Court battle highlights CON’s negative impact on competition

North Carolina’s certificate-of-need law regularly stifles healthcare competition. A recent case at the state’s second-highest court offered the latest example.

The CON is a mandatory government permission slip. North Carolina providers must secure a CON before building a hospital, adding hospital beds, opening many other types of healthcare facility, or adding major medical equipment like a magnetic resonance imaging machine.

Thanks to CON, residents of four northeastern North Carolina counties have been limited to MRI access from just one provider, Sentara Advanced Imaging Solutions, “for over a decade.” That’s according to a North Carolina Court of Appeals brief.

“This has not occurred by happenstance, but rather is the direct result of Sentara’s deliberate steps to suppress competition and retain its monopolistic standing for the last decade,” wrote lawyers representing Chesapeake Diagnostic Imaging Centers.

Virginia-based Chesapeake has been waging a legal battle since 2023 against North Carolina regulators’ decision to award Sentara a new CON. It would permit Sentara to add another MRI to serve Pasquotank, Perquimans, Currituck, and Camden counties.

Sentara now has CONs for two MRI machines in Pasquotank County. One is fixed to its current location. The other mobile MRI is “required to be moved weekly to different locations throughout the four counties.” Yet a hearing in the legal dispute “established conclusively that Sentara has not moved the mobile since 2017.”

Chesapeake cannot add an MRI scanner within the four counties without state government’s blessing. “A provider can only acquire a fixed MRI scanner pursuant to a need determination in the State Medical Facilities Plan,” the legal brief explained. The State Health Coordinating Council in Raleigh writes the plan.

Draft plans from 2017 to 2021 called for a new MRI scanner. “In each of those five years, Sentara filed petitions … seeking to remove the need determinations for an additional fixed scanner in the service area where it is the sole provider of MRI services,” Chesapeake alleged.

Those petitions “went uncontested, so Sentara succeeded in convincing the SHCC  to remove the need determinations from the SMFP year after year and was able to continue to enjoy its total market dominance of MRI services in this area,” the brief argued.

Conditions changed in 2022. Chesapeake opposed Sentara’s petition. Regulators kept the new MRI scanner in that year’s plan.

Chesapeake then proposed adding a new MRI machine in Elizabeth City “at the Pasquotank Service Area’s first freestanding diagnostic imaging center — a lower-cost option for patients than the hospital-based MRI services Sentara offered while it held a monopoly in the service area — thereby increasing the total inventory of MRI scanners in the service area to three (two fixed and one mobile) and crucially providing patients a lower-cost alternative that Sentara chose not to offer for over a decade,” Chesapeake’s lawyers wrote.

Sentara filed a competing proposal. It would give up its CON for the mobile scanner and use the new CON to place an MRI machine in Currituck County.

“Thus, unlike Chesapeake’s project which will increase the total inventory of MRI scanners in the service area, Sentara’s project proposed to keep the inventory the same at two MRIs,” Chesapeake’s lawyers argued.

State regulators sided with Sentara. An administrative law judge upheld that decision. Chesapeake hopes appellate judges will reverse course.

“There is no possible way that approving the Sentara application — the monopolist who had the only service within that service area to supply MRI procedures — approving their application and denying the application of a would-be competitor, there’s no way that conforms” with CON competition standards, Chesapeake lawyer Noah Huffstetler argued in June 12 Appeals Court session. That’s true “particularly given the undisputed facts of how Sentara over and over had attempted to prevent the need from being recognized.”

It’s not clear that Chesapeake will win the legal battle. Sentara lawyer Alexander Gormley argued in the same hearing that “wisdom and common sense” led to the CON decision favoring his client.

“Chesapeake invites the court to disavow decades of its own precedent,” added Derek Hunter, the special deputy attorney general representing North Carolina regulators.

Regardless of the case’s outcome, Chesapeake has exposed a key flaw in the CON regime. Without government obstacles, Sentara and Chesapeake would be free to add MRI scanners in Elizabeth City, Currituck County, or anywhere else that makes sense based on patient demand. Other providers could enter the region as well, giving northeastern North Carolina patients multiple options.

Competition tends to lead to more convenience and lower costs for consumers. All North Carolinians would benefit if policymakers rethink their approach to the CON game.

Mitch Kokai is senior political analyst for the John Locke Foundation.