Healthcare private equity remains firmly in the regulatory hot seat as legislators look for ways to fight rising costs and, in some cases, worsened outcomes. High-profile failures of private equity-involved health systems haven't helped (e.g. Steward Health), and it could be argued that the political popularity of sponsor scrutiny is at an all-time high.
A growing group of U.S. states are now rolling out their own restrictions on dealmaking that are harsher than those at the national level, even as the FTC ramps up enforcement efforts of its own. One of the more common approaches by states has been healthcare-specific "mini-HSR Acts," allowing officials to challenge deals that they see as a risk to quality, access, and cost of care, even if those deals fall below federal antitrust thresholds.
Only one state—Indiana—calls out private equity by name in its guidelines, which came into effect July 1st, though a number of states' mini-HSR Acts include language that appears to specifically target sponsor involvement in healthcare. Washington, for example, now defines a 'hospital system' as an entity that includes the parent company (private equity ownership) as well as any affiliated entities of the parent — including any of the sponsors' other portfolio companies with no relation to the deal in question.
Some states that already have mini-HSR Acts are now considering additional legislation to increase the burden of private equity disclosure requirements in proposed healthcare transactions. California, Connecticut, Massachusetts, Minnesota, and Oregon each have active bills in their state's house or senate.
California's new measure would require a "private equity group" to provide written notice to the California attorney general at least 90 days before closing on any transactions involving healthcare facilities or provider groups. If the attorney general feels further review (including additional public input) is warranted, the waiting period can be extended an additional 59 days and, in certain cases, can further extend past the eight-month mark. After the waiting period, the attorney general will issue a determination to approve or kill the deal.
Massachusetts is also considering a waiting period and new cost-benefit analyses for high-risk deals to be conducted by the state's Health Policy Commission. The review itself could take up to 205 days, and one possible outcome of a negative finding is a five-year post-close reporting requirement in which the acquirer must submit ongoing data related to the deal's market impact.
The various proposals would each introduce substantial uncertainty into any new deals, but some states have opted for the simple approach: Minnesota's proposal is a blanket ban that would prohibit any private equity firm from acquiring any direct or indirect ownership stake or operational or financial control of a healthcare entity within the state.
Oregon is similarly contemplating an outright ban on certain transactions. Its bill, which has already passed in the House, would essentially outlaw the practice management structure that's commonly used by private equity in physician practice investments.
Other states with existing or pending healthcare transaction review laws include Colorado, Connecticut, Nevada, New York, and Rhode Island.
The definition of healthcare varies by state, but many proposals have taken a broad view that includes not only provider groups, but also payors, HMOs, pharmacy benefit managers, and third-party administrators. Life sciences, medical devices, and HCIT are generally excluded, though, other than HCIT, that doesn't help buyout firms with limited appetite for clinical trial risk.
Apart from the greater antitrust risk on any given deal, the current regulatory trend may jeopardize entire strategies: increased deal-by-deal transaction friction and lower reporting thresholds mean that even roll-ups of small add-ons could become more trouble than they’re worth, at least in certain states.
For the deals still being done, things may look a little different going forward. Knowledgeable local counsel and earlier regulatory engagement with state officials could become more important, and certain deal structures, like minority investments or joint ventures, might be a way to avoid issues in some jurisdictions. It may also be worth the time to model out the possible impact of ongoing compliance and reporting expenses or state-mandated post-closing commitments that restrict changes to staffing levels or facility closures.