Introduction to CON
Certificate-of-Need (CON) laws are state-level regulations that require healthcare providers to obtain government approval before expanding facilities, adding new services, or making significant investments in high-cost medical equipment. These laws are intended to ensure that new developments align with local healthcare needs, preventing facility overbuilding and excessive duplication of resources.
CON laws vary significantly between states, creating a regulatory landscape that can be challenging to navigate. For example, New York enforces extensive CON requirements across various services, while Florida has reduced its CON regulations to apply only to high-cost services. Due to these differences, it’s crucial to consider each state’s unique approach rather than making broad generalizations when assessing the impact of CON laws on healthcare business valuations.
History of CON Laws
CON laws were first federally mandated in the 1970s through the National Health Planning and Resources Development Act, which aimed to contain healthcare costs by promoting planned distribution of healthcare resources. This federal mandate encouraged states to adopt CON programs by linking certain federal funds to compliance with the Act. However, in 1986, the federal requirement was repealed as questions arose about its effectiveness, leaving states to decide independently whether to continue enforcing CON regulations.
Today, 38 states maintain some variation of CON laws, with each state tailoring its program to address specific healthcare challenges and priorities. For instance, Tennessee’s CON program broadly regulates various healthcare institutions, while Texas, a non-CON state, allows providers greater freedom to expand without regulatory limitations.
The Perceived Costs and Benefits of CON Laws
Benefits of CON Laws
Advocates argue that CON laws create a balanced healthcare market by preventing an oversaturation of services and ensuring that resources are allocated based on community needs. By limiting the number of providers in specific areas, CON laws can help concentrate patient volumes within existing businesses, which may allow these agencies to operate more efficiently and maintain high standards of care. This is especially relevant in rural areas, where smaller populations may not support multiple providers. By controlling market entry, CON laws can help protect local hospitals from excessive competition, thereby preserving access to essential services in these communities.
In states with large Medicaid populations, CON regulations are often viewed as tools to support healthcare providers serving low-income and underserved communities. By directing new healthcare resources toward areas with limited services, CON laws aim to ensure that these communities receive adequate access to care.
Proponents believe that this targeted approach helps promote healthcare equity, allowing providers in resource-limited areas to remain financially viable. Additionally, by controlling the number of new facilities, CON laws can help prevent the cost increases that may occur when too many providers compete for the same patient base. This approach is intended to keep healthcare costs stable and reduce inefficiencies, preventing the financial strain that underused facilities could place on the broader healthcare system.
Costs of CON Laws
Critics, however, argue that CON laws restrict competition, potentially leading to higher costs and fewer choices for patients. While supporters see these laws as a way to ensure resource efficiency, opponents contend that limiting market entry can reduce incentives for existing providers to innovate and improve care quality. For example, in non-CON states like Texas, patients generally have access to a broader range of services, including diagnostic imaging and ambulatory surgery centers, because there are fewer barriers to new providers entering the market. By contrast, strict CON requirements can lead to monopolistic conditions, where a limited number of providers dominate the market, sometimes resulting in higher prices and reduced patient options.
Although CON laws are intended to improve access in underserved areas, the time-consuming and costly application process may deter new providers from entering these markets. This can restrict service availability in rural areas, which proponents aim to protect. Critics argue that a competitive market could encourage existing providers to streamline operations and improve service quality, potentially providing a better balance of access and efficiency.
So, are CON’s Good or Bad? They can be Both.
While CON laws offer potential benefits for stabilizing healthcare markets and supporting underserved communities, they can also bring limitations that restrict competition. The impact of CON regulations ultimately depends on the specific characteristics of each state and service line.
In rural markets, for example, limiting the number of providers can help sustain local hospitals, preventing them from being outcompeted and ensuring essential care remains available. However, in more urban or competitive areas, the same restrictions might limit access to specialized services and reduce incentives for quality improvement, as critics argue.
Because CON laws vary widely across states—ranging from strict, broad regulations to targeted, service-specific guidelines—their effectiveness often depends on how well they align with a region’s healthcare needs and market conditions. In some cases, these laws may foster a balanced, accessible market, while in others, they may inadvertently reduce patient options and raise costs, illustrating the complexity of regulating healthcare resources effectively across diverse markets.
Valuation in CON States
Pinpointing a “standard” valuation multiple for agencies in CON states can be extremely difficult—supply and demand can greatly affect the multiples buyers are willing to pay, and valuations often dwarf the regular norms of the industry. This heightened demand will vary greatly depending on the specific company, buyer, and market, making it challenging to predict valuations in advance. However, there are some general trends relating to CON states that can provide further insight.
The Role of Supply, Demand, and Buyer Perspective
In states with strict CON regulations, healthcare providers often enjoy reduced competition and protection from oversaturation, which can translate into stable, predictable revenue streams. CONs also create a barrier to entry within these states, all of which support higher valuations. By limiting market entry, CON laws provide existing agencies with a greater share of the patient base and limit potential competition. In mergers and acquisitions (M&A), these market protections make businesses with established CONs very attractive to buyers, often resulting in higher valuation multiples or purchase prices. On the other hand, the stability of CON markets means there is often less incentive for providers to sell their businesses, leading to a lower supply of acquisition opportunities in general.
Market Protections and Entry Barriers
Purchasing an agency with an existing CON allows immediate market entry into areas where new licenses or permits are difficult to obtain. The ability to bypass the costly, lengthy process of obtaining a new CON adds significant appeal in states with stringent approval processes. In states like Georgia, where obtaining a new CON for home health can be challenging, agencies with an existing CON are in high demand due to their protected market position. In such cases, the sales process often evolves into auction-style bidding wars with exceptionally high multiples. It’s also worth pointing out that Georgia is a unique state when it comes to CON regulation. The Southeast is home to the highest concentration of CON states, which generally regulate both home health and hospice (like Alabama) or hospice but not home health (like Florida). However, Georgia is unique in that it regulates home health through the Certificate-of-Need system, but not hospice. This shows how CON-driven market barriers may exist for certain service lines but not others depending on the state. Because of this, it’s important to be familiar with the CON laws in your state regarding the specific service lines that you offer.
Market Size and Demographics
Additionally, the value of an agency with a CON is partly determined by the size and demographics of the markets they serve. For instance, an agency with a CON in a large, urban market with a dense population of seniors and little direct competition will command higher valuations than an agency with a CON serving a sparsely populated rural area with limited patient volume and growth potential. Urban markets often offer more opportunities for revenue diversification and sustained patient demand, which enhances their attractiveness to buyers. In contrast, rural markets may face challenges such as workforce shortages and constrained service expansion, potentially limiting their valuation despite the protective benefits of the CON. Although valuations may vary based on specific market conditions, the regulatory advantages of a CON often provide an added layer of stability, helping shield agencies from market fluctuations and making them especially appealing in mergers and acquisitions.
Valuation in Non-CON States
Flexibility and Growth Potential
Non-CON states foster a more open market, allowing providers to enter and expand with fewer regulatory hurdles. This openness supports a dynamic healthcare landscape, where patient volumes and revenue streams may fluctuate due to increased competition. While this competitive environment can sometimes lead to lower valuation multiples compared to CON states, it appeals to M&A buyers seeking rapid expansion opportunities free from regulatory constraints. In non-CON states, valuations are more closely tied to factors like growth potential, market share, and operational efficiency, as there is no regulatory shield to stabilize revenue.
For example, in Texas—a non-CON state—much of the market is concentrated in large cities like Dallas and Houston. The absence of CON requirements in Texas creates opportunities to expand into different cities and markets through acquisition or by launching de novos. This contrasts with states like Alabama, where CON requirements restrict market entry and dictate the geography that an agency can serve. In Alabama, acquiring an agency with a CON may provide access to a specific area, but expanding beyond the CON’s coverage requires obtaining additional approvals, which can be challenging or impossible depending on the area.
While businesses in non-CON states may not benefit from the protective advantages of a CON, they offer unique growth opportunities to investors focused on agile expansion. In these states, the comparatively lower barrier to entry creates flexibility for buyers and allows for faster adjustments to market conditions, making non-CON states particularly attractive for buyers pursuing expansion and growth.
Conclusion
Certificate of Need (CON) laws are complex, state-specific regulations that influence healthcare market dynamics and have a direct impact on the valuation of a home health or hospice business. These laws aim to balance resource distribution, control costs, and support patient access by regulating healthcare expansion. While CON laws can offer stability by limiting market saturation and supporting underserved areas, they also face criticism for restricting competition and potentially raising patient costs.
In healthcare M&A, CON laws often elevate valuations in states with strict regulations due to reduced competition and market protection. Conversely, non-CON states provide greater flexibility for expansion, appealing to investors seeking rapid growth without regulatory constraints, and typically have lower valuations compared to CON states. Understanding these nuances is crucial for buyers and sellers, as CON laws shape not only market entry strategies but also the strategic value of healthcare businesses across different states.
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In 1997, Joe founded Reachout Home Care, a Medicare and private duty agency, which he grew into three operating companies in Dallas and Houston before selling to Humana in 2014 using Stoneridge Partners. After the sale of his own company Joe joined Stoneridge, and for the last ten years has used his industry knowledge to help other owners list their companies and bring them to a successful close. With a proven track record in operations and M&A, Joe brings unmatched experience and
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