John Locke Update / Research Brief

What Does the N.C. Constitution Say About Cronyism?

posted on in Health Care, Health Care & Human Services, Law & Regulation, Legal Update
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Nothing in the U.S. Constitution implies a hierarchy among rights. Nevertheless, the federal courts have insisted on relegating economic rights to second-class status. By means of this piece of judicial activism, the federal courts made it possible for Congress and the agencies administered by the federal executive to engage in blatant cronyism, despite various constitutional guarantees—like the right to due process and the right to the equal protection of the law—that would otherwise forbid such favoritism.

Most state courts used to blindly follow the federal courts’ lead in that regard, but, fortunately, that’s beginning to change. When it comes to interpreting state constitutions, the state courts have the final say, and in several recent cases what those state courts have said is, “Regardless of what the federal courts may say about the federal constitution, our state constitutions do protect economic rights and forbid cronyism.”

In 2015, for example, the Texas Supreme Court held that a law designed to protect the state’s cosmetologists from competition violated the Texas Constitution. As I’ve reported before, cronyism is vulnerable to a similar attack under North Carolina’s Constitution, and a recently filed lawsuit, Singh v. North Carolina Department of Health and Human Services, illustrates exactly how it can be done.

In a previous Update, my colleague Jordan Roberts described how the plaintiff, Dr. Gajendra Singh, fell victim to a particular form of cronyism authorized by North Carolina’s certificate of need (CON) laws:

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 [Certificate of Need] 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.

Jordan went on to explain why the CON laws remain on the books despite the fact that they restrict the public’s access to and raise the cost of health care services:

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.

Rather than give in to the regulators and the interest groups, Dr. Singh turned for help to the Institute for Justice (IJ), a national public interest law firm that has successfully defended entrepreneurs’ economic rights in other states. With the local assistance of Shanahan McDougal, IJ filed a complaint on Dr. Singh’s behalf asking the Wake County Superior Court to declare that North Carolina’s CON laws violate North Carolina’s Constitution.

The complaint alleges two separate violations of Article I, Section 19, which states:

No person shall be … deprived of his life, liberty, or property but by the law of the land.

The North Carolina courts have consistently interpreted this clause to guarantee both the right to due process and the right to equal protection. According to the complaint, requiring Dr. Singh to obtain a certificate of need in order to purchase an MRI machine violates his right to due process because the requirement “lacks a real and substantial (or even a rational) relationship to protecting the health and safety of North Carolina patients,” and it violates his right to equal protection because “it draws an arbitrary and irrational distinction between providers who already own an MRI scanner … and providers who do not.”

The complaint also alleges a violation of Article I, Section 32, which states:

No person or set of persons is entitled to exclusive or separate emoluments or privileges from the community but in consideration of public services.

According to the complaint, North Carolina’s CON law violates this section because it “grants certain providers an exclusive privilege to provide MRI services in their areas” for no purpose other than “to protect incumbent MRI providers from competition.”

Finally, the complaint alleges a violation of Article I, Section 34, which states:

Perpetuities and monopolies are contrary to the genius of a free state and shall not be allowed. 

The plaintiffs contend that by “conferring an exclusive privilege to provide MRI services in the service areas and flatly prohibiting other providers from doing so,” North Carolina’s CON law grants the former a monopoly in plain violation of Section 34.

In addition to asking the court to declare that North Carolina’s CON law violates North Carolina’s Constitution in each of the ways listed above, Dr. Singh’s complaint also asks for a permanent injunction blocking the enforcement of those laws and an award of attorneys’ fees, costs, and expenses.

If Dr. Singh prevails, he will finally be able to realize his dream of providing low-cost imaging services in Forsyth County, but that’s not all. A win for Dr. Singh will open the door for other medical entrepreneurs throughout the state, thereby making health care cheaper and more accessible for all North Carolinians. It will also encourage challenges to other forms of cronyism, and, if those challenges are successful, many other types of goods and services will also become cheaper and more accessible.

There’s a lot at stake in this case. Those who benefit from cronyism will be hoping and praying that Dr. Singh loses. That means the rest of us need to hope and pray that he wins!

Jon Guze is Senior Fellow in Legal Studies at the John Locke Foundation. Before joining the John Locke Foundation, Jon practiced law in Durham, North Carolina for over 20 years. He received a J.D., with honors, from Duke Law School… ...

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