Expanding behavioral health companies continue to face headaches from restrictive state certificate of need (CON) laws.

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

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

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

The process often includes public comments and may even include a process allowing incumbent health providers to challenge new projects. These processes can lead to controversy and even legal challenges.

Still, in some cases, the pandemic-driven shifts in approach to CON laws have expanded a slight historical advantage that behavioral health organizations have in most states.

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

The intended impact of CON laws in many states is ensuring some level of control by the state in 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 across the state, but that those services are appropriately utilized before more investment is made to increase access in any particular area,” Melissa Reitz, the principal and owner of McCall Hamilton, told BHB. Her lobbying and consulting firm’s expertise includes the state CON law and program.

Like many states, Michigan continues to see legislators debate reforms to CON laws. This has included efforts to repeal the law, and similar conversations are happening in other states.

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

NASHP’s tracking of statehouses finds that local lawmakers have introduced 55 bills related to CON across 19 states in 2023.

“While CON was created to aid in health service planning, states now use CON to understand rates of facility and overall system consolidation – larger health providers expanding or affiliating with others to broaden their footprint – or to understand if there is a particular service area within the state that has fewer providers and can cause an access issue for patients,” Maureen Hensley-Quinn, senior program director of coverage, cost and value for NASHP, told BHB.

Johanna Butler, a policy associate with NASHP, also pointed out Montana scaled back its CON laws to only cover long-term care facilities; Washington renewed a CON exemption for psychiatric facilities; and Georgia lawmakers have 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 not likely to expand or reestablish them.

Already, many types of behavioral health facilities don’t fall under CON laws, Andrew Dick, an attorney with Hall Render, told BHB. The more intensive a facility’s services are, the more likely they are to fall under a CON regulation. The most common services where these regulations apply include inpatient services, psychiatric facilities and beds and residential/inpatient addiction treatment facilities.

“An inpatient hospital for behavioral or psychiatric patients isn’t as challenging to get as of the last couple of years,” Dick said. “I don’t think they’ve been as contentious as, say, a new general acute care hospital. I think some of it’s driven by the fact that most communities and most regulators acknowledge that someone 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 an uptick in psychiatric hospital projects. However, these projects tend to make up for the psychiatric services and beds that were abandoned in the years leading up to the pandemic.

Poor payer reimbursement and major regulatory reforms have caused many hospitals to shut down or diminish their psychiatric services. This has led to shortages of beds or, if not a shortage, inequitable and inefficient distribution of psychiatric beds.

Major health care companies see an opportunity to meet the need for expanded psychiatric services.

Franklin, Tennessee-based Acadia Healthcare Co. (Nasdaq: ACHC), the largest pure-play behavioral health provider in the U.S., sees adding new psychiatric facilities, largely through joint ventures with market-leading hospitals, as a key part of its mission to double its revenue.

Additionally, New York City-based US HealthVest seeks to build new psychiatric facilities in partnership with other health care organizations. Specifically, the company targets states with CON laws because the high barrier to entry presented by these regulations gives US HealthVest a competitive advantage.

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

The cost of CON laws

The practical effects of CON laws on behavioral health organizations are longer development timelines. That comes from added red tape, additional costs from legal/consultant fees and state fees and the possibility of a protracted public battle.

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

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

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

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

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

While CON applications, don’t necessarily “create an absolute barrier,” they do “slow the process down and introduce additional costs to be able to get in [to new markets] and, even if you do everything right, you’re still subjected to the local resistance of, for example, opening an addiction treatment center,” Peloquin said.

A key for Discovery Behavioral Health is engaging expert legal counsel at the outset. The company works with several firms for various issues. It uses the national health care law firm Polsinelli for regulatory issues, Peloquin said.

I don’t think they’ve been as contentious as, say, a new general acute care hospital. I think some of it’s driven by the fact that most communities and most regulators acknowledge 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 one part of a larger regulatory process to build or open a new facility, something that must be considered as part of a whole 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 for the “NIMBY” phenomenon to enter the process.

NIMBY, a smarmy acronym for not in my backyard, is a derisive label for community activity that opposes development. In the context of behavioral health, NIMBYs include community members who oppose real estate development on specious, and in the case of behavioral health, stigmatic grounds.

“There’s this perception of ‘yes we recognize that there’s a need to have addiction treatment, but we want you to put it in the next community over and not in our community,'” Matt Boyle, CEO and co-founder of Landmark Recovery, told BHB. “That’s very common of what we hear and what we have to fight against.”

Local real estate development processes can easily become acrimonious, fueled by bigoted beliefs against those with behavioral health issues and the organizations that serve them. This kind of acrimony and politicization can creep into CON processes, too.

When a CON process goes wrong

Landmark Recovery, a Franklin, Tennessee-based addiction treatment provider, faced denial of a CON following a protest by an incumbent provider in Connecticut. Landmark is pursuing an appeal in the process, according to public documents.

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

The health strategy office cited the testimony of a leader of the intervenor in the process: High Watch Recovery Center.

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

Prior to applying for the CON, Landmark Recovery and its partner on the project Sabra Health Care REIT (Nasdaq: SBRA), as well as others, had already renovated the facility. The total capital budget was originally estimated to be $4 million, the CON application states.

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

Landmark Recovery has quickly grown 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 stymied the company’s original plan for 2023. Boyle said it had planned to open two facilities a month this year, doubling its rate of growth. It intends to continue opening one facility each month.

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

“We put CON deals at the bottom of the barrel due to the massive uncertainty of getting approved, the cost ($500,000 easily) and the time (12+ months),” Boyle said in a follow-up email. “We do not have a blanket ban against CON states, but we do typically avoid them.

“The CON makes things more difficult because of the risk and uncertainty. You aren’t guaranteed to get it, but you have to spend a year and half a million dollars pursuing it.”

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

“If I don’t have to file a certificate of need and go through all the costs associated to open up a facility, and if I had two like markets, I would definitely pick one that does not require a certificate of need,” Peloquin said.