Can North Carolina's Department of Human Resources tell a home-health agency it can only treat patients within the geographic 'service area' on its Certificate of Need?

Plain-English summary

The North Carolina Department of Human Resources (DHR) interpreted the state's Certificate of Need (CON) statutes (Chapter 131E, Article 9) to require, or allow it to require, a home-health agency to serve only those patients who reside within the agency's CON-defined "service area." Other types of providers were not similarly restricted. The AG was asked whether DHR's restriction was immune from federal antitrust law under the state-action doctrine.

The AG answered: no.

The restriction is a horizontal market allocation. Restraints that allocate territories or customers among competitors have been per se illegal under the common law since 1415 (Dyers Case) and under the Sherman Act since Addyston Pipe (1899). The DHR rule, by restricting home health providers from serving patients outside their CON service areas, allocated patient populations among competitors.

The state-action doctrine is the only escape. Under California Retail Liquor Dealers Association v. Midcal Aluminum (1980), a state's anticompetitive restraint is exempt from the Sherman Act only if it satisfies two prongs: (1) the restraint must be "clearly articulated and affirmatively expressed as state policy," and (2) the regulated conduct must be "actively supervised" by the state. FTC v. Ticor Title (1992) reinforced that both prongs require "real compliance."

Prong 1 (clear articulation) fails. The North Carolina CON statutes do not clearly articulate a policy of allocating patients among home health providers. The legislative scheme reflects the opposite policy: it distributes facilities among patient populations, who are then free to choose their own provider. N.C. Gen. Stat. § 131E-175(1) (efficient distribution of facilities). N.C. Gen. Stat. § 131E-183(a)(18a) (patient choice among competing providers). The "service area" terms in § 131E-176(16)o (home-health agency offices) and § 131E-176(24a) (general definition) are administrative, used to determine need for a new facility at a particular locale. They do not authorize the Department to restrict any provider to serving only those patients who live in the area. Reading "service area" as an "only" or "exclusive" term would require interpolating words that the legislature did not use. Under In re Hardy and Board of Education v. Wilson, North Carolina courts do not interpolate provisions.

Prong 2 (active supervision) is undetermined. The AG noted that the active-supervision prong (Patrick v. Burget, 1988) depends on specific facts about whether state officials actually review and disapprove anticompetitive conduct. The AG did not have facts sufficient to determine whether the prong was met. But because prong 1 fails, prong 2 is academic.

Conclusion. The DHR territorial restriction is not immune from federal antitrust law under the state-action doctrine.

Currency note

This opinion was issued in 1995. Subsequent statutory amendments, court decisions, or later AG opinions may have changed the analysis. Treat this page as historical context, not current legal advice. Verify current law before relying on any specific rule, deadline, or remedy mentioned here. The Certificate of Need framework has been amended multiple times since 1995 (some states have repealed CON entirely; North Carolina retained it but has refined its scope). Federal antitrust state-action doctrine has continued to develop in cases like North Carolina State Board of Dental Examiners v. FTC (2015), which sharpened the active-supervision prong for state regulatory boards composed of market participants. Counsel should verify the current statutory framework and the post-1995 state-action doctrine before relying on this opinion.

Historical context: what the AG concluded

The AG opinion is unusually doctrinally rich for an administrative-law advisory. It works through both prongs of the Midcal test and a careful reading of the CON statutes.

Horizontal territorial allocation is per se illegal. The AG begins with the antitrust frame. The Supreme Court in Addyston Pipe (1899) confirmed that competitor territory allocation is per se illegal under the Sherman Act. Business Electronics v. Sharp Electronics (1988) and Timken Roller Bearing Co. v. United States (1951) continue the rule. The DHR restriction, if applied to home health providers, allocates patient populations among competitors.

The Midcal/Ticor frame for state-action immunity. A state's anticompetitive restraint escapes Sherman Act scrutiny only when (1) clearly articulated state policy authorizes it and (2) active state supervision exists. The federal courts insist on "real compliance with both parts" because "[s]tates must accept political responsibility for actions they intend to undertake" (Ticor). The doctrine is disfavored because it "may serve as nothing more than an attractive nuisance in the economic sphere" (Ticor, 112 S.Ct. at 2178).

CON statutory text and intent. The AG works carefully through the CON statutes:

• N.C. Gen. Stat. § 131E-175 (legislative findings). Subsection (1) directs efficient distribution of facilities among patient populations. Subsection (2) seeks economical and readily available health care. Subsection (6) cites the burden of excess capacity.
• N.C. Gen. Stat. § 131E-178 requires a CON before offering or developing a "new institutional health service."
• N.C. Gen. Stat. § 131E-176(16)(a) defines "new institutional health service" to include construction, development, or establishment of a new health service facility.
• N.C. Gen. Stat. § 131E-176(16)o specifies what counts as a new institutional health service for home-health agencies: "[t]he opening of an additional office by an existing home health agency within its service area as defined by rules adopted by the Department; or the opening of any office by an existing home health agency outside its service area as defined by rules adopted by the department."
• N.C. Gen. Stat. § 131E-176(24a) defines "service area" as the area "which receives services from a health service facility."
• N.C. Gen. Stat. § 131E-183(a)(18a) lists patient choice among competing providers as a criterion.

The "service area" terms are administrative, not substantive. The "service area" references in §§ 131E-176(16)o and 131E-176(24a) authorize DHR to define service areas for purposes of determining need. Without a defined geographic boundary, DHR could not rationally evaluate the need for a particular facility at a particular locale. The statutes assign DHR (rather than the applicant) responsibility for defining the area. They do not restrict providers from serving patients outside the area.

The "clearly articulated" prong fails. The AG concludes the General Assembly's stated purpose is to regulate the distribution of home-health-agency offices among patient populations. There is no "clearly articulated and affirmatively expressed" indication that the legislature is taking political responsibility for the obverse, "exclusively distributing patients among home health providers." That would intrude into "the highly personal and intimate decision of each citizen to select his or her home health provider."

Statutory construction principles. Under In re Hardy (N.C. 1978), "[w]ords and phrases of a statute must be construed as a part of the composite whole and must be accorded only that meaning which other modifying provisions and the clear intent and purpose of the act will permit." Under Board of Education v. Wilson (N.C. 1939), courts "may not interpolate provisions which are wanting in [a] statute." Reading "only" or "exclusive" into the CON statutes' "service area" references would violate both rules.

The active-supervision prong is undetermined. Patrick v. Burget (1988) requires that state officials have and exercise power to review particular anticompetitive acts and disapprove those that fail to accord with state policy. Ticor underscores that "the potential for state supervision was not realized in fact" is fatal. The AG did not have facts sufficient on this prong but found prong 1 dispositive.

The bottom line. The DHR restriction is not state-action-immune. Home-health agencies may serve patients outside their CON service areas without exposing the agency to a state enforcement action that would survive federal antitrust scrutiny.

Common questions

Can a North Carolina home-health agency serve patients outside the area listed on its Certificate of Need?

According to this opinion, yes. The CON-defined "service area" is an administrative concept used to evaluate need for new facilities, not an enforceable boundary on patient population. The DHR's contrary interpretation lacks state-action antitrust immunity and is therefore vulnerable.

What is the state-action doctrine in antitrust law?

The state-action doctrine, from Parker v. Brown (1943) and Midcal (1980), exempts state-authorized anticompetitive restraints from federal antitrust law when (1) the state has clearly articulated the policy and (2) actively supervises the conduct. The doctrine is disfavored and narrowly applied.

What is horizontal market allocation?

An agreement or restraint that divides customers, territories, or product markets among competitors. Per se illegal under the Sherman Act since Addyston Pipe (1899), regardless of reasonableness or economic justification.

Does this opinion bind the DHR?

No. AG advisory opinions are not binding. But the analysis is persuasive and signals that DHR enforcement of a territorial restriction would face antitrust risk. A home-health agency facing such enforcement could plausibly raise the antitrust defense.

How has the state-action doctrine evolved since this opinion?

Significantly. The Supreme Court in North Carolina State Board of Dental Examiners v. FTC (2015) tightened the active-supervision prong for state boards composed of market participants. The general framework (clear articulation + active supervision) survives, but enforcement is more aggressive.

Background and statutory framework

N.C. Gen. Stat. § 131E-175 (CON legislative findings). Distributes health facilities among patient populations to ensure economical and readily available care.

N.C. Gen. Stat. § 131E-178 (CON requirement). Person must obtain a CON from DHR before offering or developing a "new institutional health service."

N.C. Gen. Stat. § 131E-176(16) (definition of new institutional health service). Subsection (a) covers facility construction. Subsection o covers home-health-agency offices, including offices opened within or outside the agency's "service area as defined by rules adopted by the Department."

N.C. Gen. Stat. § 131E-176(24a) (service area). "The area of the State, as defined in the State Medical Facilities Plan or in rules adopted by the Department, which receives services from a health service facility."

N.C. Gen. Stat. § 131E-183(a) (CON criteria). Includes need (a)(1), area need (a)(3), and patient choice among competing providers (a)(18a).

The opinion is signed by K. D. Sturgis (Assistant Attorney General) and John R. McArthur (Chief Counsel). The AG at the time was Michael F. Easley.

Citations

• N.C. Gen. Stat. §§ 131E-175(1)-(2), 131E-175(6), 131E-176(16), 131E-176(16)(a), 131E-176(16)o, 131E-176(24a), 131E-178, 131E-183(a)(1), (3), (18a).
• FTC v. Ticor Title Ins. Co., 504 U.S. 621, 112 S.Ct. 2169 (1992).
• California Retail Liquor Dealers Association v. Midcal Aluminum, Inc., 445 U.S. 97, 100 S.Ct. 937 (1980).
• Lafayette v. Louisiana Power and Light Co., 435 U.S. 389, 98 S.Ct. 1123 (1978).
• Llewellyn v. Crothers, 765 F.2d 769 (9th Cir. 1985).
• Addyston Pipe & Steel Co. v. United States, 175 U.S. 211, 20 S. Ct. 96 (1899).
• Business Electronics v. Sharp Electronics, 485 U.S. 717, 108 S.Ct. 1515 (1988).
• Timken Roller Bearing Co. v. United States, 341 U.S. 593, 71 S. Ct. 515 (1951).
• Patrick v. Burget, 486 U.S. 94, 108 S.Ct. 1658 (1988).
• In re Hardy, 294 N.C. 90, 240 S.E.2d 367 (1978).
• Board of Education v. Wilson, 215 N.C. 216, 1 S.E.2d 544 (1939).
• Dyers Case, Y.B. 2 Henry V, pl. 26 (1415).
• Von Kalinowski, Antitrust Laws and Trade Regulation, Vol. 1, § 1.02[2] n.8.

Source

• Landing page: https://ncdoj.gov/opinions/where-home-health-providers-may-serve-patients/

Original opinion text

The official page reproduces the opinion's substantive analysis on state action immunity and CON statute construction. The introductory facts and request sections are not present in the rendered text. The analysis and conclusion reproduced here are complete on the available pages.

(1) State Action Immunity. The state action doctrine is a creature of federal law that guides the resolution of conflicts between two fundamental policies: federalism, and antitrust. The state action doctrine begins with the premises that "[t]he preservation of the free market and of a system of free enterprise without price fixing or cartels is essential to economic freedom," and that a "national policy of such a pervasive and fundamental character is an essential part of the economic and legal system within which the separate states administer their own laws for the protection and advancement of their own people." FTC v. Ticor Title Ins. Co., ___ U.S. ___, 112 S.Ct. 2169, 2176 (1992). Under principles of federalism, however, a state may depart from this essential national policy if, first, the restraint is "clearly articulated and affirmatively expressed as state policy;" and, second, the regulated conduct is "actively supervised" by the state. California Retail Liquor Dealers Association v. Midcal Aluminum, Inc., 445 U.S. 97, 63 L. Ed. 2d 233, 100 S. Ct. 937 (1980).

Federal courts insist on "real compliance with both parts of the Midcal test" to assure that "[S]tates must accept political responsibility for actions they intend to undertake" when they depart from "fundamental and accepted assumptions about the benefits of competition within the framework of the antitrust laws." Ticor, 112 S.Ct. at 2178. Moreover, in construing state statutes, "state action immunity is disfavored." Id.; Lafayette v. Louisiana Power and Light Co., 435 U.S. 389, 398-399, 98 S.Ct. 1123, 1129, 55 L.Ed.2d 364 (1978). The federal courts' stringent view of state-action immunity reflects the concern that "a broad doctrine of state-action immunity may serve as nothing more than an attractive nuisance in the economic sphere." Ticor, supra, 112 S.Ct. at 2178. Finally, the restraint must be "of a kind contemplated by the statutory scheme." Llewellyn v. Crothers, 765 F.2d 769, 774 (9th Cir. 1985).

(2) North Carolina Certificate of Need Law.

N.C. Gen. Stat. § 131E-178 requires a person to obtain a certificate of need (CON) from the Department before offering or developing a "new institutional health service," which is defined as, inter alia, the "construction, development or other establishment of a new health service facility," N.C. Gen. Stat. § 131E-176(16)(a). This law is directed to the efficient distribution of institutional health care facilities to assure "economical and readily available health care," N.C. Gen. Stat. § 131E-175(2), and to prevent "excess capacity of health care service facilities [which] places an enormous economic burden on the public who pays for the construction and operation of these facilities as patients, health insurance subscribers, health plan contributors and taxpayers." N.C. Gen. Stat. § 131E-175(6). As the term "certificate of need" implies, the most important criterion for issuance of a CON is demonstrated need for the facility at the proposed locale. See, e.g., N.C. Gen. Stat. § 131E-183(a)(1) and (3).

N.C. Gen. Stat. § 131E-176(16), in defining "new institutional health services," outlines, in subsection o, the activities of home health agencies for which a certificate of need must be obtained:

The opening of an additional office by an existing home health agency within its service area as defined by rules adopted by the Department; or the opening of any office by an existing home health agency outside its service area as defined by rules adopted by the department.

N.C. Gen. Stat. § 131E-176(24a) contains a definition of general application to all health service facilities reviews, and not simply to home health agency offices:

"Service area" means the area of the State, as defined in the State Medical Facilities Plan or in rules adopted by the Department, which receives services from a health service facility.

The Department interprets these statutes as requiring, or allowing the Department to require, that a home health agency serve only those patients who reside within the agency's service area designated for CON purposes. The Department does not currently limit other providers to serving only those patients who reside within their CON service areas.

(3) The Department's Interpretation Does Not Qualify for State Action Immunity.

Horizontal arrangements to allocate territories or customers among competitors have been held illegal under the common law since at least 1415, when an attempt to restrain a dyer from competing in a town for just six months so offended the court that it held: "By God, if the plaintiff were here he should go to prison until he paid a fine to the King." Dyers Case, Y.B. 2 Henry V, pl. 26; see, Von Kalinowski, Antitrust laws and Trade Regulation, Vol. 1, § 1.02[2], n. 8. Shortly after enactment of the Sherman Act, the Supreme Court confirmed the per se illegality of this type of restraint. Addyston Pipe & Steel Co. v. United States, 175 U.S. 211, 44 L. Ed. 136, 20 S. Ct. 96 (1899). This continues to be the law today. See, e.g., Business Electronics v. Sharp Electronics, 485 U.S. 717, 734, 108 S.Ct. 1515, 99 L.Ed.2d 808 (1988); Timken Roller Bearing Co. v. United States, 341 U.S. 593, 95 L.Ed. 566, 71 S. Ct. 515 (1951). The Department's interpretation of N.C. Gen. Stat. §§ 131E-176(16)o and 131E-176(24a), as allowing or requiring it to restrain home health providers from serving patients who live outside their CON service areas, is so treated unless it is protected by state action immunity.

The Department's interpretation is not supported by a clearly articulated and affirmatively expressed State policy to allocate territories, and patient populations, among home health providers. Instead, the CON statutory framework reflects the obverse legislative approach: to distribute health care facilities among patient populations, N.C. Gen. Stat. § 131E-175(1), who are then free to choose from among competing providers, whether near or far, see N.C. Gen Stat. § 131E-183(a)(18a). "Words and phrases of a statute…'must be construed as a part of the composite whole and must be accorded only that meaning which other modifying provisions and the clear intent and purpose of the act will permit.'" In re Hardy, 294 N.C. 90, 95-96, 240 S.E. 2d 367 (1978) (citation omitted). Here, the General Assembly's stated purpose is simply to regulate the distribution of home health agency offices among patient populations. N.C. Gen. Stat. § 131E-176(16)o, quoted above. There is no "clearly articulated and affirmatively expressed" indication that the General Assembly is taking political responsibility for the obverse — exclusively distributing patients among home health providers, and thereby intruding into the highly personal and intimate decision of each citizen to select his or her home health provider.

The mention of "service area" in N.C. Gen. Stat. § 131E-176(16)o is non-substantive: that statute, on its face, authorizes the Department to define service areas in the course of determining need for new home health agency offices. As a practical matter, without an administratively defined geographical boundary, the Department could not rationally determine need for a particular facility at a particular locale. This statute simply makes clear that the Department — and not the applicant — is responsible for defining service area for any proposed new home health agency office.

N.C. Gen. Stat. § 131E-176(24a) is a parallel to N.C. Gen. Stat. § 131E-176(16)o, that applies to CON planning and reviews for all types of new institutional health service facilities, and not just home health agency offices. It, too, is non-substantive: it provides a general definition of "service area," as the area defined by the Department that "receives" services from a provider. Neither of these statutes indicates a "clearly articulated and affirmatively expressed" legislative intent either to restrict any provider to serving only those patients who reside within the provider's service area, or to authorize the Department to impose such a radical restriction on patient choice.

Finally, it is not plausible that a court would read the terms "only" or "exclusive" into these statutes' references to "service area." It is a universal rule of statutory construction that a court "may not interpolate provisions which are wanting in [a] statute," see, Board of Education v. Wilson, 215 N.C. 216, 1 S.E.2d 544 (1939). This is especially so where to do so would turn the statutory scheme on its head, see In re Hardy, supra, as well as yield a disfavored statutory interpretation, see Ticor, 112 S.Ct. at 2178.

It is unclear whether the Department's interpretation meets the second, "active supervision" prong of the Midcal test. The second prong "requires that state officials have and exercise power to review particular anticompetitive acts of private parties and disapprove those that fail to accord with state policy." Patrick v. Burget, 486 U.S. 94, 100-101, 100 L.Ed.2d 93, 108 S.Ct. 1658 (1988). Determining whether this prong has been met depends on the facts of each case. In Ticor, for example, the Court underscored that the states' regulatory schemes did not meet the second prong because "the potential for state supervision was not realized in fact… In the absence of active supervision in fact, there can be no state-action immunity…" 112 S.Ct. at 2179 (emphasis added). Here, however, we do not have facts sufficient to determine whether, or the degree to which, the Department actively supervises the conduct of home health providers.

CONCLUSION

Based on the analysis set forth above, we conclude that the Department's restriction, on where home health providers serve patients, is not immune from the federal antitrust laws under the state action doctrine.

John R. McArthur
Chief Counsel

K. D. Sturgis
Assistant Attorney General