Philip Truesdale started his own business in Aberdeen, Ohio, with a single ambulance. He now owns seven. Truesdale’s company transports patients who require non-emergency medical transportation because they need medical support while traveling, such as oxygen, dialysis, or a stretcher. Truesdale operates just a mile from the Kentucky border, yet a state law (Kentucky’s Certificate of Need statute) prohibits Truesdale from serving Kentucky residents. These so-called CON laws are patently protectionist in the ordinary course; during the Coronavirus pandemic they threaten lives.
Certificate of Need state laws have always been protectionist. Because health care is generally price inelastic, research from the Mercatus Institute establishes that CON laws are likely to increase the cost of health care. As anyone attempting to purchase Lysol wipes in the last few weeks knows, a diminished supply of a product that is relatively price inelastic typically results in an increased price. That’s the stuff of Economics 101.
And yet the federal government pushed CON laws on the states as an attempt to restrain cost growth in the healthcare sector. The National Health Planning and Resources Development Act of 1974, signed by Gerald Ford, went so far as to offer funding to states that passed CON laws and even threatened to withhold Medicare and Medicaid funds from those that did not. Because of the “massive infusion of Federal funds” into the healthcare system the industry had experienced “inflationary increases” in the cost of health care. CON laws thus sought to reduce spending by “preventing unnecessary duplication of health resources.” But as research shows, instead of limiting healthcare costs, CON laws have had the obvious opposite effect of increasing them.
Certificate of Need laws require healthcare providers to obtain the permission of a state board before starting or expanding their businesses. And get this: existing providers are able to object to a competitor’s application. Any established business may protest a certificate application and request a hearing. This results in a litigation-like proceeding (which requires the applicant to obtain an attorney, licensed in Kentucky of course) to participate in discovery, offer evidence into the record, briefing, opening statements, call and cross-examine witnesses. During this expensive and onerous process, applicants are required to demonstrate a public “need” for their business.
In a lawsuit filed by the Pacific Legal Foundation, Truesdale alleges that, in practice, Kentucky bases its determination of “need” “on whether the applicant will harm the financial interests of the existing ground ambulance companies.” To prove the requisite “need,” a certificate applicant must establish that there is enough public demand so that the new or expanded business will not “take away any customers from the current Certificate-holders.” Surprise, surprise: in Kentucky, applications are very rarely granted in the face of a competitor’s objection.
As the lawsuit filed by Pacific Legal Foundation explains, the competitor’s veto granted by state CON laws improperly burdens interstate commerce and serves no legitimate government interest.
Such pure state protectionism of established industry is ridiculous in normal times. In national emergencies like this one, they are downright dangerous. As states struggle to provide crucial medical care to their residents, some of them are waiving CON requirements. Although the federal statute promoting CON laws was repealed in 1980, states have been slow to act, with 36 still having the protectionist laws on the books. In the wake of Covid-19, 13 of these have suspended their CON laws, at least in part, but these changes may come too late to allow medical providers time to ramp up.
CON laws are bad policy in the best of circumstances. They are disastrous in circumstances like those caused by the Coronavirus. The 36 states still clinging to outmoded and economically harmful protectionism should repeal their CON laws now.