North Carolina’s Certificate of Need law — which regulates what hospitals and other medical providers can and cannot provide — is as complex as it is controversial.
A recent lawsuit brought forth by a New Bern ophthalmologist challenges the constitutionality of the law, bringing the issue to the forefront of statewide debate.
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What follows is an examination of the law, who it benefits, who opposes it and what the state’s health care landscape would look like without it.
What is the Certificate of Need law?
In North Carolina, a health provider cannot just decide they want to add a new wing or buy an MRI machine. They cannot elect to build a new operating room, nor add capacity to their NICU.
First, the state’s Department of Health and Human Services must identify a need for said service. DHHS could find a need for 25 new acute care hospital beds in County A, for example. Or the state agency could determine that County B needs expanded open-heart surgery capabilities.
Then, health care providers would apply to meet that need, with DHHS deciding which provider receives the Certificate of Need after competitive review and public hearings. The systems whose applications were denied have a chance to appeal DHHS’s decision in court, a process which can go on for months, and even years.
Once the Certificate of Need is officially awarded, the winning provider is given the green light to begin making investments in the specified service or facility.
Why are we talking about Certificate of Need?
In 2022, Jay Singleton, the ophthalmologist from New Bern, wished to start performing ocular operations at Singleton Vision Center. This would have been illegal.
That’s because DHHS’s 2021 State Medical Facilities Plan found no need for expanded operating room capacity in the Craven, Jones and Pamlico counties planning area. Not only did Singleton not have a Certificate of Need, but there wasn’t even one for which he could apply.
Singleton filed a lawsuit against DHHS in Wake County Superior Court, claiming that the Certificate of Need law infringed upon his constitutional right to run a business and earn a legitimate living.
The Superior Court sent Singleton’s case to the Court of Appeals, where it was then escalated to the State Supreme Court.
The State Supreme Court put the brakes on the whole operation. Singleton’s case originally brought the issue forth “as applied,” meaning that they should consider whether the law is unconstitutional as it was being applied in his case, and his case alone.
“The Supreme Court said ‘No, what you’re really arguing is that it’s unconstitutional, period,’” UNC law professor Joan Krause told CPP.
“The court considered it a facial constitutional challenge, not an ‘as applied’ one, and facial challenges have to go through a very different process because it’s such an important issue.”
The state Supreme Court justices decided that they would not consider the merits of Singleton’s argument until the case explicitly stated that it is a facial challenge of the law’s constitutionality. But before the Supreme Court hears it again, the case had to be sent back down to a lower court.
That means that if Singleton ultimately wins his case in the courts, the Certificate of Need law could be thrown out altogether. No future court date has yet been set.
This is not the first case challenging Certificate of Need to gain traction, but the Institute of Justice, a public interest law firm, has taken up Singleton’s case and reignited interest in the debate surrounding the law.
How did the Certificate of Need law come about?
In the 1960s, several states began passing certificate of need laws to avoid duplications of services within geographical areas that might increase costs for patients.
The North Carolina Supreme Court found the state’s original law unconstitutional in 1973. This is the only state in which a court has found such a law unconstitutional.
In 1974, under the administration of Richard Nixon, Congress adopted the National Health Resources and Development Act, which strongly incentivized states to have Certificate of Need laws. While not an outright mandate, the measure encouraged most states to adopt these laws. Louisiana was the lone holdout.
North Carolina approved a new CON law in 1977, which has since been revised several times through subsequent legislation, but has not faced a serious court challenge.
In 1986, Congress repealed the federal law, an action that Republican President Ronald Reagan signed. Many states have since eliminated their CON laws. But many, including North Carolina, have not.
What is the justification for the state law?
The justification for the law relies on two main assumptions, according to Krause. One of those is a distributional issue, and the other is economic.
The distributional argument is this: health care facilities do not have adequate incentives to serve rural populations, and given complete freedom, would cluster in a state’s urban areas. Rural hospitals usually have higher percentages of Medicare/Medicaid patients, and they tend to lose money on those patients — the government programs often pay less than the actual cost of providing care.
DHHS steps in to identify the needs of every part of the state, and require that those needs are met by the most qualified provider. If a rural county needs a hospital, it won’t go unnoticed, at least in a perfect application of the law.
The second assumption is an economic one, Krause said.
Normally, Americans rely on free market competition to drive an industry forward and control costs. That kind of thinking does not map perfectly onto the health care landscape, Krause said.
“Having more of a certain type of health care available in an area does not necessarily drive down the price of the service,” Krause said.
“Consumers do not generally make a choice between two hospitals for where they get their MRI. They can’t compare prices in the same way they do consumer goods.”
The concern is that if a hospital buys an expensive MRI machine, for example, it would charge patients as much as possible to use it in order to recoup the costs of the machine. It wouldn’t matter whether the hospital down the street also had an MRI machine.
If hospitals have no incentive to control costs, the government must step in and force them to, or so the thinking goes.
Whether these two assumptions are reflective of how the law plays out in real life are the topic of heated debate, one often demarcated by party lines. In recent years, Democrats tend to be pro-Certificate of Need, while Republicans tend to be anti.
Is NC’s law unique?
It’s complicated. Thirty-five other states have Certificate of Need (CON) laws, including all southeastern states.
However, each state’s law is slightly different.
“Among the 36 states with CON laws, there are huge variations in enforcement, timing, triggering levels, political goals and the number of services regulated by CON,” reads a North Carolina Healthcare Association analysis of the debate surrounding the law.
Twelve states that once had Certificate of Need laws have now fully repealed them or allowed them to expire, according to the National Conference of State Legislatures. In 2016, New Hampshire became the most recent state to repeal its Certificate of Need program.
Many others have modified their laws and greatly reduced their scope. South Carolina, for example, repealed nearly all Certificate of Need requirements except those that relate to nursing homes.
North Carolina has one of the stronger and more regulatory Certificate of Need laws, which is why some, such as state treasurer Dale Folwell, believe the state’s law to be very unique — and in his view, uniquely bad.
How does DHHS identify needs?
Whether the law functions as intended is dependent on the methodologies DHHS uses to identify need.
These methodologies are reviewed and updated annually by the North Carolina State Health Coordinating Council and published in the North Carolina State Medical Facilities Plan, along with the needs themselves.
The council looks at population numbers, demographics and utilization of various health care facilities, services and equipment to determine which counties need what service expansion.
“Need methodology may be a big issue on remand with (Singleton v. NCDHHS),” Krause said.
Who benefits from the Certificate of Need law?
Certificate of Need law benefits existing hospital systems by keeping potential competitors out of the state. Some of the law’s most supportive parties are UNC Health, Duke Health and Novant Health.
“The law very much favors entities that are already in the market,” Krause said.
Potential competitors must be awarded a Certificate of Need before actually building competing services in the state. Most often, systems that already serve patients in North Carolina can argue that they could meet the need more efficiently than a system who does not yet have a presence in the state.
The appeals process allows North Carolina hospital systems to protest the entrance of any new competitor into the market, giving them much more control of the outcome.
Powerful hospitals can be powerful lobbyists. In that way, it is possible for them to exert some influence over how the law is enforced. Whether this is actually the case in North Carolina is up for debate.
It also allows powerful politicians to voice their opinions on which hospital giants should be allowed to expand.
In 2022, HCA and AdventHealth were competing to meet a need for 67 new hospital beds in Buncombe County. HCA, owner of Mission Health, already has a massive, and much-maligned, presence in the county and surrounding region.
Attorney General Josh Stein, who has since become governor-elect, wrote a letter to DHHS urging the agency to deny Mission Health the Certificate of Need.
“The Department of Health and Human Services should deny Mission’s application,” Stein wrote.
“Currently, Mission has almost no competition for acute care in Buncombe County. The lack of competition is the result of Mission’s unique history … This lack of competition harms residents of Western North Carolina by increasing the cost, and reducing the quality, of health care services in the region. Awarding Mission this Certificate of Need would exacerbate the lack of competition and resulting harm.”
In the end, AdventHealth was awarded the Certificate of Need.
Does the state favor itself in awarding certificates?
One of the biggest health care providers in North Carolina is the state’s university system — University of North Carolina Health. Is it possible that the law favors UNC?
Those who enforce and shape the law are adamant that they do not favor UNC just because it is an arm of the state. The process for determining and awarding needs does not allow for that, they hold.
“I think the state of North Carolina plays a larger role in delivering health care to its residents than many other states do,” Krause said.
“I’m certainly aware, however, of situations where UNC has been turned down and one of the other competitors has been granted the certificate.”
Who opposes the law, and why?
The state’s leading Republicans oppose Certificate of Need law, including the sitting and incoming state treasurers.
“The only way we are going to reduce health care prices materially over time is by developing a competitive market,” treasurer-elect Brad Briner told CPP.
“Certificate of Need laws are the opposite of that. They are designed to protect local monopolies. The consolidation of our health care system is one of the highest out of other states, which tells you that large providers have a lot of power that prevents change. The federal government and most states have done away with Certificate of Need laws.”
Sitting state treasurer Folwell calls this “the hospital cartel.”
“When you are a cartel, you control the price, you control the access, you control the payment model, and you control whether you tell anyone how much you make,” Folwell told CPP.
“Competition drives down costs for all, especially those low-income individuals.”
Forbes lists North Carolina as the most expensive state for health care in the nation, Folwell pointed out.
Even the literature of the North Carolina Health Care Association — an organization that advocates for the state’s Certificate of Need law — doesn’t claim that Certificate of Need brings down health care costs:
“Cost comparisons between CON and non-CON states are muddy at best and cannot be used to argue conclusively for or against CON,” its analysis reads.
“There is no statistically significant price difference — inpatient/outpatient adjusted price per patient discharge — between heavily regulated CON states and non-CON states.”
For a law whose stated purpose is bringing down health care costs, this is a pretty damning statement, its opponents say.
“Repealing Certificate of Need laws doesn’t solve all of health care’s problems,” Briner said.
“The ingredients for competition and productivity growth in any industry are the same: informed consumers, aligned incentives and competing providers. Repealing Certificate of Need addresses the competing providers aspect, but we still have to inform consumers by providing price transparency.”
What do people who support it say?
Those who support the law generally point to its positive impacts on rural health care access.
“Doing the libertarian thing of just abolishing Certificate of Need and having a fully free market has a bunch of unintended consequences,” state Rep. Wesley Harris, D-Charlotte, who recently lost to Briner in the race for state treasurer, told CPP.
“We are losing hospitals, particularly in Eastern North Carolina. It’s very difficult for hospitals to stay open, but it’s also necessary to have hospitals in Eastern North Carolina. In these rural parts of the state, there simply is not the economic base to allow that competition to provide the health care that they need.”
In urban, more economically viable areas, Harris thinks that more free-market competition would likely not hurt health care quality. But hospital systems would have no motivation to continue serving sparsely-populated rural areas.
“The goal of the law is controlling costs, preventing unnecessary services and unnecessary duplication of services, and also ensuring that there’s equitable access to care across the state,” Alicia Barfield, director of health policy at North Carolina Healthcare Association, told CPP.
“It also ensures that access to services for historically underserved populations and communities are protected, particularly our rural communities. North Carolina has the second-largest rural population in the country.”
In states where Certificate of Need has been repealed, there has been a significant loss of rural health care, according to Barfield. In Texas, the law was repealed in 1985, and in the following decade, 55 rural Texas hospitals closed, she said.
“We do not want health care services to focus on profitability as their top priority rather than community needs,” Barfield said.
Does the legal challenge have legs?
“These issues have not gotten this far in North Carolina courts since 1973,” Krause said. “Most of these cases have just been bounced out of court. This is the first time that the court has directed a lower court to look at the constitutionality of the issues.
“Of course, it is possible for the lower court to say: ‘No, we are satisfied that the legislation strikes the right balance between protecting public health and protecting the right of an individual to practice.’”
At an earlier point in the case, Democratic state leaders filed briefs in the case calling for the courts to let legislators decide on the future of the state’s Certificate of Need rules, without necessarily advocating for a specific policy.
North Carolina’s Certificate of Need law has been tweaked many times without being repealed, including in 2021, when adjustments to the law passed with nearly unanimous bipartisan agreement in the General Assembly and were signed into law by Democratic Gov. Roy Cooper.
So, it is hard to say. For now, there isn’t even a court date set, so the law still has some time on the books either way.
What will happen if you throw it out?
The landscape of North Carolina health care would shift dramatically, with many new hospital systems likely entering the state. Many hope that that would increase competition and, in theory, lower prices.
Even though many states have repealed their laws, it’s hard to compare what happened in those places with what might happen in North Carolina because the laws are so different and apply to different types of care.
“Repealing CON clears the way for niche health care businesses that offer services focusing on profitability,” Barfield said.
“Hospitals, especially rural hospitals, rely on revenues from ambulatory surgery and diagnostic imaging to help offset the losses of other essential services like emergency departments, behavioral health services, and neonatal services.”
If independent cosmetic and elective surgery centers could open without a Certificate of Need, it would threaten rural hospitals’ greatest source of income: high-margin medical procedures.
Hospitals may then be put in such a disadvantaged economic position that they have to close emergency departments or labor and delivery wings. Rural areas could then see a proliferation of nonessential services while essential services close.
Could tweaking the law make it better?
The Certificate of Need appeals process often creates a situation in which a county’s health care needs are not met until years after they were first identified.
Even the law’s most fierce defenders admit there may be some work to do here.
Take the ongoing battle between UNC Health and Duke Health for which system gets to add 112 hospital beds in Durham County, for example.
The need for 40 new hospital beds was identified in 2021, and awarded to UNC Health. Duke appealed. In 2022, a need for 34 more beds was found, and awarded to UNC Health. Duke appealed. In 2023, a need for yet another 38 beds was found, and awarded to UNC Health. Duke appealed.
UNC-Research Triangle Park will not open until at least 2032, even though the need was found in 2021.
The construction of UNC Health-Rex Holly Springs in Wake County was delayed by more than a decade of appeals, according to UNC Health spokesperson Alan Wolf.
What if hospitals drop below permitted levels of care?
“To my knowledge, there is no ongoing CON review as to whether a hospital is making full use of the services they are offering,” Krause said.
“If a hospital sought to close beds or ORs, that likely would trigger the process, but not if they just stopped performing a certain type of surgery.”
The main kind of CON-enforcement NCDHHS can carry out is in the project-planning phase.
“The Agency may withdraw a certificate of need if the certificate holder does not develop the project in a timely manner and cannot show that it is making a good faith effort to develop the project in a timely manner,” the DHHS website reads.
“The Agency may also withdraw a certificate of need if the certificate holder does not develop the project in a manner consistent with the representations made in the application or with any conditions the Agency placed on the certificate of need.”
This article first appeared on Carolina Public Press and is republished here under a Creative Commons license.
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