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Protecting hospitals or stifling competition? Key thoughts on the legal battle around Iowa's CON law

The U.S. Court of Appeals for the 8th Circuit is in the middle of deciding a case from two physicians arguing the state's certificate-of-need laws are unconstitutional and protect existing outpatient surgical facilities while stymying potential competitors.

Cedar Rapids ophthalmologist Lee Birchansky, MD, had his first four applications to win CON approval denied by the state. Two hospitals in the area opposed the application, arguing that his surgery center would cherry-pick profitable procedures and endanger the hospitals that rely on profitable cases to offset charitable cases.

In June 2017, Dr. Birchansky, his patient Michael Jensen and Korver ENT in Orange City, represented by the Institute for Justice, filed a lawsuit challenging the state's CON process, specifically its preferential treatment of existing outpatient surgical facilities. The court sided with the state in October 2018, stating that existing facilities were constitutional because they were related to protecting hospitals. Dr. Birchansky and the Institute for Justice appealed.

The 8th Circuit heard arguments Jan. 15. Darpana Sheth, attorney for the plaintiff and a senior attorney at the Institute for Justice, offered insights into the state's CON system and her argument. Note: A representative for the state did not return requests for comment. The Institute for Justice is characterized as a libertarian public interest law firm.

Iowa's CON system is unique because it allows existing outpatient surgical facilities to expand freely, as long as the expansion would not surpass $1.5 million in a single year. Every other state that has a con requirement with a capital threshold applies that threshold equally to existing facilities and newcomers. The state awarded Dr. Birchansky a certificate in July 2017, which he can now use to "partner with somebody else and offer any other kind of outpatient surgery. He can expand and add more operating rooms or procedure rooms. He can build a new facility anywhere in his county or neighboring county, and he can sell a facility to anyone," without having to seek new approval, Ms. Sheth said.

Dr. Birchansky could use his certificate to partner with someone like Kurtis Kover, MD, of Kover ENT, who would then be provided the same unlimited expansion as long as it stays under the $1.5 million threshold.

The Institute for Justice and Ms. Sheth argued that Iowa's CON system is unconstitutional because it violates the 14th Amendment in arbitrarily favoring existing outpatient surgical facilities over newcomers, and because it burdens a patient's right to medical care. She added: "Iowa can't defend this unequal treatment, and instead it tries to characterize it like any other state's CON program. We know the state works this way because the state department has denied applications on the grounds that there's potential for unlimited expansion that would harm existing facilities. We also know that existing facilities routinely oppose on the grounds there's potential for unlimited expansion."

Ms. Sheth refuted the court's earlier decision that the CON laws protected hospitals, saying, "This CON requirement does not subsidize hospitals. ... Its subsidizes hospitals and their competition. That's what makes Iowa's law so irrational."

Ms. Sheth said the appeals court is ruling on the grounds of a rational basis test. Dr. Birchansky and the other plaintiffs can win their appeal if they can prove that the law does not further a legitimate government interest, which they are trying to do by arguing the law serves only to protect existing outpatient surgical facilities from competition, which is not a legitimate government interest.

The court is expected to make a decision on the case before its session concludes in June.

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