How much may health regulators regulate?

 Mark Singletary, The Daily Record Newswire
By Barry F. Rosen and Jonathan E. Montgomery
The Daily Record Newswire

Federal courts are putting state health regulators in a box with no exits.

On the one hand, health regulators managing or affecting competition in the health care industry are being told that to avoid violating the federal antitrust laws, they must articulate and supervise the anti-competitive effects of their regulations. On the other hand, health regulators are being told that they may be violating the U.S. Constitution if their clearly articulated and supervised regulations successfully displace out-of-state competitors.

The foregoing occurred last year via three decisions by federal appeals courts with jurisdiction over Maryland. Specifically, Federal Trade Commission v. Phoebe Putney Health System raised the bar for state laws seeking to immunize health care facility mergers from federal antitrust law, North Carolina State Board of Dental Examiners v. Federal Trade Commission upheld an FTC order restraining a dental board’s regulation of teeth-whitening services and Colon Health Centers of America, Inc. v. Hazel questioned the anti-competitive effect of certificate of need laws in Virginia.

Clear articulation

Federal Trade Commission v. Phoebe Putney Health System involved a Georgia county hospital’s acquisition of the only other hospital in its county. The FTC sued to stop the merger under federal antitrust law, arguing that the merger would give the merged hospitals a monopoly on inpatient services in the area.

In defense, the public hospital relied on the “state action doctrine” under which courts construe federal antitrust law not to restrict a state’s authority to regulate its internal economy by displacing private competition. The hospital argued that this doctrine applied because a Georgia law gave county hospitals extensive power to acquire facilities, take property via eminent domain and otherwise operate as a corporation with governmental powers. The hospital urged that these broad powers evidenced Georgia’s intent to displace private competition with public ownership.

The U.S. Supreme Court rejected the defense, and in doing so limited the state action doctrine. The court said that a presumption exists against applying the doctrine, citing the “fundamental national values of free enterprise and economic competition” underlying federal law.

The court would not set this presumption aside unless the state clearly articulates that it intends to displace private competition. The court then concluded that state authorization to county hospitals to acquire facilities did not “clearly articulate” such an intent because the law neither (1) expressly stated such an intent; nor (2) made displacing competition practically inevitable. The court reasoned that the power to operate a hospital and acquire other hospitals does not necessarily imply the power to create a hospital monopoly.

Close supervision

The Supreme Court is now considering whether to further limit the state action doctrine via North Carolina State Board of Dental Examiners v. Federal Trade Commission.

In that case, the FTC sued to stop North Carolina’s dental board from punishing non-dentists who whiten teeth. The FTC alleged that the dental board amounted to a dentists’ cartel to squelch competition.

In ruling for the FTC, a federal appeals court explained that the state action doctrine does not permit a state to create a quasi-private body to stifle competition, even if the state clearly articulates its desire to create such a cartel. The court then found that the dental board was quasi-private. The court noted that the board is composed of practicing dentists (not neutral bureaucrats), that board members are elected by other dentists (not appointed by the state) and that the actions of the board are not closely supervised or controlled by other officials of the state.

The Supreme Court has taken the case and will, in the next few months, decide whether to affirm the appeals court and thereby continue to narrow the state action doctrine.

Brick wall behind exits

Colon Health Centers of America, LLC. v. Hazel applied federal constitutional law to throw Virginia’s certificate of need (CON) law into question.

Virginia, like many states, forces persons wishing to establish or expand certain health care facilities to first obtain a CON. A CON usually requires a showing that there is an unmet need for the project locally and that the project will not create local over-capacity. CON laws theoretically aim to promote equitable geographic access to health services while minimizing the facility capital costs that consumers ultimately bear.

In this case, Maryland and Delaware health care providers wishing to offer radiology services in Virginia sued Virginia to invalidate its CON requirement for MRI and CT equipment. The providers relied on the doctrine of the “dormant” Commerce Clause of the U.S. Constitution. The doctrine holds that, since the Commerce Clause grants the federal government the authority to regulate interstate commerce, a state cannot divert the interstate flow of commerce to burden out-of-state competitors and privilege in-state businesses.

Applying the doctrine, the providers alleged that Virginia’s CON law made navigating the CON process so difficult (through burdensome application documentation and litigated fact-finding) and allowed so many parties to intervene to draw out a decision (up to nine months or more) that the law essentially kept the radiology market in Virginia in stasis.

Although not an express goal of the CON law, in effect only incumbent, in-state providers, that is, those with existing CONs, could legally operate in Virginia. Out-of-state providers were in practice locked out.

The providers also alleged that the purported benefits of the CON law were a sham, given that the CON law reduced access by shunning new providers and raised costs by freeing incumbents to increase prices without fear of competition.

The federal appellate court held that if the suing providers could prove their allegations true, Virginia’s CON law would be illegal under the dormant Commerce Clause. The court then sent the suit back to a trial court for factual development, where it now sits.

Lessons learned

Federal courts are signaling that deference to state agencies’ traditional discretion over health and professional licensure should bend to federal laws promoting free, interstate competition. Two lessons should be drawn.

First, unless the Supreme Court reverses trend, professional licensing bodies created outside the state bureaucracy will not be tolerated. Professional licensing entails disciplinary and regulatory activities that would certainly run afoul of federal antitrust law if done by a private actor. A private physician board that defines the practice of medicine to include laser hair removal, for instance, necessarily restrains competition by non-physicians. Boards will not be safe if not subject to state appointment and oversight by other state officials.

Second, courts have placed state legislators and regulators crafting laws that displace private competition (whether intentionally or incidentally) on the horns of a dilemma. On the one hand, Phoebe Putney suggests that legislators should draft express text showing awareness of the statue’s effect on competition. Otherwise, federal courts will read the law unduly narrowly. On the other hand, Colon Health Centers suggests that the more a law articulates a policy to displace competition by out-of-state providers, the more vulnerable the law becomes to a federal constitutional challenge.

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Barry F. Rosen is chairman and CEO of the law firm of Gordon Feinblatt LLC and heads the firm’s Health Care Practice Group. He can be reached at 410-576-4224 or brosen@gfrlaw.com. Jonathan E. Montgomery is an associate in the firm’s Health Care Practice Group, and he can be reached at 410-576-4088 or jmontgomery@gfrlaw.com. 

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