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Certificate of Need

Overview

A Certificate of Need (CON) is the requirement that a healthcare organization obtain permission from an oversight agency before making changes. Generally applies only to facilities or facility-based services.

Gillian I. Russell, Terminology, in FUNDAMENTALS OF HEALTH LAW 1, 8 (American Health Lawyers Association 5th ed., 2011).

Policy

CON requirements are a regulatory process that mandates certain hospitals, nursing homes, and other healthcare providers to obtain state approval to open or expand a facility or offer new services. The CON process is intended to help ensure that new services proposed by healthcare providers are needed for quality patient care within a particular region or community.

Excerpt from Robert G. Marks, Kristian A. Werling, and Scott Becker, Investing In Healthcare Entities In Today's Private Equity Dominated Market, AHLA Connections (formerly Health Lawyers News) (Nov. 2004).

Common Area of Concern

One of the primary legal drivers of value for direct providers of healthcare services is the presence or absence of a certificate of need requirement for the business. In a jurisdiction where a certificate of need is required by the state, a buyer would not necessarily be able to expand that business or effect a change of control without obtaining some form of approval from the state. On the other hand, the presence of a certificate of need requirement also produces a barrier to entry of new participants in the market. A potential competitor may not be able to quickly open next door and compete with a seller’s business in a certificate of need state, because the appropriate state body would be charged with assessing whether or not the community in which the competitor business would be located is in need of that type of facility or business. There is a natural tendency for pricing to be higher in areas where there is a certificate of need requirement since it is a barrier to entry of competitors. However, this often cuts both ways, since a business may have significant constraints on its growth, either in its own jurisdiction or a bordering jurisdiction. When evaluating comparable businesses and sale multiples, buyers need to be aware of exactly how comparable they are from a certificate of need perspective.

Excerpt from Geoff Cockrell and Bart Walker, Maximizing Value in the Sale of Your Healthcare Business, Business Law and Governance Practice Group Executive Summary (American Health Lawyers Association April 2012).