by Jordan Roberts
Director of Government Affairs, John Locke Foundation
Is it legal for the state to block a private citizen’s entry into a market? A lawsuit challenging North Carolina’s Certificate of Need laws (CON) is attempting to answer that question. Dr. Gajendra Singh is the founder of the Forsyth Imaging Center in Winston-Salem. Dr. Singh opened this facility in 2017 to offer patients medical imaging services at cheaper rates than those offered by other providers in the area. He was able to purchase most of the equipment needed to fully stock his imaging center, except an MRI machine, which is regulated under North Carolina’s CON laws.
North Carolina’s CON laws state that in order for a new facility to be built or changed substantially, the private individual must show a state planning board that there is a demand for this service in the service area. If the state does not believe that there is sufficient demand, the board will deny the request for a certificate of need. Dr. Singh was told by N.C. Department of Health and Human Services regulators that there are a sufficient number of MRI scanners in Forsyth County and that he was not permitted to purchase, install, and operate one there.
CON laws were put in place at the federal level in 1974 to try to control rising health care costs. The counterintuitive logic behind such a restrictive law was the idea that an abundance of unused and duplicated services would lead to higher costs due to underutilization and overcharging. In the end, there was no evidence the laws reduced health care costs. In many cases, they had actually raised costs. Shortly after the federal CON laws were repealed, a handful of states also repealed their state CON statutes, but most states kept them in place. Thirty-eight states still maintain some form of CON program. The following table lists the states that still have CON laws, the year they were established, passage of any state has moratoria on certain services, and services are included under the moratorium:
North Carolina has a particularly restrictive CON program that regulates the following facilities: adult care homes, ambulatory surgical facilities, chemical dependency treatment facilities, diagnostic centers, home health agencies, hospices, hospitals, ICF/MF facilities, kidney disease treatment centers, nursing home facilities, psychiatric facilities, rehabilitation facilities, and other various services.
All of North Carolina’s immediate neighbors and almost all of the states in the Southeast have some variation of a CON program. Most of these states regulate the creation and expansion of common facilities and services, including hospitals, skilled nursing facilities, hospice facilities, certain health clinics, alcohol and substance treatment facilities, and almost any expansion or acquisition of existing health facilities. Regulation of the number and scope of health care facilities of this magnitude further distorts the supply and demand of health care resources, producing inefficient allocation.
Why, then, are these laws still in place? After all, overall health care spending in the U.S. has risen exponentially since the law’s inception. One explanation is the presence of a special interest effect that occurs when there are opportunities for government regulators, in this case a central planning board, to choose market participants. When the state mediates access to the market, the result is a government-sanctioned monopoly that controls the output of certain health care services. That monopoly providers have an incentive to lobby the government planning board to keep competitors, such as Mr. Singh, out of the market. If there is a single, state-sanctioned provider of goods and services, the artificial suppression of supply will lead to artificially high prices.
Dr. Singh argues these laws are unconstitutional because they infringe on his rights to economic liberty and equal protection under the law. Dr. Singh partnered with the Institute for Justice, which litigates free-market infringements like CON laws, to bring the suit forward in Wake County Superior Court.