North Carolina General Assembly Broadens Exemptions to CON Review

by K&L Gates LLP

The North Carolina legislature recently expanded the exemptions to Certificate of Need (“CON”) review in the recent budget bill, known as the “Current Operations and Capital Improvements Appropriations Act of 2013.” See Session Law 2013-360, Section 12G.3. The legislature accomplished this expansion by adding two new subsections (subsections (f) and (g)) to the CON exemption statute, N.C. Gen. Stat. § 131E-184. Subsection (f) broadens the exemption for replacement equipment. Subsection (g) exempts capital expenditures for replacement and renovation of existing health service facilities under certain conditions. The new law became effective on July 1, 2013.

Under North Carolina law, a CON is required prior to offering or developing a “new institutional health service.” A “new institutional health service” includes a variety of services and activities, including a capital expenditure exceeding $2 million to develop or expand a health service or a health service facility, or which relates to the provision of a health service. See N.C. Gen. Stat. § 131E-176(16)b. Also, the acquisition of certain medical equipment triggers the need for a CON. See N.C. Gen. Stat. § 131E-176(14o), (16)f1, and (16)p. To obtain a CON, an applicant must file an application and undergo a rigorous review process, which includes requiring an applicant to demonstrate, among other things, the need for its project and financial feasibility. Pursuant to N.C. Gen. Stat. § 131E-184, certain types of services or proposals are exempted from CON review, and thus can be developed without undergoing the CON review process.

Replacement Equipment Exemption
Prior to the enactment of Session Law 2013-360, the acquisition of replacement equipment was exempt from CON review only if the costs associated with acquiring and making operational the replacement equipment were less than $2 million. See N.C. Gen. Stat. §§ 131E-176(22a), 131E-184(a)(7). In Session Law 2013-360, the General Assembly amended N.C. Gen. Stat. § 131E-184 to add a new subsection, subsection (f), which expands the replacement equipment exemption by providing that the purchase of replacement equipment exceeding $2 million is exempt under certain conditions. All of the following conditions must be met for replacement equipment costing more than $2 million to be exempt from CON review:

(1) The equipment being replaced is located on the main campus.

(2) The Department has previously issued a certificate of need for the equipment being replaced.

(3) The licensed health service facility proposing to purchase the replacement equipment shall provide prior written notice to the Department, along with supporting documentation to demonstrate that it meets the exemption criteria of this subsection.

Session Law 2013-360 defines the term “main campus” as the main building from which the licensed health service facility “provides clinical patient services and exercises financial and administrative control over the entire facility, including the buildings and grounds adjacent to that main building.” See S402, Section 12G.3.(a). It also includes “[o]ther areas and structures that are not strictly contiguous to the main building but are located within 250 yards of the main building.” Id. This definition of “main campus” is added to the CON law in a new subsection, subsection (14n), to N.C. Gen. Stat. § 131E-176.  

One interpretive question that will arise under Subsection 2 above is whether the new exemption covers situations where a facility once obtained a CON for an equipment item, but has then subsequently replaced that equipment through the already existing “under $2 Million” exemption provisions in Section 184(a)(7).   Also, “main campus” interpretive questions will no doubt arise. 

Facility Replacement and Renovation Exemption
The second exemption provision added to N.C. Gen. Stat. § 131E-184 by Session Law 2013-360 relates to capital expenditures for replacement facilities. The new subsection (g) of N.C. Gen. Stat. § 131E-184 creates a broad exemption category for existing health service facilities.  It provides that capital expenditures exceeding the $2 million threshold in N.C. Gen. Stat. § 131E-176(16)(b) are exempt from CON review if all of the following conditions are satisfied:

(1) The sole purpose of the capital expenditure is to renovate, replace on the same site, or expand the entirety or a portion of an existing health service facility that is located on the main campus.

(2) The capital expenditure does not result in (i) a change in bed capacity as defined in G.S. 131E-176(5) or (ii) the addition of a health service facility or any other new institutional health service other than that allowed in G.S. 131E-176(16)b.

(3) The licensed health service facility proposing to incur the capital expenditure shall provide prior written notice to the Department, along with supporting documentation to demonstrate that it meets the exemption criteria of this subsection.

Accordingly, this new exemption provision permits an existing health service facility to renovate or expand on the same site without a CON, regardless of the cost. However, the project cannot involve adding CON-regulated equipment or beds and still remain exempt. Thus, the  condition in Subsection 2 above will likely cause interpretational questions surrounding whether reviewable items are so entwined with the proposed renovation or replacement project so as to spoil the exemption for the latter.  Moreover, as with the new replacement equipment exemption, some new facility exemptions will raise “main campus” interpretive questions. As with any exemption under N.C. Gen. Stat. § 131E-184, prior written notice of the exemption is required to be given to the Department’s CON Section.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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