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 Department of Human Resources read North Carolina's certificate of need statutes as requiring, or allowing it to require, home health agencies to serve only patients living within their designated service areas. The Attorney General concluded that this restriction was not immune from federal antitrust law under the state-action doctrine. That was the opinion's conclusion; it did not decide the outcome of a particular enforcement case.

The opinion describes two requirements for state-action immunity: a clearly articulated state policy authorizing the restraint, and active state supervision. It found the first requirement missing. The statutes use service areas to determine the need for home health agency offices, but the AG found no clear legislative authorization to divide patients among providers by territory. The opinion cites statutory language allowing patients to choose among competing providers and says the terms "only" and "exclusive" cannot be read into the service-area provisions.

The AG said it lacked enough facts to determine whether the Department met the active-supervision requirement. Its finding on the first requirement was enough to conclude the territorial restriction lacked state-action immunity. The opinion did not declare every agency free of all CON conditions or determine how a court would resolve a particular enforcement action.

Currency note

This opinion was issued in 1995. Check current certificate of need law and federal antitrust doctrine for a present service-area question.

Background and statutory framework

N.C. Gen. Stat. § 131E-178 required a certificate of need before offering or developing a new institutional health service. The opinion quotes provisions addressing new home health agency offices inside or outside a defined service area. It reads those provisions as part of planning and need review, without an express restriction on where an existing provider may serve patients.

The opinion cites the Midcal test for state-action immunity and finds no clearly articulated policy for the Department's proposed geographic limit. It leaves the active-supervision question unresolved because the available facts were insufficient.

Common questions

Q: Did the AG say the Department's service-area restriction had state-action antitrust immunity?
A: No. The opinion concluded that the restriction was not immune because the statutes did not clearly authorize allocation of territories or patients among home health providers.

Q: Did the AG decide whether the Department actively supervised providers?
A: No. The opinion says the facts were insufficient to decide that part of the immunity test.

Q: Does this opinion decide whether an agency could defeat a specific state enforcement action?
A: No. Its conclusion is about state-action immunity for the Department's described restriction. It does not evaluate a particular enforcement proceeding or decide the agency's exposure under every applicable law.

Citations

• N.C. Gen. Stat. § 131E-178
• N.C. Gen. Stat. § 131E-176(16)o
• N.C. Gen. Stat. § 131E-176(24a)
• N.C. Gen. Stat. § 131E-183(a)(18a)
• FTC v. Ticor Title Ins. Co., 112 S.Ct. 2169 (1992)
• California Retail Liquor Dealers Association v. Midcal Aluminum, Inc., 445 U.S. 97, 100 S. Ct. 937 (1980)

Source

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

Original opinion text

(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