will most certainly be part of his application process.

Dr. Singh claims in his lawsuit that the “burdensome and expensive” CON application process contributes to the “fundamentally anticompetitive” nature of the CON law.  According to his lawsuit, the CON application and appeals process for an MRI could take up to threeyears, it could cost Dr. Singh more than $445,000, and his application would still not guarantee that he would be granted a CON. Dr. Singh contends in his lawsuit that the application and appeals process gives incumbent providers “every opportunity to thwart, undermine, and frustrate their potential competitors’ applications, while at the same time exerting their considerable economic advantage to obtain the new CON for themselves-and thus, retain their monopoly status.”

Dr. Singh also stated in a WRAL article that the cost of the CON application and appeals process would make his goal of providing “safe, quality, affordable” MRI scans virtually impossible.  Dr. Singh’s lawsuit states that while his imaging center is a for-profit entity, he operates the center with a charitable focus that he accomplishes by offering imaging services at discounted rates.  Dr. Singh’s lawsuit also states that he is currently attempting to meet his charitable mission by renting a mobile MRI, but that the “exorbitant” cost of the rented MRI has limited his ability to provide discounted MRIs to only two days each week, as opposed to the seven days per week that he offers the other imaging services at his center.  This cost, he claims in his lawsuit, severely limits his charitable mission and ultimately prevents the residents of Forsyth County from obtaining “safe, quality, affordable”MRI scans.

The CON application process is also one area where the parties on both sides of the debate tend to agree that some change may be needed.  Julie Henry stated in a Carolina Journal article that “NCHA and our members have been and continue to be supportive of efforts to modernize the application and appeals process, while maintaining the law and protecting access to critical services in our communities.”  

This shared view that the application and appeals process could benefit from some refinement represents a potential for the opposing sides to compromise in the future. If Dr. Singh’s lawsuit ends with a decision that the current CON statute is unconstitutional, it may even provide a basis for the legislature to consider revisions to the current CON statute.  For now though, the fate of North Carolina’s current CON law, and the ongoing CON debate, is up to the North Carolina judiciary.

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About Rob Johnston (3 Articles)
Rob is a third-year law student who served as a Staff Writer for the Campbell Law Observer. Originally from Syracuse, New York, Rob and his family now live in South Carolina. Rob received his Bachelor’s degree in Healthcare Management from Appalachian State University, a Master in Health Administration from the Medical University of South Carolina, and a Master of Jurisprudence in Health Law from the Loyola University Chicago School of Law. Before law school, Rob held leadership positions in the healthcare industry, including at a large health system, where he developed the compliance and legal services functions. He also held a regional leadership position with a national home health provider before co-founding a company that developed distribution channels for medical device start-ups. The summer after his 1L year, Rob was a Summer Associate with Nexsen Pruet’s Healthcare Practice in Columbia, South Carolina. He has also externed at the North Carolina Healthcare Association. Rob is interested in healthcare regulatory law and healthcare transactions.
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