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VA's 'Certificate of Need' Law Pretty Much Unconstitutional

By William Peacock, Esq. on October 25, 2013 | Last updated on March 21, 2019

Virginia has this pretty onerous rule. If a medical service provider wishes to open a facility in a Virginia market, it has to first obtain a certificate of need. Not only does the certificate cost significant money, but it requires navigating a maze of bureaucratic processes to complete the approximately seven-month process. And if any person (including competing existing businesses) requests an "informal fact-finding" session, the process can take years.

Does it violate the dormant interstate commerce clause? It seems likely that it does -- it places a hefty burden on new operations, one if its purposes is to protect "existing" (by definition, in state) businesses, etc. And while the district court dismissed two plaintiff medical companies' claims, the Fourth Circuit, in an unusually direct reversal, all but killed the law.

How Did the District Court Stray? Let us Count the Ways

In most reversals, you tend to see soft rejections of the lower court's opinions. And while this was far from an outright bench-slap, the Fourth Circuit's rejection of the lower court's approach was very direct, so direct in fact, that it even gave detailed instructions for remand on the standard to apply and the factual data to gather and analyze.

You knew things weren't going to go well for the district court or the appellees when the circuit court noted that the 12(b)(6) dismissal "reproduced, almost verbatim, appellees' memorandum in support of their motion to dismiss."

In other words: try harder, district court.

So what did that court get wrong? Besides the verbatim recitation of the appellees' paperwork, it analyzed the burden on interstate commerce according to how it affected these two small businesses. Instead, the proper analysis is how the law affects interstate commerce as a whole, not "merely discrimination against the specific parties before it." As the Supreme Court noted in 1978, the clause "protects the interstate market, not particular interstate firms."

"The district court gave a serious claim the back of its hand," Judge Wilkinson noted. "This was error."

Pretty Much Unconstitutional, But Fact-Find, Will Ya?

The medical companies that seek to do business in Virginia, without the burdensome certificate process, conceded that the law wasn't facially invalid, but argued that it has a discriminatory purpose and effect. One of the implementing regulations states that the purpose, in part, is to "discourage [] the proliferation of services that would undermine the ability of essential community providers to maintain their financial viability."

That's a verbose and pretty way of saying that the law protects existing in-state entities from competition. And the appellants allege that the arduous fact-finding conferences are almost exclusively requested by existing businesses protecting their turf. And when an in-state company expands, it faces at least one fewer objector (itself).

The Fourth Circuit notes that we can't be sure that this has a discriminatory effect on out-of-state companies, though it certainly sounds like it would. It ordered the district court to develop the record on this point, and gave it nearly three pages of instruction on how to do so. This might be one of the most detailed remand orders we've ever seen.

Concurrence: Congress Ditched This Scheme For a Reason

Judge Wilson's concurrence serves as an interesting history note: Congress sponsored this whole mess in the 1970s, giving these types of laws an exemption from dormant commerce clause scrutiny, but repealed the governing legislation in 1986, after "its failures had become well past obvious."

He ended with an ominous note for the law, should it make its way back to the Fourth Circuit, stating, "in my view, a state regulatory system that chooses to limit competition as its means to promote the delivery of health care will still likely, if not inevitably, entangle itself with the dormant commerce clause."

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