The ‘competitor’s veto’ is killing entrepreneurship — but that may end this year

It’s true that businesses never welcome competition, but imagine if they had the statutory authority to shut out new enterprises. That twisted scenario is reality in over half of states, where entrepreneurs in the medical and transportation industries essentially must ask their competitors for permission before starting up. Predictably, the incumbents usually say no, invoking a little known regulation called a Certificate of Need (CON) law.

The way a CON law typically works is that a person who seeks to start a business must first notify all existing businesses in the same industry that they’re applying for a license. The existing businesses can protest the application, which triggers a hearing. At the hearing, the applicant must prove to state authorities that the proposed business is “necessary.”

{mosads}The problem is that the only way to show that products or services are necessary — particularly if they are new or innovative — is to offer them and find out. The market allows entrepreneurs to discover whether their services are necessary through experimentation. Even the most prescient entrepreneurs cannot be certain the market will sustain them. CON laws thus send applicants on a fool’s errand, asking them to prove something that cannot be proven in advance.

Moreover, even if one musters some supposed evidence of necessity, the existing businesses can testify in opposition that a new business is not necessary because they could serve any demand. As a result, protested applications are almost always denied. A federal trial court in Kentucky aptly described the CON law process as the “competitor’s veto” when striking it down as unconstitutional in a lawsuit brought by Pacific Legal Foundation.

Although CON laws started in the transportation industry, in 35 states they also apply to medical services. This means that in over half of states, practitioners must undergo the expensive and often futile CON law process before adding hospital beds, purchasing medical equipment, opening a birthing center, or providing mental health services. Stories of CON laws preventing entrepreneurs from providing innovative (and lower cost) medical services — such as virtual colonoscopies, laparoscopic surgery, and newborn intensive care unit centers — are well documented.

CON laws, therefore, do not just harm economic opportunity; they jeopardize people’s lives. A doctor in Virginia, for example, recently was denied the ability to offer non-invasive virtual colonoscopies because a competitor protested his application. Colorectal cancers kill more than 50,000 Americans each year, but they are treatable if caught early. The new technology would have made colonoscopies quicker and easier, thereby encouraging people to get screened. Thanks to the state’s CON law, however, Virginians were denied access to that important technology.

It’s no surprise that by stifling competition, CON laws restrict access to medical services. A recent report found that counties with CON laws for ambulances experience higher wait times compared to others with open competition. A growing body of research confirms that CON laws decrease the supply of services but do nothing to improve the quality of service.

The good news is that several states are considering repealing their CON laws this year. The bad news is that it’s difficult to get these laws off the books, given the medical industry’s support of the CON system. Alaska legislators are seeking to repeal their CON law for medical services for the third year in a row. The past two attempts failed in part because of staunch opposition from the nursing and hospital interest groups.

Maryland and South Carolina also are considering getting rid of their CON laws. The latter’s program almost ended in 2013 when former Gov. Nikki Haley defunded it, but it was saved after state hospitals successfully argued in court that the legislature, not the governor, was responsible for ending the program. This year, the legislature sought to do just that (notably, the state hospital association opposes the move).

Georgia, too, is considering repealing its CON law after a lawsuit failed to do the same last year. Because judges are notoriously deferential to the legislature’s judgment about economic regulations, CON laws are surprisingly difficult to get struck down in court. Georgia’s legislative effort may be able to accomplish what the lawsuit could not.

Kansas is considering repealing its CON for transportation services such as moving and taxi companies. And Missouri, Oregon, Montana and West Virginia repealed transportation CON laws in recent years following constitutional lawsuits. The transportation industry has provided a vital path to entrepreneurship for people with fewer skills and less capital. But transportation CONs persist in over 30 states, depriving people of one of the first rungs on the ladder to economic opportunity.

CON laws are antithetical to the American dream, and demonstrably harmful to consumers. Whether by lawsuit or legislative change, it’s time for them to end.

Anastasia Boden is an attorney at Pacific Legal Foundation, which litigates to enforce the Constitution’s guarantee of individual liberty.