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CONs in the ASC Industry: A Brief History & Analysis

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History
As of 2013, a total of 37 states had a certificate of need law in place. CON law can regulate anything from acute hospital beds to ultrasound, according to the National Conference of State Legislatures, and the services covered vary from state to state.

The presence of CON programs in the U.S. has undergone several changes since its inception in 1964 when New York became the first state to adopt a CON program. Following that first appearance, CON programs popped up in more than half of the country's states and even spent a stint as a federal act covering all 50 states. The act was eventually repealed, after which a number of states shed their CON programs, according to the report.    

In 2011, 27 states had active CON law regulating ambulatory surgery centers. These states include: Alabama, Arkansas, Connecticut, Delaware, Georgia, Hawaii, Illinois, Iowa, Kentucky, Maine, Maryland, Minnesota, Mississippi, Missouri, Nevada, New Hampshire, New Jersey, New York, North Carolina, Rhode Island, South Carolina, Tennessee, Vermont, Virginia, Washington, West Virginia and Washington, D.C.

CON controversy
Though a significant number of states maintain active CON programs, the law's presence is a contentious one. Proponents of the program cite its original purpose as a way to reduce unnecessary services and control healthcare dollars, while the opposition argues the program is unnecessarily restrictive and deters healthy competition. In 2013, efforts to reform or repeal CON programs were made in several states.

In May 2013, Alabama Governor Robert Bentley signed into law revisions to the state's CON law. The revisions clarify that sale, lease or change of ownership transactions involving CON-owning entities do not require CON review board review or approval.  

The Ambulatory Surgery Center Association of Illinois spoke out against proposed changes to the state's CON law that would require a certificate of need application for the addition of each new surgical specialty in ASCs. Late last year the Illinois legislative Joint Commission on Administrative Rules ultimately rejected the proposed changes. JCAR plans to bring stakeholders together early this year to discuss potential changes in the current CON law.

In 2013, Republican lawmakers in Maine sought to repeal the state's CON program. The Maine Hospital Association opposed the repeal. The state's CON program still regulates ambulatory surgery centers.

House Bill 306 introduced in Montana would require any organization intending to build an ASC in a county with an existing small hospital to undergo a stricter review process. The bill would require organizations to file a CON application and conduct a study of the financial and operational impact the ASC would have on existing healthcare facilities. The Montana House Human Services Committee killed House Bill 306. The state maintains its previous rule, which requires a CON in counties with 20,000 people or less.

Three Republican lawmakers of North Carolina sponsored House Bill 177 that would ease strict CON rules and potentially make opening ASCs in the state an easier process. North Carolina hospital representatives lobbied heavily against the bill. A provision in the bill would stop hospitals from developing their own standalone ASCs in the state.

On the other hand, organizations such as the John Locke Foundation, State Employees Association of North Carolina, N.C. Orthopaedic Association and Ambulatory Surgery Center Association expressed support for the bill. The last recorded action on the bill occurred May 15, 2013, according to an Open States report.

In July 2013, South Carolina suspended its CON program due to budgetary concerns. Since then, healthcare providers in the state have moved forward with plans for 69 projects that would have previously required CON approval, according to a report by The State. The CON law is expected to be up for discussion during this year's legislative discussion.

Closely following the suspension of South Carolina's CON program, Georgia physicians rallied to call for a loosening of the CON program in their state. The CON program still stands in the state, though it could be an item on the 2014 legislative agenda.

How it affects the ASC market
ASCs face a number of hurdles in the highly regulated environment of certificate need states. Physicians trying to open an ASC in a CON state often lack market clout and face opposition from hospitals and health systems.

For example, Physicians Endoscopy and a group of five North Carolina physicians filed a CON application for an endoscopy center in 2010 and received conditional approval in 2011. But, CaroMont Health filed an appeal, claiming the new endoscopy center would be a financial detriment. After three years, the North Carolina Court of Appeals denied CaroMont Health's claim. Pending final approval from the state, the two-room endoscopy center will open in the summer. In other instances, hospitals interested in having a stake in ASC could use their market clout to open a surgery center in a CON market.

CON states, while a challenge to break into, represent a less saturated market. ASCs operating in CON states face less competition from other surgery centers. "Some of the best opportunities are in states where there has been a relaxing of CON regulations thereby making it more possible for physicians to develop their own ASC," said Barry Tanner, CEO of Physicians Endoscopy, in a Becker's ASC Review report.

Holding a CON in a certificate of need state can positively impact a center's value, said Stuart Neiberg, MAcc, CPA, CFA, a Manager with HealthCare Appraisers, during an 11th Annual Orthopedic, Spine and Pain-Management Driven ASC Conference session.

More Articles on ASC Transactions and Valuation Issues:
4 Recently Announced ASC Joint Venture & Partnership Agreements
ASC & Hospital Partnerships: Weighing the Pros & Cons
6 Recent Ambulatory Surgery Center Plans, Openings & Expansions

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