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Certificate of Need (CON) laws for home health agencies vary by state.
In some states, there are no restrictions. In others, there are strict restrictions on how many home health and hospice providers are allowed to operate. There are also ones with CON laws in hospice, and not in home health – or vice versa.
The issue is divisive in health care, as it is specifically in home health. Taking a step back, however, can allow one to see both the pros and cons to each side of the argument.
Broadly, a CON program is a state regulatory tool that controls the number of health care resources in a given area. The concept began with hospitals, then was extended to other settings.
It requires providers looking to enter a CON state to prove there’s an overwhelming need for more, for instance, home health services. There are 35 states that have some sort of CON. But, again, each state has different regulations.
Either way, CON regulations have – and will continue to – shape the home health sector for years to come. Home Health Care News explores the issue in this new HHCN+ report.
The pros and cons of CON
Based in Atlanta, the Visiting Nurse Health System (VNHS) is a diversified home-based care provider. Overall, the nonprofit cares for about 6,500 patients in its network.
Given the fact that it offers home health and hospice, Georgia is a unique place for the company to operate. The state has CON laws for home health, but not for hospice.
“There’s a lot of competition in hospice, a lot of very small providers that kind of dilute the market,” Dorothy Davis, the president and CEO of VNHS, told HHCN. “Whereas in home health, that’s managed with CON. It’s much more controlled, and so I know who I’m competing against. I can really keep a good eye on my competitive position in the market in home health. Hospice, on the other hand, is just really difficult.”
Because a lot of providers in home health also provide hospice, Georgia’s structure bifurcates their strategic approach when it comes to competition.
It does in other states, too. For instance, a relatively common misconception is that Florida is a CON state for home health. It is not, but is for hospices and SNFs.
“Frankly, in our hospice world in Georgia, there’s a lot of fraud, and that’s one of the pros of having a CON,” Davis said. “It takes a level of sophistication and knowledge to compete when that provider type is restricted, versus anybody that knows how to put a business license and Medicare provider number together being able to become a hospice provider.”
On the flip side, however, insiders have argued that the quality suffers in states that have CON. With less competition and usually no new entrants, providers are able to get away with being less on the ball compared to their non-CON counterparts.
That, plus access-to-care concerns, are two issues providers petitioning to enter a CON state will tend to hone in on.
Mike Dordick, the president of McBee Associates, has been asked to testify on both sides of these arguments before. McBee is a health care services and consulting firm that works with providers in a wide range of states, which gives it – and Dordick – a relevant perspective into the effects of CON regulations.
“It’s really a competitive advantage as a provider because the barriers to entry are so strong,” Dordick told HHCN. “There’s always the argument that CONs can cause access-to-care issues. The challengers will say that there are patients that aren’t getting seen. And I’ve been on both sides of that argument. But you do see certain counties where there’s not enough providers or a provider has staffing challenges.”
If there’s just one or two agencies allowed to provide care in a certain area, and one or both of them is having staffing challenges – almost a certainty during the COVID-19 pandemic – patients become vulnerable.
While challengers will argue that there are patients left unseen due to CON regulations, defenders of the CON will usually provide data that shows the same amount of Medicare-eligible patients – percentage wise – are being cared for in that state versus another.
“It’s really a competitive advantage as a provider because the barriers to entry are so strong.”
– Mike Dordick, the president of McBee Associates
But that’s not always reliable data, either.
As Dordick pointed out, the amount of Medicare-eligible individuals who could benefit from home health care varies from state to state. That’s due to a slew of causes, including socio-economic demographics. Dordick did say, though, that enough challengers have won over the years to close many home health gaps in care across the country.
“I think in certain markets, [CON regulations] make sense,” Dordick said. “I’m for them in an area where there’s good access to care and you have high-quality providers that are providing services. Then, there’s not a good reason to have additional providers. Where I’d say I’m against them is places where there’s not enough providers and where the quality of care is not as good. Then you start to look at it and say, ‘Are the patients getting the services they really deserve?’”
Future impact
CON regulations are constantly a topic of debate, yet they are rarely changed. The issue extends to political affiliation as well. Generally speaking, Republicans are more in favor of free markets (non-CON), while Democrats are more likely to favor these types of regulations.
What’s more worth examining is whether the M&A environment in the home health and hospice markets will be impacted significantly by the regulations in the future. As M&A has ticked up, opportunities to enter into certain states have become much more scarce.
“I think we find ourselves, if anything, a little behind,” Luke James, the former president of Encompass Health’s home health and hospice arm, told HHCN last year. “That’s somewhat intentional. But in terms of what’s left in some of these states that we’d like to be in, it’s certainly scarcer than it used to be.”
Dordick has seen specific examples where CON-certified agencies with virtually no patients have been sold for $2 million to $3 million just because of that certification.
“You will see some significantly higher valuations in those CON states,” Dordick said. “So they’ve always been a target of anyone who’s trying to acquire because of the restriction to competition.”
There’s a chance that acquisition-hungry organizations could see those higher valuations bleed into other potential deals, too, as options run low. Any agency operator that has even hinted at the idea it would be willing to sell in a CON state likely gets calls on a daily basis, Dordick said.
At the same time, the M&A playing field is much more transparent in CON states, which is a plus that Davis noted.
“On the mergers-and-acquisition side of the home health business, it’s much more transparent,” Davis said. “You have a sense of what’s happening, versus in hospice, where there could be new entrants and I wouldn’t have a formal way to know.”
And while it still may be a more expensive and extensive process to enter into a CON state, for larger providers, it’s much easier to capture a larger percentage of a state’s market in one move.
“For an Amedisys or Kindred at Home, they’re looking for a large deal to grow their market share,” Davis said. “And it’s much easier to identify those in deals.”
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