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From Health Law Daily, October 24, 2013

Dormant Commerce Clause claims require fact inquiry beyond motion to dismiss

By Kathryn S. Beard, JD

Further proceedings and factual inquiries are needed to determine whether Virginia’s certificate-of-need program for medical capital ventures violates the dormant Commerce Clause (Colon Health Centers of America, LLC v Hazel, October 23, 2013, Wilkinson, J). Dormant Commerce Clause inquiries are highly fact-specific, and there were sufficient questions of fact raised to withstand a motion to dismiss. Claims that the certificate-of-need requirement violates the Fourteenth Amendment were properly dismissed.

Certificate-of-need. Businesses are required to obtain a “certificate of public need” before launching a medical enterprise in Virginia (Va. Code Ann. secs. 32.1-102.1 et seq.12 Va. Admin. Code secs. 5-220-10 et seq.). Most medical capital expenditures, including the construction of new facilities and the addition of new equipment or services to an existing facility, are governed by the certificate-of-need program. Applicants must demonstrate that there is a public need for the service it seeks to offer in the relevant region (Va. Code Ann. sec. 32.1-102.3(A)). The requirement’s purposes are (1) to preclude the development of excess capacity; (2) to ensure proper geographical distribution of medical facilities; (3) to protect the economic viability of existing providers; and (4) to promote the provision of cost-effective medical services. After an application is submitted with a fee of 1 percent of the proposed expenditure ($20,000 cap), a regional health planning agency must complete its initial investigation within 60 days and provide the Department of Health with its recommendation regarding the application. The Department of Health then determines whether an informal fact-finding conference is warranted, basing its decision on either its determination of necessity or a good-cause demonstration by an intervening party. If a fact-finding conference takes place, the certificate-of-need application process can take a significant amount of time.

Colon Health Centers and Progressive Radiology are medical providers seeking to avoid the “onerous” burdens of the certificate application process. Both businesses currently provide services at offices in other states and seek to enter the Virginia market but have been deterred from doing so by the certificate requirement. They filed suit challenging the constitutionality of the program, alleging that it violates the dormant Commerce Clause, as well as the Equal Protection, Due Process, and Privileges or Immunities Clauses of the Fourteenth Amendment. The district court granted Virginia’s motion to dismiss on all counts; the businesses appealed.

Dormant Commerce Clause. The Commerce Clause of the U.S. Constitution (Article I, sec. 8) empowers Congress to regulate commerce among the several states; courts have read a negative implication prohibiting states from discriminating against interstate commerce, called the “dormant Commerce Clause.” Statutes that treat in-state and out-of-state economic interests differently so that the former is benefitted and the latter is burdened unlawfully impede interstate commerce. Statutes may discriminate facially, in purpose, or in practical effect. The certificate-of-need statute is not facially discriminatory, but Colon Health Centers and Progressive Radiology allege that it is discriminatory in purpose and in practical effect. The complaint alleges that the stated purpose in one of the implementing regulations, discouraging the proliferation of services that would undermine the ability of essential community providers to maintain their financial viability (12 Va. Admin. Code sec. 5-230-30), is protecting current in-state providers from new out-of-state entrants. As to the discriminatory effect, the businesses complain that the statute allows in-state businesses the power to obstruct the market entrance of new competitors by authorizing them to request fact-finding conferences. The court held that granting the state’s motion to dismiss was error, because dormant Commerce Clause inquiries are highly fact-based, require a sensitive case-by-case analysis, and the businesses raised sufficient practical questions of fact. The case was remanded to the district court for further proceedings on the dormant Commerce Clause claims.

Fourteenth Amendment. The court found that all of the Fourteenth Amendment claims were properly dismissed. The Equal Protection claim was based on the idea that nuclear cardiac imaging is treated differently from other types of medical imaging; because it is a non-suspect classification, Virginia needed to only reasonably conceive of a rational basis to survive this level of scrutiny. The program is also subject to rational basis review under the Due Process Clause because it does not infringe any fundamental or enumerated right. In both cases, Virginia provided a variety of legitimate purposes served by the statute. Lastly, the Privileges or Immunities claim states that the certificate-of-need program contravenes the “right to earn an honest living.” The right to pursue a particular occupation is not included in the rights guaranteed by the Privileges or Immunities Clause (see Slaughter-House Cases83 U.S. 36 (1872)). The court affirmed the dismissal of all Fourteenth Amendment claims.

The case number is 12-2272.

Attorneys: Robert McNamara, Institute of Justice, for Colon Health Centers of America, LLC and Washington Imaging Associates-Maryland, LLC. Michael Hugh Brady, Attorney General’s Office, for Bill Hazel.

Companies: Colon Health Centers of America, LLC; Washington Imaging Associates-Maryland, LLC

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