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Economic Liberty

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

“[T]he great deference due state economic regulation does not demand judicial blindness to the history of a challenged rule or the context of its adoption nor does it require courts to accept nonsensical explanations for regulation.”


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

This case is a constitutional challenge to Mississippi's Certificate of Need ("CON") program. Under consideration are a set of laws that require health care facilities to apply and receive a state-issued CON before opening, expanding, relocating, changing ownership, or even acquiring major medical equipment. Also at stake are 40-year-old moratoria which bar the issuance of CONs to certain new health care facilities, particularly those that offer at-home health care services.

From 1985, three years after the creation of the moratorium, to 2014, the Mississippi State Department of Health reports that demand for at-home health services tripled. Amidst the COVID-19 pandemic, agencies offering these services have taken on critical importance as many of us seek alternatives to hospitals, nursing homes, and other care facilities that increase the risk of exposure to the virus. To protect ourselves and our loved ones, and in our collective effort to stop the spread, some of us turned to agencies like those at issue in this case.

Plaintiff Charles Slaughter alleges that the CON regime, including the moratoria, violates the equal protection and substantive due process clauses of the United States and Mississippi Constitutions. Specifically, he claims that the regime harms Mississippians, protects monopolies, and worsens the very goals it claims to advance. 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….

By way of background, CONs were a national phenomenon of the 1970's. The National Health Planning and Resources Development Act of 1974 conditioned federal funding upon states adopting CON programs that met federal guidelines. In 1979 the Mississippi legislature, like many other states, adopted CON laws. By 1982, every state except for Louisiana had implemented some version of a CON program. See National Conference of State Legislatures.

In 1987, however, Congress repealed the law. Since then, widespread scholarly and government research has admitted that the experiment was misguided. See Complaint at 70 n.1 (collecting research). Specifically, CONs are ineffective in achieving the desired outcome: less expensive, more accessible, and better-quality health care. Still, today 35 states retain CON laws.

The Board and Health Department, the agencies that administer the CON program, disagree with the research consensus. Citing the State Health Plan, they claim the CON regime is designed to "prevent unnecessary duplication of health resources; provide cost containment; improve the health of Mississippi residents; and increase the accessibility, acceptability, continuity and quality of health services." They review the CON program annually and have recommended it continue….

[T]he CON application and approval process … is lengthy and costly, and ultimately the process can result in what is essentially a trial with attorneys, consultants, exhibits, and written motions. Any "affected persons," including current home health providers, can oppose the application. After the proceeding, the Board and Health Department evaluate whether the applicant has demonstrated need based on several factors, including 16 criteria (e.g., "economic viability," "consistency with the state health plan," and "access by health professional schools") as well as a regional formula to define "need."

Even so, there is a categorical ban on certain new facilities applying for CONs at all. In 1982, the predecessor to the Health Department determined that no new home health care agencies were needed and issued an administrative moratorium on their licensure. During the subsequent legislative session, the administrative moratorium was codified into state statute. It was expanded in 1986. This moratorium, or some version of it, has remained in place for 40 years. Four decades! And, since this moratorium was imposed, the number of home health patients has increased by at least 194 percent. Now, one can only enter the market if a current operator is willing to sell their CON….

Plaintiff's federal due process and equal protection claims are subject to rational-basis scrutiny. Under this standard, Mississippi is afforded great deference. Those attacking the rationality of a legislative decision have the burden of negating "every conceivable basis which might support it."

That is not to say that rational-basis review is a rubber stamp. "Between 1970 to 2000, applying rational-basis review, the Supreme Court struck down at least a dozen economic laws as violating either the Equal Protection Clause or the Due Process Clause." Tiwari v. Friedlander (W.D. Ky. Aug. 14, 2020) (collecting cases). The Fifth Circuit and district courts in this Circuit have also struck down laws applying the same. E.g., St. Joseph Abbey v. Castille (5th Cir. 2013).

In a recent application of rational-basis scrutiny, the Fifth Circuit held that courts need not take a state's justifications at face value where they seem implausible or impermissible. "[T]he great deference due state economic regulation does not demand judicial blindness to the history of a challenged rule or the context of its adoption nor does it require courts to accept nonsensical explanations for regulation." A state's rationale for economic protection of a favored industry is categorically not a legitimate interest. Accordingly, where seemingly implausible rationales or illegitimate purposes are at play, the Court may delve into evidence of irrationality….

The critical inquiry today is whether the Complaint, viewed in the light most favorable to plaintiff, plausibly alleges that CON laws and the moratoria do not rationally relate to any legitimate state interests. To that end, plaintiff claims that the laws do not reduce costs, increase access, or improve the quality of home health care, as the State contends. Plaintiff argues that the laws undermine each of these purported goals and instead, protect incumbent health care facilities from competition.

The Complaint is replete with factual support including legislative history, case law, and a substantial body of peer-reviewed studies, publications, and government-backed research. For example, as to costs, the Complaint shows that Congress repealed its CON incentive explicitly because "the evidence showed that certificate-of-need programs resulted in increased health care costs." In 1988, 2004, 2016, and 2020, the Federal Trade Commission and the Department of Justice agreed, stating "CON programs are not successful in containing health care costs, and that they pose serious anticompetitive risks that usually outweigh their purported economic benefits." The agencies later added that their position is premised on research showing that CON programs are associated with "fewer hospitals, higher costs, lower quality of services, and increased mortality." The FTC re-urged its concerns considering the COVID-19 pandemic. Numerous peer-reviewed articles and journals bolster these claims.

Plaintiff refers the Court to a recent decision by the U.S. District Court for the Western District of Kentucky that analyzed whether CON laws encourage or discourage health care accessibility. That court cited a study by George Mason University finding that "while the average state has 362 hospital beds per 100,000 population, this number falls to 263 per 100,000 in states with [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)). That court credited allegations that CON regimes generally reduce access and denied Kentucky's motion to dismiss the challenge to its CON laws.

Finally, regarding quality, plaintiff cites substantial research showing that "stringent Certificate of Need programs decrease the quality of care in many settings." The Tiwari court came to the same conclusion at the pleadings stage.

Taken as true, as the Court must, the allegations reveal that CON laws result in more costly, less accessible, and worse quality health care. What's more, plaintiff claims that the basis for CON laws and the moratoria is pure economic protectionism—an illegitimate government interest. "By perpetually shielding the existing home health monopolies from competition and allowing them to continually expand their staffing and capacity within their service areas, Mississippi ensures that the formula it uses will never show a need for a new home health agency," says Slaughter. Startups have no chance. "It is impossible for startups to enter the market, and because nothing prevents incumbents from expanding their staffing and capacity, Mississippi's formula will likewise never show a need."

It is no secret that significant financial interests are at stake when it comes to CON laws. The Tiwari court refers to the interplay of interests as "rent-seeking"—"rents" referring to monopoly profits.

Rent-seeking businesses make a sort-of "extra-legal" contract with politicians: money and votes for the politicians, regulations that ensure a monopoly for the interest group. Mean-while, consumers lose out. Without the market competition that normally regulates businesses' behavior, the monopoly can charge otherwise unsustainably high prices for otherwise unsustainably mediocre products.

The FTC and DOJ similarly warn that "incumbent firms seeking to thwart or delay entry or expansion by new or existing competitors may use CON laws to achieve that end." In practice, plaintiff alleges, current operators do exactly that: expand their offerings to absorb any purported "need," and eliminate the opportunity for any new competitors to enter the market.

In sum, plaintiff has set forth allegations negating the State's purported bases for the laws. At this stage, plaintiff's claims are plausible, particularly within the home health care context. The due process claim may proceed.

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)….

It is worth noting that several courts have evaluated the constitutionality of various CON programs and come to different results. The Eight and Fourth Circuits have determined that they are indeed constitutional. See Colon Health Centers of America, LLC v. Hazel (4th Cir. 2013); Birchansky v. Clabaugh (8th Cir. 2020). In contrast, the Ninth Circuit has found that CON programs may be unconstitutional to the extent they burden interstate commerce, Yakima Valley Mem'l Hosp. v. Wash. State Dep't of Health (9th Cir. 2011), and the Eastern District of Kentucky has found them unconstitutional. Bruner v. Zawacki (E.D. Ky. 2014).

This case is different. First, to this Court's knowledge, none of the previous challenges to CON laws involve categorical bans on start-ups in certain facilities. Mississippi's 40-year-old moratoria is an outlier. Second, this case involves artificial limitations on at-home health care during the height of a global pandemic. This unprecedented context is highly relevant.

That said, today's Order only speaks to the sufficiency of the Complaint. How plaintiff's allegations will fare at the merits stage is a separate matter. But at this juncture, like the courts in Tiwari, Birchansky v. Clabaugh (S.D. Iowa 2018), and Bruner, this Court will deny the pending motions so that the parties may develop an evidentiary record and proceed to the merits.

{Defendants also argue that plaintiff's administrative moratorium challenge is moot because the administrative moratorium ended in 1982, when the statutory moratorium went into effect. Plaintiff rebuts that the Miss. Admin. Code still includes an administrative moratorium on the books. 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. Still, the decision struck me as important and worth noting. Congratulations to the Mississippi Justice Institute / Mississippi Center for Public Policy on the victory.