Expanding behavioral health organizations are facing headaches from restrictive state certificate of need (CON) laws

The COVID-19 pandemic has changed the approach many states take when regulating behavioral health facility development. In part, it amplified voices calling for CON reform as the epidemic revealed and addressed America’s poor mental health.

Most states — 35 — have such laws, according to the National Conference of State Legislatures. No national CON law exists and state CON laws vary widely.

Most CON laws require health care organizations to obtain permits from state agencies to build, expand, or add certain facilities. CON applications must substantiate the need for that service and show that the project aligns with the state’s plan for health care development.

The process often includes public comment and may even include a process that allows current health providers to challenge new projects. These processes can lead to controversy and even legal challenges.

Still, in some cases, epidemic-driven changes have extended the slight historical advantage that behavioral health agencies have had in most states toward CON laws.

For example, the state of North Carolina passed a law in March that expands Medicaid under the Affordable Care Act. In the same law, HB 76, elected officials removed “mental hospitals” and “chemical dependency treatment facilities” from its CON law while leaving the law in place for other services.

The intended effect of CON laws in many states is to ensure some level of state control over the health care economy, largely in the interest of ensuring a degree of efficiency.

“The Michigan Certificate of Need program is designed to ensure that there is access to quality health care services throughout the state, but that those services are utilized appropriately before further investment is made to increase access in a particular region,” said Melissa Reitz, principal and owner of Hamilton McCall, BHB. said His lobbying and consulting firm expertise includes state CON laws and programs.

Like many states, Michigan continues to see legislators debate reforming the CON law. That includes efforts to repeal the law, and similar conversations are happening in other states.

Experts from the National Academy for State Health Policy (NASHP) told BHB that some states have made changes to CON laws to improve behavioral health promotion. But most efforts to expand the field fall within other efforts such as funding and reimbursement initiatives.

NASHP’s tracking of statehouses shows that local lawmakers introduced 55 CON-related bills in 19 states in 2023.

Source: Health Systems Low Cost State Legislative Action, HASHP

“While CON was created to assist in health service planning, states now use CON to understand benefit rates and overall system consolidation – whether large health providers are expanding or affiliating with others to expand their footprint – or whether there is a specific service area within. Understanding that states have fewer providers and can create access issues for patients,” Maureen Hensley-Quinn, NASHP’s senior program director of coverage, cost and value, told BHB.

According to Johanna Butler, a policy associate with NASHP, Montana has scaled back its CON laws to cover only long-term care facilities; Washington renewed a CON exemption for psychiatric facilities; And Georgia lawmakers assembled a study group to consider CON reform.

Several experts and insiders tell BHB that most states are likely to reform or eliminate CON laws and are unlikely to expand or reinstate them.

Meanwhile, many types of behavioral health facilities are not covered by the CON Act, Andrew Dick, an attorney at Hall Render, told BHB. The more intensive a facility’s services, the more likely they are to fall under a CON regulation. The most common services to which these rules apply include inpatient services, psychiatric facilities and beds, and residential/inpatient addiction treatment facilities.

“An inpatient hospital for behavioral or psychiatric patients is not as challenging as it was a few years ago,” Dick said. “I don’t think they were as controversial as a new general acute care hospital. I think some of that is driven by the fact that most communities and most regulators recognize that somebody trying to open a new facility is probably a good thing.”

Dick, whose practice focuses on health care real estate and environmental law, has seen a boom in mental hospital projects. However, these projects tend to make up for psychiatric services and beds that were abandoned in the years leading up to the pandemic.

Many hospitals have closed or reduced their psychiatric services due to poor payment and major regulatory reforms This has led to bed shortages or, if not shortages, inequitable and inefficient distribution of psychiatric beds.

Major healthcare organizations see an opportunity to address the need for expanded psychiatric services.

Franklin, Tennessee-based Acadia Healthcare Co. (NASDAQ: ACHC ), the largest pure-play behavioral health provider in the United States, sees adding new psychiatric facilities through joint ventures with market-leading hospitals as a core part of its mission. To double its income.

Additionally, New York City-based US HealthVest plans to partner with other healthcare organizations to develop new psychiatric facilities. Specifically, the company targets states with CON laws because the high barriers to entry presented by these laws give US HealthVest a competitive advantage.

However, that competitive advantage comes with a trade-off.

Cost of CON Act

The practical implications of CON legislation on behavioral health organizations have a longer development time frame. This comes from added red tape, additional costs from legal/consultant fees and state fees, and the potential for protracted civil war.

“I cannot overemphasize the amount of time, energy and money it takes to go through a CON when virtually everything is addressed in these underlying regulatory processes,” says a source at a large behavioral health care provider.

The process becomes a “repetitive performance” that conflicts with separate real estate and land development processes. The pandemic itself has been a disruptive force, exacerbating delays in the CON process as states grapple with the virus, said the same source, who requested anonymity because of several pending CON processes.

John Peloquin, CEO of Discovery Behavioral, speaking at Invest 2022.

CON processes may lend themselves to predictable outcomes in certain states where the government clearly describes how it assesses need. Reitz said the Michigan CON process is run through an administrative process, not by committee. Predictability is a hallmark of that state’s program, he added.

Even in that case, states cannot invest heavily in staffing CON offices. John Peloquin, president and CEO of Irvine, California-based Discovery Behavioral Health, told BHB that staffing issues on top of a lengthy process can stretch the time between approval and decision by several years.

The length of a CON process can vary. Discovery Behavioral Health, for example, has seen CON processes take as long as 2.5 months in Kansas, 11 months in Wisconsin and two years in New Jersey, Peloquin said.

While CON applications, do not necessarily “create an absolute barrier,” they do “slow down the process and introduce additional costs to be able to enter.” [to new markets] And, even if you do everything right, you still run into local resistance to, for example, opening an addiction treatment center,” Peloquin said.

A key to Discovery Behavioral Health is engaging expert legal counsel early on. The organization works with several organizations for various issues. It uses the national health care law firm Polcinelli for regulatory matters, Peloquin said.

I don’t think they were as controversial as a new general acute care hospital. I think some of that is driven by the fact that most communities and most regulators recognize that someone trying to open a new facility is probably a good thing.

Andrew Dick, attorney with Hall Render

Peloquin said he thinks of the CON as part of a larger regulatory process for building or opening a new facility, something that must be considered part of a holistic process. This includes working with local municipalities on land use or real estate development. Often, these processes include public notice and comment periods. This allows the “NIMBY” phenomenon to enter the process.

NIMBY, a smart acronym for Not in My Yard, is a derisive label for community activism that opposes development. In the context of behavioral health, NIMBYs include community members who oppose real estate development in particular areas and, in the case of behavioral health, stigmatized grounds.

“Yes we recognize that there is a need for addiction treatment, but we want you to put it not in our community but in the next community,” Matt Boyle, CEO and co-founder of Landmark Recovery, told BHB. “That’s what we hear about and against. It’s very common that we have to fight.”

Local real estate development processes can easily become intense, fueled by behavioral health issues and fanatical beliefs against the agencies that serve them. Such resentment and politicization can also creep into CON processes.

When a CON process goes wrong

Landmark Recovery, a Franklin, Tennessee-based addiction treatment provider, faces a CON denial after protest from an incumbent provider in Connecticut. Landmark is appealing the process, according to public documents.

The Connecticut Office of Health Strategy denied Landmark Recovery’s application to build a new detoxification and residential facility at a former nursing home in New London, Connecticut, according to a memo dated Dec. 8, 2022.

The Office of Health Strategy cited testimony from a leader in the intervention process: High Watch Recovery Center.

“I want to point out that a lot of these arguments are very, you know, emotional about the clients we serve and the people we’re trying to help, but they don’t equate to necessity. Extra beds,” Jerry Schwab, CEO of High Watch Recovery Center, said, according to a transcript of the hearing. “At any given time across the state of Connecticut … we haven’t had a significant problem finding beds.”

Before applying for the CON, Landmark Recovery and its partner Sabra Health Care REIT (Nasdaq: SBRA ), as well as others, had already renovated the facility. The total capital budget was initially estimated at $4 million, the CON filing said.

“We’re in this irony right now because we were denied a CON because Connecticut’s position is that they don’t have a drug problem that requires any more beds,” Boyle said.

Landmark Recovery has grown rapidly across the U.S. It now operates 14 facilities and plans to open eight more by the end of the year. However, local regulatory hurdles – including CON and zoning issues – have hampered the company’s original plans for 2023. Boyle said it plans to open two facilities a month this year, doubling its growth rate. It intends to operate one facility per month.

Boyle sees CON regulations as inherently protective of market incumbents that raise the cost of clearing regulatory hurdles “to the point of absurdity”.

“We put the CON contracts at the bottom of the barrel because of the huge uncertainty of getting approval, cost ($500,000 easily) and time (12+ months),” Boyle said in a follow-up email. “We don’t have blanket sanctions against CON states, but we generally avoid them.

“CON makes things more difficult because of risk and uncertainty. You’re not guaranteed to get it, but you have to spend a year and a half million dollars to pursue it.”

Peloquin reflects similar sentiments for his company’s rapid expansion. Discovery Behavioral Health operates more than 150 treatment centers in 16 states. It expanded to Pennsylvania as well as other major metros in 2022, including Los Angeles, Milwaukee and Seattle.

Peloquin said

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