On January 21, 2016, in Colon Health Centers of America, LLC v. Hazel1(Colon Health), the U.S. Court of Appeals for the Fourth Circuit upheld the constitutionality of Virginia's certificate of public need (COPN) program, which requires healthcare providers to obtain permission from the state before establishing or expanding healthcare facilities. Virginia's COPN laws are equivalent to what many other states dub Certificate of Need (CON) laws, which have been the subject of widespread antitrust criticism and scrutiny. The Colon Health case represents the latest in an ongoing debate about the propriety of state CON laws, and signals that these laws are likely to remain a contentious issue for courts, legislators and policymakers.

Ongoing Debate Regarding CON Laws

Currently, 36 states plus the District of Columbia and Puerto Rico have CON laws in place.2 CON laws typically require that potential new entrants into healthcare markets and market participants seeking to expand demonstrate a sufficient public need for their proposed ventures in the relevant geographic areas. States vary in the design and scope of their CON programs.

As we have discussed in prior "Manatt Health Updates," the future of CON programs has been, and remains—as this recent Virginia case exemplifies—the subject of ongoing debate on antitrust grounds. (See our April "Manatt Health Update" article on Phoebe Putney for additional discussion of policy concerns regarding CON laws.) Opponents of CON laws, including the Federal Trade Commission and Department of Justice's Antitrust Division, have argued that they serve as barriers to competition, and urged states to consider whether these laws best serve the needs of their citizens.3

CON law proponents argue that these laws benefit consumers and providers by preventing overinvestment in medical facilities, excluding facilities that are likely to be underutilized, protecting the economic viability of existing providers, providing increased access to care for the indigent, and facilitating cost-effective healthcare spending. Virginia cited these benefits in defending its COPN law in Colon Health.

However, even Virginia has acknowledged the need to carefully review its COPN program and its impact on access to healthcare. Just last year, a state-sponsored task force spent several months evaluating the COPN program and made recommendations for its reform, suggesting both substantive and procedural changes.4 Virginia's deliberation of its COPN program coincides with recent litigation challenging these laws.

The Colon Health Case: The Latest Attack on CON Laws

In Colon Health, the Fourth Circuit upheld the lower federal court's dismissal of claims challenging Virginia's COPN laws as unconstitutional. Plaintiffs, two out-of-state medical imaging service providers, sought to enter the Virginia market to offer MRI and CT scanning services but encountered roadblocks in navigating the state's COPN process. Plaintiffs subsequently alleged that the state's COPN laws are unconstitutional because they place an undue burden on interstate commerce and discriminate against interstate commerce in both purpose and effect. Although plaintiffs conceded that, on their face, the laws apply to all healthcare providers, they argued that since existing providers are all in-state, the laws effectively shelter in-state providers from out-of-state competition.

The court rejected this argument. Instead, it upheld Virginia's COPN laws, finding that they:

  • Serve multiple legitimate public interests,
  • Do not give in-state providers a systematic advantage, and
  • Do not impose burdens on interstate commerce that outweigh the local benefits.

Takeaways

Both regulators and private parties have complained that CON laws act as barriers to competition in the healthcare market. In recent decades, many states have studied and evaluated their CON programs to assess their impact and effect. Yet, the majority of states have maintained their CON programs: since 2000, only one state has repealed its program.5 TheColon Health case is the latest in this ongoing series of attacks against CON laws, and adds to long-standing questions about the future of state CON programs.

Colon Health represents both the limitations and the potential policy benefits of litigation concerning CON laws. On the one hand, Colon Health demonstrates the difficulties in uprooting CON laws in the courts, here on constitutional grounds. These difficulties stem, at least in part, from courts' deference to states' determination of public health benefits. At the same time, the Colon Health case also shows that litigation activity has potential to fuel the ongoing policy debate regarding effects of these programs on the healthcare market. Ongoing litigation activity centered on anticompetitive effects of CON laws, even if unsuccessful in the courts, may lead states to continue reassessing their effectiveness.