Kentucky CON

The Lhotshampas Find Refuge in the United States

In the 19^th and early 20^th centuries, people from Nepal emigrated to southern Bhutan in search of work. Over the decades, these Nepalese maintained their language and culture and became known as the Lhotshampas, meaning “Southerners.” Unfortunately, in the late 1980s, the Bhutanese ruling majority started an organized campaign of discrimination against this ethnic minority. Many Lhotshampas were forced out of the country and found themselves in refugee camps in Nepal.

Just over a decade ago, many of these refugees were resettled in the United States and other English-speaking countries. Thousands of Lhotshampas now call Louisville home.

The Plaintiffs: Dipendra Tiwari and Kishor Sapkota

Dipendra Tiwari came to the United States in 2008. He then earned an MBA and became a certified public accountant. He now operates a tax and accounting firm in Louisville that caters to the Nepali-speaking population.

Dipendra’s business partner is Kishor Sapkota, a home health aide from Nepal. Thinking that they could form another business catering to Louisville’s Nepali speakers, they formed Grace Home Care, Inc. They’re well aware that limited English proficiency is one of the “key barriers” for refugees.

And while Dipendra was free to open an accounting firm focused on Nepali speakers, there is just one reason he can’t provide home health care for the same people in his community: Kentucky’s CON law.

The History of CON Laws

Put simply, a certificate of need is a government authorization to compete. Unlike in most parts of the economy, in industries regulated by CONs, it is illegal to offer a new service unless a would-be entrepreneur first proves to the government that the new service is “needed.”

The earliest medical CON requirements applied only to big publicly funded facilities such as hospitals. The theory was that restricting investment to what was needed would decrease costs. Then, in the late 1960s, the American Hospital Association began campaigning for CONs nationally because they enriched hospitals by insulating them from competition.

In the 1970s, the federal government was swayed by the hospitals and started offering states financial incentives to impose CONs. ¹ The lure of federal funding led every state but Louisiana to adopt them. Over time, however, the federal government realized that CONs don’t control costs and don’t improve the health care system. Congress repealed its funding in 1986. ² Since then, a dozen states have eliminated their CON programs.

The CON in Kentucky

That reform didn’t reach Kentucky. Today, Kentucky still requires CONs for a mishmash of medical services. ³ Assisted-living residences and group homes don’t need CONs, yet home health agencies do. So, while Dipendra could open a group home without a permission slip from his competitors, he can’t do the same for home health care.

Instead, anyone who wants to open a home health agency goes through a formal review process. It begins with a 20-page application and a fee that starts at $1,000. ⁴ Depending on when the application is submitted, it can take three months just for review to start. Then applications are published so that existing providers have a chance to object—usually in a hearing that amounts to a full-on trial on whether a future competitor can keep the applicant out of business. And even if the CON is granted, competitors can appeal to court. ⁵ The process can easily cost tens of thousands of dollars just in attorney fees.

And the game is rigged from the start. That’s because entrepreneurs may offer new services only if there’s a pre-determined need in the county where they plan to operate. Those determinations are made every two years by Kentucky’s Cabinet for Health and Family Services.

For home health agencies, it comes down to clumsy arithmetic. First, Kentucky looks at how many people in different age groups are using home health care in the state. Then, using county by county population statistics, it uses the state-wide figures to guess how many people in each county need care. Finally, it subtracts out the number of patients who recently received care in each county. The resulting difference is the “need.” The process doesn’t assess the need for services that are niche or better or innovative. It is just a guess based on middle-school math.

This certificate of need scheme is designed to let existing home health agencies and hospitals expand and keep new competitors out. Only if a county has a need of 250 people or more are new home health agencies allowed. Yet existing home health agencies can expand into a county if 125 estimated people need care. And a hospital in a county can establish a home health agency there if the need is 50. The state boils it all down in a chart every year:

If your county is listed in green (because the need is 250 or more), new agencies are allowed. Otherwise, you’re out of luck.

But this scheme is just a handout to special interests. A major report from the Justice Department and the Federal Trade Commission found no reliable evidence that CONs benefit the public—and clear evidence that they grant anticompetitive benefits to protected business interests. The Obama administration agreed that “CON laws appear to have failed to control costs” and that “the CON process may be exploited by competitors seeking to protect their revenues.” There is even evidence that CONs lead to higher costs and worse care.

In fact, only a few years ago, Kentucky hired a national consulting firm to review health care in the state. It recommended “Suspending / discontinuing the CON program for home health agencies.” But entrenched interests objected. Hospitals, for example, argued that Kentucky should exempt hospitals’ own agencies from the CON requirement, while keeping it for everyone else. Today, the CON remains, keeping hardworking people like Dipendra from meeting the true needs of their communities.

The Legal Claims

That’s why, with help from the Institute for Justice, Dipendra is defending his rights in court. He’s bringing two legal claims.

First, everyone has the right to earn an honest living free from irrational laws. Letting giant health care conglomerates keep entrepreneurs out of business has nothing to do with protecting the public—and everything to do with protecting entrenched corporations. That is not a legitimate government interest. ⁶

Second, Kentucky’s CON law applies to businesses unequally. Established businesses get to operate based on a calculation from years or decades earlier; there’s no need required to stay in business. To start a business, however, depends on the number a crude formula spits out. And for some businesses, there’s no requirement at all. For example, assisted-living facilities perform services akin to home health, except they invest more capital first. If they don’t need to prove they’re needed—before investing greater capital—why should home health agencies?

After all, can you imagine this sort of “need” requirement in any other industry? Banning new supermarkets wouldn’t make groceries cheaper. In health care, like anywhere else, when an entrepreneur has a lightbulb moment, the government has no business forcing patients to keep using candles.

The Litigation Team

Dipendra and Kishor are represented by Institute for Justice Attorneys Jaimie Cavanaugh and Andrew Ward.

About the Institute for Justice

The Institute for Justice is a nonprofit public-interest law firm and the nation’s leading legal advocate for economic liberty. IJ has challenged CON laws in North Carolina, Iowa, and Virginia.