COVID-19 Exposes Evil of Anticompetitive State Certificate of Need Laws

Authors: Aaron Gott and Jarod Bona

The United States is in lockdown to “flatten the curve” of COVID-19 cases because our hospital system has even less capacity to handle a surge of cases than Italy—where overload has led physicians to have to make tough decisions about which patients deserve treatment priority. New York, the U.S. epicenter of the coronavirus, is expected to reach capacity in a matter of days and some hospitals have already exceeded their intensive-care capacity.

Hundreds of thousands of people may die directly as a result of inadequate hospital capacity in the United States, which is at its lowest in decades. In fact, the U.S. had nearly 8 hospital beds per 1,000 people in 1970, a number that has steadily declined to 2.9 per 1000 people today. Our elected officials have issued orders and recommendations that have our economy screeching to a halt, while Congress is considering unprecedented economic relief measures in the trillions of dollars to soften the fallout.

What put us in this position? There are many reasons. But one major culprit that is at least partially to blame for our current predicament has been nearly 50 years in the making: state certificate of public need laws (often called CON laws) that artificially limit the supply of hospital beds and medical equipment.

In 1974, Congress passed the National Health Planning Resources Development Act, which encouraged states to enact certificate-of-need laws for medical capital investment. Nearly every state enacted them. State bureaucrats, rather than the free market, would thereafter determine whether we “need” more ICU capacity, more testing labs, and more equipment like ventilators. The idea behind CON laws, proven wrong long before COVID-19, is that allowing states to control supply would reduce runaway healthcare costs and improve access to care.

Here is how a CON law generally works: it is illegal (often with criminal consequences) to build any kind of medical facility or make a capital medical equipment purchase without first obtaining a certificate allowing you to do so from the state health agency. It can cost millions of dollars and take several years to get one, if you can get one at all. In some states, your competitors have a right to object to the issuance of the certificate. In the worst states, monopolist and oligopolist hospital systems prevent competition because they have such a stranglehold on state bureaucrats and processes that most would-be competitors don’t even bother trying to get a certificate of need.

New York, by the way, is one of those states that still has a draconian certificate of need law on its books. New York requires a certificate of need for the “establishment, construction, renovation and major medical equipment acquisitions of health care facilities.” Any project that would add new hospital and/or ICU beds would require a certificate of need, and it is likely that adding new ICU-grade ventilators would also require a certificate of need because they individually cost tens of thousands of dollars.

New York has just 3,200 ICU beds but expects it will need between 18,600 and 37,200 to handle the expected wave of hospitalizations.

As antitrust and competition lawyers, certificate of need laws long have been on our minds. They are terrible, immoral policies even in the best of times.

We’re not alone in this thinking: even Congress quickly saw the error of its ways. In 1984, recognizing that the program was a failure, Congress repealed the provisions that encouraged certificate of need laws. Some states repealed their CON laws in the years since, but 35 states still have them on the books, largely because monopolist and oligopolist healthcare systems don’t like competition, and they have lobbying strangleholds over many state legislatures.

For years, the U.S. Department of Justice Antitrust Division and the Federal Trade Commission have jointly pleaded for states to repeal their anticompetitive certificate of need laws (and criticism of CONs features prominently in their comprehensive guide on improving competition in healthcare). Yet states still have them, and courts have often refused to strike them down under the U.S. Constitution despite their disastrous effect on interstate commerce.

One example is Colon Health Centers v. Hazel, a case by our friends at the Institute of Justice challenging the constitutionality of Virginia’s parochial certificate-of-need law under the dormant Commerce Clause. The plaintiffs in that case sought to open state-of-the-art clinics with MRI machines and CT scanners that would improve and cheapen certain types of cancer screenings, but they could not do so without first risking millions of dollars in a certificate of need process that was likely to be contested by existing providers, eventually resulting in denial.

We filed an amicus brief on behalf of law and economics scholars in that case to argue that states’ claims of cost-controlling benefits of CON laws are unsupported by empirical evidence. Nevertheless, the Fourth Circuit upheld the law on summary judgment, finding that the putative benefits of the law were not speculative (even in the face of evidence showing no such benefit), and that those benefits outweighed the effect the law has on interstate commerce.

That case may have been decidedly differently if it were heard today.

Now, in the face of an unprecedented pandemic and an economy that has come screeching to a halt as a result of shelter-in-place orders and social distancing recommendations—put in place primarily to “flatten the curve” and avoid the overload our inadequately supply of healthcare facilities—these laws have proven not just ineffective, but completely unconscionable.

More importantly, CON laws could now prevent us from quickly building up temporary medical infrastructure to deal with the surge of cases. We cannot rely on government alone to rise to the occasion with military resources; CON laws must get out of the way so that private enterprise can help fill in the gaps.

We are in an unprecedented state of emergency that is partly attributable to CON laws. And CON laws may cripple our response. We cannot change the past, but we and our governments have an opportunity to take immediate corrective action that could save lives and reduce the economic impact going forward:

1. Executive Branches of Governments Should Exercise Emergency Authority Suspending All CON Laws

First, and most importantly, the President of the United States should suspend the operation of all state CON laws indefinitely by executive order, citing this national economic and public health emergency. Likewise, each state governor should exercise his or her emergency authority, to the extent applicable, to suspend the operation of CON laws in their state indefinitely.

By doing so, these executives would send a loud and powerful message that removes much of the red tape standing in the way of the private sector’s efforts to ramp up the construction of temporary emergency facilities and production of necessary medical equipment for COVID-19 patients.

One state, North Carolina, has already temporarily lifted its certificate of need law solely as it relates to hospital bed capacity. Connecticut is waiving “statutory and regulatory requirements for certain transactions,” but still requires companies to file paperwork requesting a waiver and then wait for bureaucrats to make a decision. These minor reprieves are not nearly enough, but they are a start.

2. Congress Should Immediately Preempt All State Certificate of Need Laws

Congress has plenary authority to expressly preempt any state law affecting interstate commerce, and no one can now question that the federal interest here far exceeds the purely parochial interests served by state certificate of need laws.

Congress should amend title 15 of the U.S. Code to provide that state certificate of need laws are hereby expressly preempted by federal antitrust law—in their entirety—because they irreconcilably conflict with the federal policy favoring competition.

3. State Legislatures Should Repeal and Repudiate Their Certificate of Need Laws

It should go without saying that state legislatures have an independent duty to their own citizens to immediately repeal their certificate of need laws before they do even more damage. Repeal will allow businesses to step up and create medical facilities with permanent legal certainty that an executive order cannot necessarily accomplish.

4. Businesses and Law Firms Should Continue to Challenge Certificate of Need Regimes and Other Government Red Tape

In the absence of decisive, immediate action by our government officials outlined above, businesses and law firms should resort to taking emergency legal action against state CON regimes. If you are a business that desires to contribute to our national response by rapidly constructing new medical facilities or producing or purchase critical medical equipment but face legal uncertainty or bureaucratic red tape, please tell us immediately. We want to help, and we have a unique opportunity to put our knowledge and expertise to good use.

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You can read our article in the Minneapolis Star Tribune about the problems with certificate of need laws here.

Image by Sasin Tipchai from Pixabay