How easing state oversight spurred a construction 'arms race'

Healthcare construction has ramped up in states that repealed or narrowed certificate of need laws.

Health systems have built an increasing number of inpatient and outpatient facilities in states such as Florida and South Carolina that significantly limited the scope of certificate of need laws. More states are expected to follow suit, spurring building booms and increasing competition.

Related: Why health systems are pumping billions of dollars into outpatient care

"It has been an arms race, allowing hospitals to grab new market share,” said Matthew Coursen, who leads U.S. healthcare leasing advisory at the real estate management firm JLL. “De novo growth is something we expect to see as more states look to repeal certificate of need laws.”

An increasing number of states, such as Tennessee and Alabama, are studying the impacts of certificate of need adjustments and considering legislation that would limit the oversight process.

States with certificate of need laws must approve new healthcare projects or expansion of existing facilities, as overseers weigh the demand for care and supply. Competitors can oppose those decisions, potentially delaying projects and increasing costs.

Certificate of need laws were designed to limit costs and the potential for unnecessary care by restricting the supply of healthcare services. Proponents of the oversight process claim providers in states without these laws would flock to the most affluent communities, creating access gaps in underserved areas.

But many economists and policy experts argue the requirements preserve market share for the largest organizations, creating monopolies that increase costs. In fact, there are fewer rural providers in states with certificate of need laws compared with states without that oversight process, said Matthew Mitchell, senior affiliated scholar at George Mason University’s Mercatus Center, who studies certificate of need laws.

“Certificate of need laws act exactly as the standard economic model predicts about supply restrictions — when you restrict supply, you tend to see less access, higher costs and lower quality,” he said. “The effects are especially lopsided in rural and underserved communities where certificate of need laws significantly reduce access to care.”

Such laws can also drag out hospital planning and construction, health systems said.

For instance, BayCare St. Joseph’s Hospital-North was tied up in certificate of need-related appeals for several years.

BayCare Health System applied for a certificate of need in October 2002, and the state signed off on the Lutz, Florida-based hospital two years later. BayCare had planned to break ground on the project in early 2006, but Tampa General Hospital and University Community Hospital in 2004 appealed the state’s approval.

It took until August 2007 to resolve the appeals and revise the certificate of need. BayCare broke ground in September 2007 and the hospital opened in February 2010.

“That hospital was full within a few months of opening,” said Lou Galdieri, BayCare co-chief operating officer, who will take on the role of chief administrative officer on March 30.

In 2019, Florida eliminated certificate of need requirements for all types of healthcare facilities except hospices, skilled nursing facilities and intermediate care facilities for the developmentally disabled.

That decision streamlined the development process for BayCare Hospital Manatee, Galdieri said. The 16-hospital system started mapping out plans for the hospital in July 2022, announced construction plans in April 2024 and will host a groundbreaking ceremony next month.

Competition has increased exponentially over the past six years since the law was changed, Galdieri said.

“You will see a great deal of new construction in states that repeal certificate of need laws," he said.

AdventHealth has also built more healthcare facilities since Florida changed its certificate of need law. The Altamonte Springs, Florida-based health system has built about a hospital a year over the past five years, said David Banks, chief strategy officer at AdventHealth, which also operates hospitals in North Carolina, Colorado, Georgia, Illinois, Kansas, Kentucky, Texas and Wisconsin.

“There has been a real acceleration in construction for all levels of care facilities in Florida, from acute care hospitals to freestanding emergency departments,” he said. “Competitors have built within a mile or two from us, which wouldn’t have happened under the old certificate of need law. The repeal has sped things up and allowed us to use capital more efficiently.”

Policymakers are looking at healthcare access gains in states like Florida, building momentum to narrow or repeal certificate of need laws, experts said.

Derek Gregg, executive vice president of operations at construction firm Robins & Morton, was at a conference in Birmingham, Alabama, this month that featured a discussion on how changes to the state’s certificate of need law could boost the economy.

“More states are looking to Florida as a model,” he said. “It’s good for the population to have more choices of care closer to home.”

North Carolina’s hospital approval process provides a stark contrast, Banks said.

The state has eased some certificate of need requirements for certain services such as psychiatric facilities, but not for acute care hospitals.

In 2022, the North Carolina Department of Health and Human Services approved AdventHealth's certificate of need application for a hospital in Buncombe County, but the health system has not started building yet amid opposition from competitors, Banks said.

“It really extends how long it takes to get services to communities,” he said. “It would’ve taken half the time in Florida.”

Health systems in South Carolina, and other states that have eased certificate of need laws, also plan to expand, said Hamilton Espinosa, healthcare market leader for the construction firm DPR Construction.

South Carolina in 2023 implemented a law that will eliminate all certificate of need requirements for hospitals by 2027. The May 2023 law immediately removed certificate of need requirements for all other healthcare facilities except nursing homes.

There was a perception in South Carolina that the certificate of need law limited the ability for health systems to meet the needs of the growing population, said Andy Snyder, partner and healthcare market leader at architecture firm NBBJ.

“A lot of systems in South Carolina are positioning for a freer market,” he said.