Claim that “Certificate of Need” Law Lacks a Rational Basis Can Go Forward

Start at Slaughter v. Dobbs), decided by Judge Carlton Reeves on Thursday (S.D. Miss.):

The case involves a constitutional challenge of Mississippi’s Certificate of Need (“CON”) Program. A set of laws is being considered that requires health care facilities to obtain a CON from the state before they can open, expand, relocate, change their ownership or acquire major medical equipment. There are also 40-year old moratoria, which prohibit the issue of CONs for certain health care facilities that provide at-home services.

Three years ago, Mississippi State Department of Health created the moratorium. However, demand for at-home services increased by three times between 1985 and 2014. As many people seek alternative care to hospitals and nursing homes that can increase their risk of contracting the disease, the importance of agencies providing these services has increased. We all turned to these agencies to protect our loved ones and stop its spread in an effort to save our lives.

Charles Slaughter, the plaintiff, claims that the CON system, which includes the moratorias, is in violation of both the substantive due process and equal protection clauses of the United States Constitutions. He claims the CON regime, including the moratoria, harms Mississippians and protects monopolies. It also worsens its stated goals. For support, he relies on 40 years’ worth of research finding that CON laws stifle innovation in the health care industry and merely protect established companies from competition….

Background: CONs are a 1970s national phenomenon. Federal funding was conditioned by the 1974 National Health Planning and Resources Development Act on states that adopted CON programs in compliance with federal guidelines. Like many states, the Mississippi legislature adopted CON laws in 1979. Every other state had a CON program, with the exception of Louisiana. Check outNational Conference of State Legislatures.

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Congress overturned the law in 1987. The experiment has been widely criticized by government and academic researchers alike. Refer to the ComplaintAt 70.1 (collecting Research). Consolidated information is inefficient in attaining the desired result: lower cost, better quality, and more accessibility to health care. Still, today 35 states retain CON laws.

According to the CON programs administrators, Health Department and Board, they disagree with the consensus. They cite the State Health Plan to claim that the CON program is intended to prevent unnecessary duplication in health resources, provide cost control, improve Mississippi’s health, and enhance accessibility, acceptance, continuity, and quality health services. They review the CON program annually and have recommended it continue….

[T]he CON application and approval process is helpful … is lengthy and costly, and ultimately the process can result in what is essentially a trial with attorneys, consultants, exhibits, and written motions. An “affected person” can object to the application, including any current or former home health care providers. Following the hearing, both the Board and the Health Department will determine if the applicant has met the requirements based upon 16 criteria.e.g.“Economic viability,” “consistency in the state’s health plan” and “access to health professional schools” are some of the criteria. There is also a regional formula that defines “need.”

Even so, an absolute ban is placed on any new facility applying for CONs. An administrative moratorium was issued on licensure of home-health care agencies by the predecessor to Health Department in 1982. The administrative moratorium was incorporated into the state statute during the next legislative session. The moratorium was further expanded in 1986. It has stood in some form or another for more than 40 years. Four decades! Since the moratorium, home-health patients have increased at least 194 per cent. Now, one can only enter the market if a current operator is willing to sell their CON….

A rational-basis review is conducted on the Federal Due Process and Equal Protection claims of Plaintiffs. Mississippi receives great deference in this regard. Critics of the rationality and validity of legislative decisions have to prove that it is supported by “every possible basis.”

However, rational-basis reviews are not a universally accepted standard. “Between 1970 and 2000, the Supreme Court applied rational-basis analysis to determine whether any economic law was in violation of the Equal Protection Clause, or the Due Process Clause.” Tiwari v. Friedlander (W.D. Ky. Aug. 14, 2020) (collecting cases). District courts of this Circuit as well the Fifth Circuit have also rejected laws that applied to it. E.g., Castille and St. Joseph Abbey (5th Cir. 2013).

The Fifth Circuit ruled that the courts should not accept a state’s justifications as fact in a rational-basis application.[T]The great deference that state economic regulation requires does not require judicial blindness as to the history or context of the challenged rule, nor do courts have to accept any nonsensical reasons for its regulation. The state’s justification for protecting a preferred industry from economic harm is not legitimate. Accordingly, where seemingly implausible rationales or illegitimate purposes are at play, the Court may delve into evidence of irrationality….

Today’s critical question is: Is the ComplaintPlaintiff, when viewed from the most favorable light, claims that CON laws as well as the moratoria are not rationally related to any legitimate state interest. The State claims that these laws don’t reduce cost, access and quality, but plaintiff says they do. Plaintiff claims that each of the stated goals is undermined by the law and protects incumbent health care providers from being outsourced.

It ComplaintThe Complaint is rich in factual support, including case law and legislative history. It also contains a large body of peer-reviewed publications and government-backed research. As an example, regarding costs, the Complaint states that Congress removed its CON incentive in part because it “evidence showed that certificate of need programs resulted…in increased healthcare costs.” The Federal Trade Commission, 2016 and 2020 agreed that CON programs were not effective in controlling health care costs and they present serious anticompetitive risk that often outweigh any economic benefit. The Federal Trade Commission and the Department of Justice later stated that CON program are linked to “fewer hospitals”, higher prices, lower quality, and greater mortality. In light of the COVID-19 pandemic, FTC raised its concerns again. This claim is supported by numerous journals and peer-reviewed articles.

Plaintiff refers to a U.S. District Court in the Western District of Kentucky decision that examined whether CON laws discourage or encourage access to healthcare. The court referenced a George Mason University study that found “while an average state has 362 hospitals beds per 100,000 people, this figure falls to 263 in states with at least 100,000.” [CON] programs.” Tiwari v. Friedlander (W.D. Ky. 2020) (citing Thomas Stratmann & Jake Russ, Do Certificate-of-Need Laws Increase Indigent Care? 11-12 (Mercatus Center, George Mason Univ., Working Paper No. 14-20, 2014)). The court accepted the allegations that CON systems generally limit access to information and rejected Kentucky’s request to dismiss its challenge to CON laws.

Plaintiff also cites extensive research that shows “stringent Certificate of Need” programs can reduce the quality of care in different settings. This is the TiwariThe court reached the same conclusion during the stage of pleadings.

As the Court will accept, CON laws are false. They result in health care that is more expensive, less available, and of lower quality. What’s more, plaintiff claims that the basis for CON laws and the moratoria is pure economic protectionism—an illegitimate government interest. Slaughter says Mississippi protects existing home-health monopolies against competition by allowing them expand their capacity and staffing within their service areas. This ensures that there will be no need to create a new agency. It is impossible for startups to enter the market. It is difficult for startups to get into the market. Because incumbents can expand their capacity and staff, Mississippi’s formula won’t allow them to do so.

CON laws are a matter of significant financial interest. This is not a secret. There are many factors that can affect the effectiveness of CON laws. Tiwari court refers to the interplay of interests as “rent-seeking”—”rents” referring to monopoly profits.

The rent-seeking business makes an “extra-legal” agreement with politicians. They get votes and money, as well as regulations to ensure that the interest group has a monopoly. Mean-while, consumers lose out. Consumers lose out because the market competition is not there to regulate businesses’ behaviour. Monopoly owners can set unreasonable high prices for something that is otherwise good, but it cannot sustainably maintain them.

FTC warnings that existing firms may attempt to block or derail entry by potential new competitors. DOJ and FTC also warn that CON laws can be used to accomplish this end. Plaintiff alleges that the current operators practice exactly this: they expand their product offerings in order to satisfy any purported need and remove any opportunity for newcomers to enter the market.

Summa summarizing, the plaintiff has made allegations that negate the State’s pretended bases for the laws. The claims of plaintiff are plausible at this point, in particular within the home-health care context. It is possible to file a due process claim.

The court also concluded the same under the Equal Protection Clause (unsurprising, since the rational basis test applies both to equal protection and substantive due process)….

Notable is the fact that different courts have weighed in on various CON program constitutionality and came up with different conclusions. These programs are legal according to the Eight and Fourth Circuits. Check out Colon Health Centers of America, LLC, v. Hazel (4th Cir. 2013); Birchansky v. Clabaugh (8th Cir. 2020). Contrary to this, the Ninth Circuit found CON programs unconstitutional in the sense that they threaten interstate commerce. Yakima valley Mem’l Hosp. v. Wash. State Dep’t of Health (9th Cir. (2011), and they were declared unconstitutional by the Eastern District of Kentucky. Bruner v. Zawacki (E.D. Ky. 2014).

But this case is different. This Court is aware that none of the CON law challenges have involved categorical bans against start-ups at certain facilities. Mississippi’s 40 year-old moratoria stands out. The second is that this case involves artificial limits on at-home medical care in the midst of an epidemic. This is a unique context that’s extremely relevant.

However, this Order speaks only about the sufficiency. Complaint.It is not clear how plaintiffs’ allegations will fair at merits. At this point, however, the plaintiff’s allegations will fare at merits stage just like the courts. Tiwari, Birchansky v. Clabaugh (S.D. Iowa (2018) BrunerThis Court will dismiss the pending motions to allow the parties to develop evidence records and move on with the merits.

{The defendants also claim that plaintiff’s challenge to the administrative moratorium is moot since the administrative moratorium expired in 1982, the date when the statutory moratorium was put into effect. The Miss. Admin. Code continues to include an administrative moratorium. This Court finds that it is unclear whether the administrative moratorium was ever repealed and thus, the challenge against the administrative moratorium may proceed.}

Again, note that it’s not clear that plaintiff will prevail on the merits; and, even if he does, it’s not clear that he’ll win on an appeal—the rational basis test is indeed (rightly or wrongly) highly deferential, and, as the court notes, two circuit courts have upheld similar (though not identical) laws under that test. I still find the decision important and worthy of note. We are very proud of the Mississippi Justice Institute/ Mississippi Center for Public Policy for this victory.