By Steve Hall
In all but a dozen U.S. states, proposals to develop or expand a hospital, clinic, outpatient surgery center or similar project must obtain a state agency’s certification that the local community needs the infrastructure or services to be provided there. In those markets, a certificate of need (CON) is a make-or-break component of any healthcare real estate development large enough to be regulated.
How did we get here?
The concept of linking hospital and clinic development to a community’s healthcare needs is nothing new. For roughly 30 years after World War II, the federal government required communities to provide population and per capita income data to demonstrate their need for new hospital beds funded with loans or grants under the Hospital Survey and Construction Act of 1946. Better known as the Hill-Burton Act, the program had helped fund construction of nearly a third of the nation’s hospitals before lawmakers rolled it into the National Health Planning and Resources Development Act of 1974.
Nearly all of today’s certificate of need (CON) statutes trace their impetus to this 1974 measure. At the time, Congress found that “the massive infusion of federal funds into the existing healthcare system” was contributing to inflationary pricing.
Believing better planning would help states and communities to match medical facility development with patient needs, Congress directed all states to establish CON guidelines. The programs were to charge a state health planning agency with vetting proposed capital expenditures for new institutional health services, which could range from building a hospital to expanding a clinic or adding high-tech devices. The state agency would review each plan and choose whether to certify it as needed and therefore free to proceed.
Most states adopted CON laws as a result. New York had a decade’s head start, having asserted its authority to determine need for proposed hospital or skilled nursing project development in 1964. Louisiana is the only state that didn’t enact some form of CON legislation.
The federal government severed funding associated with CON review in 1987. Since then, several states have modified or repealed their CON rules, and organizations are pressuring lawmakers in other states to revisit their statutes. While most changes have tended toward deregulation, Indiana bucked that trend on July 1 this year when it enacted a new CON program, 20 years after removing a similar law from its books.
While CON statutes vary, all began with a goal of containing healthcare cost inflation by avoiding overbuilding in a community’s medical resources. This longstanding assumption argues that a hospital with too many empty beds will likely increase patient fees and other pricing to cover its overhead. Similarly, if two imaging centers open to serve a patient population that is only large enough to support one lab, neither facility may be able to attract enough patients to cover its capital and operating costs without raising prices.
States often weigh the opinions of existing providers in determining the need for proposed facilities. Critics argue that this practice stifles competition that could force existing providers to operate more efficiently, which would ultimately reduce patient costs.
Most states have or had CON laws in place, but some have tempered or abandoned those regulations to take varying degrees of a free-market approach to healthcare development. The ranks of states in each camp continue to change, so any healthcare professional or organization contemplating a relocation, expansion or launch of a healthcare business should investigate local need certification requirements early.
Even when a state health authority denies an application for a new need certification, there may be other options available, says Andrew King, president and founder of Acumen Healthcare, a Georgia-based developer and manager of ambulatory surgery centers in 20 states.
One route may be to purchase or merge with an existing entity that already holds a certificate. With a valid CON, the combined entity may then be able to relocate or develop a facility without incurring a new review, provided the firm will continue to serve the same patient base covered in its certification.
And as CON reform proposals gain support in states including Alaska, Maryland, Mississippi, North Carolina, South Carolina, Tennessee, Vermont and Washington, changing laws may soon open new opportunities in healthcare development. Georgia administers one of the nation’s most stringent need certification programs, for example, but recently eased some of those regulations. Its reforms in 2019 freed private cancer treatment centers to add beds without going through the CON application process. Georgia also raised the capital expenditure thresholds a provider can make before triggering CON review from $2.5 million to $10 million for a healthcare facility, and from $1 million to $3 million for diagnostic equipment.
Also in 2019, Florida repealed need certification requirements for general hospitals, tertiary hospital services such as those provided by oncology centers or psychiatric facilities, and complex medical rehabilitation beds; similar requirements for the state’s specialty hospitals will end in July 2021.
Need certification requirements can be a source of confusion and frustration, particularly if CON-related challenges surface after a project has already absorbed substantial time and capital. Because failure to obtain this precious document can derail even a well-funded and otherwise sound business plan, need certification should take precedence over many other planning aspects for a healthcare project.
Steve Hall is Senior Managing Director in the Healthcare Advisory Services group at Transwestern, a national commercial real estate firm. Based in Atlanta, Steve advises owners and users of medical office space on portfolio management, asset acquisition and disposition, build-to-suit development, and lease negotiation and administration.
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