FTC and DOJ Advise on Virginia CON Law

Practical Law Legal Update w-000-7167 (Approx. 4 pages)

FTC and DOJ Advise on Virginia CON Law

by Practical Law Antitrust

Published on 28 Oct 2015 • USA (National/Federal)

The Federal Trade Commission (FTC) and the Antitrust Division of the Department of Justice (DOJ) submitted a joint statement to the Virginia Certificate of Public Need (COPN) Work Group regarding their views on certificate-of-need (CON) laws.

On October 26, 2015, the FTC and the DOJ (the Agencies) submitted a requested joint statement to the Virginia COPN Work Group suggesting that Virginia consider whether repealing or retrenching its COPN program would best serve the needs of Virginians. The Agencies generally encourage repealing CON laws or limiting their scopes. The Agencies noted that, while CON laws were enacted with the goals of reducing healthcare costs and improving access to care, CON laws can prevent the efficient functioning of healthcare markets by:

Creating barriers to entry and expansion.
Limiting consumer choice.
Stifling innovation.
Allowing incumbent firms to thwart or delay entry by new competitors.
Denying consumers the benefit of an effective remedy following the consummation of an anticompetitive merger (see What's Market, In the Matter of Phoebe Putney Health System, Inc. and Palmyra Park Hospital, Inc. (litigated case)).

The Agencies noted that Virginia's COPN program requires healthcare providers to obtain a COPN from the State Health Commissioner before initiating certain projects regarding:

Facilities, such as hospitals, nursing homes, psychiatric facilities, and rehabilitation hospitals.
Services, such as general acute care services, cardiac services, obstetrics, and organ transplantation.

The Commissioner may not issue a COPN unless the Commissioner has determined that there is a public need for the project and may condition a COPN on the provision of :

A certain amount of charity care.
Care to those with special needs.
Health services in a medically underserved area.

The COPN process can be time-consuming and costly, delaying entry by at least many months and possibly deterring entry if an entrant decides that the process is too costly. In addition to raising entry barriers, the Agencies further argued that CON laws can:

Reduce the ability of the market to respond to consumer demand for different treatment options, settings, or prices.
Remove or delay the competitive pressures that can spur the existing competitors to innovate, improve services, or introduce new services.

The Agencies also argued that CON laws may harm competition because competitors may take advantage of the CON process to protect their competitive advantage. For example, a hospital may file challenges or comments to a potential competitor's CON application merely to thwart or delay competition. In addition to delaying competition, impeding the CON process can also divert scarce resources away from healthcare innovation as potential entrants incur legal, consulting, and lobbying expenses responding to competitor challenges.

Lastly, the Agencies noted that, as seen in FTC v. Phoebe Putney, CON laws can impede effective structural remedies for anticompetitive mergers. Phoebe Putney involved a challenge to the merger of two hospitals in Georgia. The FTC argued that the merger had created a monopoly in the provision of inpatient general acute care hospital services sold to commercial health plans in the relevant area. During litigation, the hospitals consummated the merger, and, as a result, the FTC was precluded from ordering a divestiture due to Georgia's CON laws and regulations. (See What's Market, In the Matter of Phoebe Putney Health System, Inc. and Palmyra Park Hospital, Inc. (litigated case).)

The Agencies then reviewed the evidence on whether CON laws achieved their original goals of controlling healthcare costs and mitigating the incentives created by a cost-based healthcare reimbursement system. The Agencies concluded that the evidence shows they have not. The Agencies noted that, although the reimbursement system has changed significantly, CON laws still exist in many states, and CON proponents use cost control as a justification for CON programs. CON proponents also argue that the laws positively affect the quality of healthcare services and enable states to assure access to healthcare services. However, the Agencies found evidence that:

CON laws are actually likely to increase, rather than constrain, healthcare costs by potentially shielding existing healthcare providers from competition, which allows those existing firms to raise prices. With more competitors in a given market, health plans can bargain more effectively on price and services. CON laws also reduce beneficial investment because of the high cost of the application process.
Quality of care is not necessarily dependent on a high volume of procedures (an outcome of CON laws). The Agencies argued that the most pronounced effect of volume on quality outcomes may be limited to certain complicated procedures, and even when studies show a volume/outcome relationship, the volume effects may not offset the other effects of CON programs on quality.
More targeted policies may be more effective at ensuring access to care without anticompetitive harm. Proponents of CON laws argue that, with the extra profits healthcare providers receive under CON laws, those providers fund provision of care to the indigent. Virginia's COPN laws explicitly require that a COPN may be conditioned on the applicant's agreement to provide a certain amount of indigent care, care to patients requiring specialized services, or care in medically underserved areas. The Agencies argued that research shows that safety-net hospitals are no stronger financially in CON states than in non-CON states and that CON programs are too blunt a tool for accomplishing such a specific goal.

As a result, the Agencies argued that Virginia should consider repealing or retrenching its COPN laws.

Commissioner Julie Brill of the FTC issued a concurring statement in which she agreed with the antitrust concerns of the Agencies but was concerned that the FTC did not have sufficient information to argue about the non-competition-related public policy goals of CON laws.

For more information on competition in healthcare markets, see Practice Note, Healthcare Competition: Providers and Insurers.

FTC and DOJ Advise on Virginia CON Law | Practical Law