Reason: Companies Shouldn’t Have the Right To Veto Their Competition

June 16, 2023 | By JACK BROWN
Parker Noland and truck

Katie Chubb had an idea for a business. She noticed that hospitals in Augusta, Georgia, weren’t meeting the demand for birthing services. So she founded Augusta Birthing Center, a nonprofit, freestanding birth center that could offer a better experience at a lower price. But when she applied for a license to operate, the existing hospitals protested to the state regulatory body that her services were not “needed” in the market. The state denied her the opportunity to start her business because of those protests.

Chubb ran squarely into Georgia’s certificate of need (CON) law—also known as certificates of public convenience and necessity in some states.

Under a CON scheme, the regulatory body requires the applicant to show that their service is “needed.” But that’s not all. The agency also notifies existing businesses that someone has applied for a certificate. The existing businesses can “protest” the application. That is, they testify that they are already meeting demand, so there is no “need” for a new business. It’s a competitor’s veto.

If you’ve heard of certificates of need before, it was probably in a context like Chubb’s: hospitals, medical imaging, surgical centers, and other traditional medical services. That’s where these counterproductive bans on competition are most common. But they’ve also cropped up in other industries and in surprising corners of the medical field.

For example, research from my employer, Pacific Legal Foundation, in 2021 found that 17 states required new moving companies to obtain a certificate of need to enter the industry. Since then, some states have repealed their moving company CONs, but 15 states still suppress competition in the moving industry. Of those, 11 enable existing moving companies to insert themselves into the application process through protests. This turns what should be a low-cost way to start a business into an expensive endeavor, all to the benefit of companies that already have certificates of need, that benefit from reduced competition at consumer expense.

Other CON laws are more unique. Louisiana, for example, is the only state that applies a certificate of need law to respite care—temporary care for special-needs children. Before a new respite care business can open, the state’s “Facility Need Review” law requires the applicant to prove that her services are “necessary.” In making this determination, the Louisiana Department of Health does not consider whether the applicant is qualified to provide respite care but instead looks to the number of other providers in the area. In 2018, Ursula Newell-Davis, a social worker and entrepreneur, decided to open a business to provide respite services to families with special-needs children. Unfortunately, when she applied for Facility Need Review, she was denied. Ursula, helped by the Pacific Legal Foundation, is challenging the law in federal court as a violation of her constitutional right to earn a living.

Parker Noland, a U.S. Army veteran and entrepreneur living in Montana, has run afoul of yet another unusual CON law. Montana is one of just four states that requires a CON to haul garbage. When Parker applied for a certificate to haul construction debris from the Montana Public Service Commission, Allied Waste Services and Evergreen Disposal, subsidiaries of two of the largest garbage companies in America, protested his application. Recognizing the futility of fighting two huge corporations with effectively limitless resources, Parker withdrew his application.

As is the case with other CON laws, Montana’s CON law for garbage haulers serves only to protect incumbents from competition. Former Public Service Commissioner Roger Koopman, a critic of Montana’s certificate scheme, has observed that the competitor’s veto has allowed incumbent providers in Montana to command profit margins of 40 percent, compared to 8 percent to 10 percent in nearby Oregon. Because they have such a strong financial interest in kneecapping potential competitors, it is unsurprising that lobbying from established companies has seen this garbage law survive two separate repeal efforts, forcing Parker to fight for his right to earn a living in state court.

CON laws are an albatross around the neck of would-be entrepreneurs. Not only do they require applicants to prove that their business is “needed” before opening, but that near-impossible task  demands significant time and money. CON laws hurt consumers by decreasing the supply of services, raising prices, and lowering service quality. After all, a business has little incentive to lower its prices or improve its service when it can use the force of the government to keep the competition out.

This op-ed was originally published at Reason on June 16, 2023.