Regulatory Forces: Certificate of Need and the No Surprises Act

Introduction

Beyond the compliance framework (Stark Law, Anti-Kickback Statute) that applies to all healthcare entities, two specific regulatory regimes have outsized impact on healthcare services deal economics: Certificate of Need laws, which create barriers to entry, and the No Surprises Act, which constrains pricing. Healthcare bankers evaluating services transactions must model the impact of both.

Certificate of Need (CON)

A state regulatory requirement that healthcare providers obtain government approval before constructing new facilities, expanding existing facilities, or acquiring major medical equipment. CON programs exist in approximately 35 states (though scope and rigor vary significantly). The stated purpose is to control healthcare costs by preventing excess capacity, but the practical effect is to limit competition and protect incumbent providers. In CON states, a hospital or ASC cannot open a new facility without demonstrating community need and obtaining approval from a state health planning agency, a process that can take 12-24+ months and may be contested by existing providers.

Valuation implications. In CON states, existing facilities operate with a de facto government-granted franchise. The CON itself has value because it cannot be easily replicated: a competitor cannot simply build a competing facility without navigating the same approval process. This franchise value is reflected in higher acquisition multiples for facilities in strong CON states relative to non-CON states.

Deal model implications. De novo expansion is constrained in CON states because new facilities require regulatory approval. Roll-up strategies that depend on opening new locations must factor in CON timelines and approval uncertainty. Conversely, acquiring existing facilities in CON states provides immediate market access that competitors cannot easily challenge.

The No Surprises Act (NSA), effective January 2022, prohibits "surprise" medical bills from out-of-network providers in two key scenarios: emergency services (regardless of whether the facility is in-network) and non-emergency services at in-network facilities where the patient did not choose the out-of-network provider (e.g., an out-of-network anesthesiologist at an in-network hospital).

Revenue impact. Before the NSA, certain physician specialties (emergency medicine, anesthesiology, radiology, pathology) generated significant revenue from out-of-network billing, often at rates 3-5x in-network levels. The NSA replaced this with a dispute resolution process that typically results in payment at or near the qualifying payment amount (QPA), which approximates the median in-network rate. This compression reduced revenue for out-of-network-dependent practices by 20-40%.

The final article in this section covers healthcare services M&A and PE exits, including the current deal landscape, buyer types, and exit strategies.