The Sixth Circuit Court of Appeal recently voiced skepticism of Kentucky’s Certificate of Need (“CON”) laws while simultaneously ruling that they met the Fourteenth Amendment’s “rational basis” test.^[1]

Case Background

Appellants were denied an application to open a home healthcare company catering to Nepali-speaking patients based on a state requirement that new entrants must show there are at least 250 patients in an area who need a new entrant, or at least 125 patients who need an expanded service from an existing company. Following Kentucky’s denial of their CON application, Appellants filed suit in federal district court, alleging that Kentucky’s CON regulation violated their Fourteenth Amendment right to earn a living, served only the illegitimate end of protecting incumbent home healthcare companies from competition, and lacked a rational basis.

On appeal, the Sixth Circuit disagreed, upholding the district court’s ruling granting summary judgment for the defendants. Regardless of whether the Kentucky law accomplished its intended aims, the court explained, there was still a sufficient rational connection between its desired ends and its avowed means. Nevertheless, despite ruling for Kentucky, on February 14, 2022, the Court cast doubt on the efficacy of state CON laws more generally:

While we cannot claim to have the expertise of the economists or other scholars critical of these laws or the knowledge of the federal and state legislators that have repealed them, we can say that the judgment that this was a failed experiment has the ring of truth to it.^[2]

And, perhaps even more strikingly, the Sixth Circuit took the very rare tack of proposing alternative means for Appellants to challenge or circumvent the state’s denial of their CON application. The court suggested that Appellants might have better fortunes filing a new application, and seeking review of its denial in state court based on the procedural and substantive guarantees of state administrative law or, alternatively, under Kentucky’s constitution.

State CON Laws

Most states have some form of CON law.^[3] These laws essentially require a state health planning authority to review and approve the creation, expansion, or transfer of ownership of certain healthcare facilities.

CON laws, once ubiquitous in the U.S., have fallen out of favor over the last 30 years, and have been heavily criticized by some federal agencies, particularly the Federal Trade Commission and Department of Justice. For example, in 2015, the two antitrust enforcers released a joint statement concluding that, “after considerable experience, it is now apparent that CON laws can prevent the efficient functioning of healthcare markets in several ways that may undermine those goals.”^[4] According to the statement, CON laws create barriers to entry and expansion and hamper the agencies’ ability to effectively remedy anticompetitive mergers.^[5] At the same time, the statement explained, existing evidence does not suggest that CON laws have generally succeeded in their ostensible purposes of controlling costs or improving quality.

Implications

The Sixth Circuit’s critique of Kentucky’s regulations in its decision suggests that the view that state CON laws no longer achieve their intended purpose and actually reduce competition may be gaining increasing traction, including among at least some judges. At the same time, the decision also suggests that federal judges will continue to be deferential to state law, provided states can demonstrate that their CON laws and other regulations satisfy the minimal requirements of the “rational basis” test. The Sixth Circuit, at least, does not seem willing to alter the status quo, even if it may not be wholly convinced of the merits of state CON laws.

FOOTNOTES

^[1] Dipendra Tiwari, et al. v. Eric Friedlander, et al., No. 21-5495, 2022 WL 443343 (6th Cir. Feb. 14, 2022).

^[2] Id. at 12.

^[3] Alabama, Alaska, Arkansas, Connecticut, Delaware, Florida, Georgia, Hawaii, Illinois, Indiana, Iowa, Kentucky, Maine, Maryland, Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Montana, Nebraska, Nevada, New Jersey, New York, North Carolina, Ohio, Oklahoma, Oregon, Rhode Island, South Carolina, Tennessee, Vermont, Virginia, Washington, West Virginia, and the District of Columbia all have some form of CON law. Arizona, Minnesota, and Wisconsin do not have formal CON laws, but have similar prior-approval processes for some healthcare services. See, e.g., Nat’l Conf. of State Legislatures, Certificate of Need (CON) State Laws, (Feb. 2022), https://www.ncsl.org/research/health/con-certificate-of-need-state-laws.aspx.

^[4] Joint Statement of the Federal Trade Commission and the Antitrust Division of the U.S. Department of Justice to the Virginia Certificate of Public Need Work Group, 1-2 (Oct. 26, 2015), 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_copn-1.pdf.

^[5] For example, in the Phoebe Putney case the FTC sought to enjoin a merger that allegedly created a monopoly in the provision of inpatient general acute care hospital services sold to commercial health plans in Albany, Georgia and its surrounding areas. Both the district court and the Eleventh Circuit found that the merger was protected from antitrust scrutiny by the “state action doctrine.” The Supreme Court reversed, holding that “state action immunity” did not apply. However, the merger was consummated while appeals were pending, and Georgia’s CON regime precluded structural relief. See generally In re Phoebe Putney Health Sys., Inc., Dkt. No. 9348, https://www.ftc.gov/enforcement/cases-proceedings/111-0067/phoebe-putney-health-systeminc-phoebe-putney-memorial.