Healthcare Private Equity Transactions Under Scrutiny: Midyear Review

At the end of last year, Holland & Knight predicted that "the current enforcement environment will continue into 2024 and will focus heavily on the healthcare industry, along with private equity transactions or 'roll-ups.' Companies in those industries should expect heightened scrutiny leading to more antitrust investigations and litigation." (See Holland & Knight's previous alert, "A Year in Review in Healthcare Antitrust: What Healthcare Providers Need to Know," Dec. 15, 2023.) As the summer draws to a close, the speed of proposed legislation at the state level, as well as the states taking first-mover positions, have been a surprise.

At the macro level, the first half of 2024 saw two U.S. senators propose bills attempting to regulate private equity's involvement in the healthcare industry while the U.S. Federal Trade Commission (FTC) aggressively targeted private equity for its role in healthcare. Although Congress appears more focused on other pressing matters, the FTC might find support from key state attorneys general in future actions, making a possible change in the agency's administration less impactful. We also saw an influx of new state legislation, including efforts to directly restrict private equity investment. Many bills either failed to pass or may not pass in time before the end of the legislative sessions, suggesting 1) a reduced appetite by states to burden themselves with increased administrative oversight without fully assessing the need and 2) increased industry stakeholder involvement in the discussion of those laws. Some of these bills, however, may be resuscitated during the 2025 legislative sessions. The speed at which these bills are being introduced suggests coordination of efforts across state lines.

Amid a flurry of activity at both the state and federal level (especially with regulators reacting to Steward Health Care's financial situation), this report provides a summary of the activity year to date and looks at what healthcare investors and platform companies can expect for the rest of the year.

Proposed Federal Legislation

This year's federal legislative session saw the introduction of two new pieces of legislation aimed at curbing private equity investment in healthcare. First, The Health Over Wealth Act introduced by Sen. Ed Markey (D-Mass.) and second, The Corporate Crimes Against Health Care Act introduced by Sen. Elizabeth Warren (D-Mass.). These laws, among other things, would require private equity-backed businesses to conduct more public reporting. Private equity sponsors would also be required to obtain licenses to make healthcare investments and private equity sponsors and healthcare executives could potentially be subject to criminal and civil penalties if their actions are found to have contributed to the death or injury of patients. Although there is a growing interest in private equity and healthcare-focused federal legislation, little substantive action has been taken on either of these bills. The 2024 legislative session is heading toward its August recess and will end in early January 2025. Various other controversies seem to be in focus, which may make it unlikely anything will come to fruition with respect to private equity investments in healthcare. If Republicans have control of either the Senate or House in 2025, restrictive legislation aimed at private equity firms may face substantial headwinds during next year's legislative session.

FTC's Focus on Private Equity's Role in Healthcare

The FTC and U.S. Department of Justice (DOJ) issued a joint request for information in May that focused on private equity's role in the consolidation of healthcare organizations (Healthcare RFI) and even held public workshops that highlighted the FTC's concerns. Private equity firm Welsh, Carson, Anderson & Stowe, however, scored a win with its dismissal from an FTC action targeting alleged "roll-up strategies" of a portfolio company. (For more information, see Holland & Knight's previous alerts, "Recent Ruling Shows Healthcare Private Equity Firms a Path Through the New Antitrust Era," June 4, 2024, and "Private Equity Firm Welsh Carson Dismissed from FTC Antitrust Action," May 15, 2024.) The FTC and DOJ responded by posting a second request for information (RFI) focused on serial acquisitions and "roll-up strategies" with an emphasis on private equity's role across multiple industries, including healthcare.

On the last day of the comment period for the Healthcare RFI, 11 attorneys general¹ filed a comment expressing concerns about private equity's role in healthcare. The letter claimed private equity investments increased the debt burden on the industry and resulted in cost-cutting pressures and increased prices for consumers, which the letter asserts have lowered quality and decreased access to healthcare. The letter also discussed alleged negative effects on hospitals, nursing homes and physician practices, citing examples including the Steward Health Care bankruptcy in May 2024. The attorneys general pressed the federal government to "explore all avenues to prevent conduct by private equity in healthcare that harms patients, healthcare workers, and taxpayers." They also called for increased transparency of private equity ownership and control, banning anticompetitive contractual provisions in federal contracts, such as anti-steering, and offered a joint state-federal investigation of potentially anticompetitive mergers and acquisitions. In defense of private equity investment in the healthcare industry, the American Investment Council filed a public comment that provided arguments that private equity investment improved quality of care and operational efficiencies, increased access to care in rural communities and provided necessary capital for better management, advanced technologies and new treatment offerings.

In addition, the FTC finalized its final rule on the restrictions of noncompetes, which has significant implications for the healthcare industry. (See Holland & Knight's previous alert, "New FTC Rule Bans Non-Compete Agreements in All Employment Contracts," April 23, 2024.) Since the FTC finalized its rule, one federal judge has upheld the rule, while another has attempted to block it. Although the U.S. Chamber of Commerce has sued the FTC to block the regulation, it remains to be seen what will happen to the rule that is to go into effect on Sept. 4, 2024. (See Holland & Knights previous podcast, "The U.S. Chamber of Commerce Sues the FTC Over Power Grab," May 29, 2024.) Additional challenges would appear inevitable following the U.S. Supreme Court's ruling in Loper Bright Enterprises v. Raimondo that overturned the Chevron deference. (See Holland & Knight's previous alert, "What's Next for the Regulatory Landscape Post-Chevron?," July 2, 2024.)

Successful State Legislation

Indiana: Signed into law on March 1, 2024, Indiana's Senate Bill No. 9² – Reporting of Health Care Entity Mergers and Acquisitions – became effective on July 1, 2024 (Indiana Law).

On its face, the Indiana Law appears to be one of the broadest state healthcare transaction review laws enacted to date. However, several unanswered questions remain regarding the applicability of the Indiana Law given the lack of defined terms and written guidance. Other than a fairly limited FAQ (Indiana FAQ)³ provided by the Indiana Office of the Attorney General (Indiana AG), Indiana has not yet promulgated regulations, rules or guidance related to the Law.

Noteworthy elements of this legislation include:

• $10 Million Threshold. The Indiana law requires that an Indiana healthcare entity that is involved in a merger or acquisition with another healthcare entity where the sum total of each of the healthcare entities' assets, including combined entities and holdings, meets or exceeds $10 million,⁴ to provide written notice to the Indiana AG's office 90-days prior to the anticipated date of the transaction. Healthcare entities include any organization or business that provides medical, surgical or dental services as well as private equity partnerships.
• Transaction Size Doesn't Matter. The Indiana Law is focused on the total assets of each of the transacting parties and does not reference the size of the transaction.
• Indiana Location. The Indiana Law does not contain any limitation on the location of assets inside or outside of Indiana, although the Indiana FAQ states that at least one of the healthcare entities must be located in or provide services in Indiana to trigger the requirement to provide written notice.
• Direct Acquisitions of Physician Groups. Though the Indiana Law still has certain undefined features that make it difficult to fully analyze the precise impact on healthcare investors, it appears to capture the direct acquisition of a physician group's assets by a private equity management service organization (MSO) – given that the "merger and acquisition" definition includes the acquisition of a healthcare entity's assets.
• Remains to Be Seen. It is not entirely clear whether, and to what extent, the Indiana Law might trigger AG notice for upstream affiliated MSO entity-level transactions that do not directly or indirectly impact the governance or control of any downstream MSO-contracted physician practice entities or other healthcare entities. It is possible that these types of transactions may not trigger a notice; a private equity partnership, although defined as one of the types of "healthcare entities," only appears to be a "healthcare entity" only if it is seeking to enter a merger or acquisition with another healthcare entity that is not a private equity partnership.⁵

For those with pending transactions that could require Indiana AG notice under the Indiana law, the AG has provided an email address to submit clarifying questions.⁶ At some point in the near future as the Indiana AG receives more questions and future submissions, it is likely that the Indiana AG will provide additional direction through sub-regulatory guidance or the promulgation of actual regulations to help provide more clarity on the parameters of the Indiana law.

Pending State Legislation and Rules

California. Even though California's existing law went live on Jan. 1, 2024, regulators and legislators spent the last seven months exploring how to increase the scrutiny of healthcare transactions and private equity investment in the healthcare industry. The Health Care Quality and Affordability Act⁷ (California Act) and its implementing regulations already serve as one of the most onerous state healthcare transaction laws in the nation. However, California's Office of Health Care Affordability (OHCA) recently has been seeking how to expand its reach on healthcare transactions after only a few filings has been made to date. Moreover, Assembly Bill 3129, another proposed bill covering the subject that is discussed in detail below, looks to add 1) a separate pathway for attorney general review of certain private equity investments in healthcare and 2) restrictions on private equity's control of physician and dental practices.

OHCA's Proposed Revisions to its Regulations

OHCA recently proposed significant revisions to the California Act's regulations after receiving only two submissions to date since Jan. 1, 2024. Though the final revisions may not be available for some time, the most significant proposed changes from prior drafts are highlighted below:

• "Subject Of." OHCA proposed that a healthcare entity must file if it is the subject of a material transaction involving other parties. The "subject of" language applies to a healthcare entity when it concerns its assets, control, responsibility, governance or operations in whole or in part. A transaction with a parent company of a healthcare entity could also trigger an obligation to file.
• Revenue Threshold Changes. The proposed revisions expand the language around which entities are considered part of the revenue threshold to also potentially tie in subjects of the transaction (as discussed above) as well as parent entities, or any entity that owns or controls the healthcare entity undergoing the analysis.

These proposed revisions showcase an intent by OHCA to capture more transactions, but also raise more questions. For example: What are the bounds of the "subject of" language? Would it include a landlord, an electronic medical records provider or a management services organization? By folding in parent entities, how far up the chain in the organization will be affected? Will this capture out-of-state transactions conducted by parent corporations of healthcare entities in California? Holland & Knight submitted a public comment to OHCA that dives deeper into the proposed regulations.

In its board meeting on June 26, 2024, OHCA acknowledged public comments (including Holland & Knight's) but it did not address them. Rather, OHCA seemed concerned about private equity using "loopholes" to conduct transactions above the healthcare entity level. It remains to be seen what additional revisions will be made to the proposed regulations. OHCA projects it will post a notice of emergency rulemaking on Aug. 6, 2024. If that occurs, the California Office of Administrative Law (OAL) would open a review for public comments Aug. 21-25, 2024. OAL would review any received public comments for 10 days and any revisions would become effective Sept. 3, 2024.⁸

AB 3129 – Subjecting Private Equity Investment in Healthcare to Attorney General Review

California Assembly Bill 3129⁹ (the California Bill) introduced in February 2024 would require private equity and hedge funds to receive the California Attorney General's consent before conducting certain healthcare transactions in California. (For detailed discussions of the California Bill, see Holland & Knight's previous alerts, "California Court Decision Further Scrutinizes the Friendly PC Model – Now What?," June 24, 2024, "New Bill Would Empower California AG to Curtail Healthcare Private Equity Transactions," June 12, 2024, and "Private Equity Healthcare Transactions Under Scrutiny," March 14, 2024.)

On May 21, 2024, the California Bill passed the Assembly and moved to the Senate where it faced additional reviews and amendments. On June 27, 2024, there was a win for the healthcare industry when the drafters removed a vague section that if read broadly could have prohibited private equity-backed Management Services Organizations (MSOs) and Dental Services Organizations (DSOs) from providing management services to practices. The drafters also broadened the definition of hedge fund to include entities that solely provide or manage debt financing secured in whole or in part by the assets of a healthcare facility, including, but not limited to, banks and credit unions, commercial real estate lenders, bond underwriters and trustees. The California Bill now sits with the Senate Committee on Appropriations, which has scheduled its hearing on Aug. 5, 2024.¹⁰ There is not much time remaining to complete the legislative process, as the last day for bills to pass is Aug. 31, 2024, and the California governor's last day to sign or veto bills is Sept. 30, 2024.¹¹ If enacted by these deadlines, the California Bill would take effect Jan. 1, 2025.¹²

Pennsylvania. The Pennsylvania legislature has three proposed bills (H.B. 2012,¹³ H.B. 2344¹⁴ and S.B. 548¹⁵) sitting in both the state House of Representatives and Senate that aim to impose notification requirements on healthcare facilities, systems or providers engaging in certain healthcare transactions. H.B. 2012's requirements also capture out-of-state healthcare companies, either medical or dental, that generate at least $10 million in revenue from in-state patients. Parties subject to the bills would be required to provide notice of a transaction involving a merger, acquisition or affiliation with the Pennsylvania Attorney General's office 90 to 120 days prior to the effective date of the agreement. Pennsylvania's legislature is on a break and will not reconvene until Sept. 16, 2024. It remains to be seen if one or more of these bills will make progress prior to the 2024 session closing on Nov. 14, 2024.

Stalled Bills

Connecticut. Proposed legislation in Connecticut would have required the state's Office of Health Strategy to develop and implement a plan by Jan. 1, 2025, concerning private equity firms acquiring or holding ownership interest in healthcare facilities (Connecticut Bill). The plan would include an assessment of whether a certificate of need (CON) should be required for private equity firms looking to acquire a healthcare facility as well as recommendations for disclosure and notice requirements. The Connecticut Bill covered all healthcare institutions including, but not limited to, hospitals, hospice, residential home care, nursing homes, substance use treatment facilities, outpatient clinics and clinical laboratories. The Connecticut Bill currently sits in committee and failed to pass during this year's legislative session, which has closed for 2024 and will not resume until early 2025. See H.B. 5319.

Massachusetts. In 2024, a healthcare bill was reintroduced in Massachusetts intended to protect community hospitals from unfair competition by enhancing the scope of the existing market review process. The original version, H.B. 4653 (Massachusetts Bill), initially proposed by the Massachusetts House of Representatives, would broaden the reach of the commonwealth's Health Policy Commission (HPC) by requiring material change notices for any transactions involving a "significant equity investor," which was defined as any private equity company with a financial interest in a provider or other investors with at least a 10 percent interest. The Massachusetts Bill also would have allowed the HPC to examine size and market share of corporate affiliates or significant equity investors, limit the amount of debt a provider organization with private equity investment could acquire and potentially would have added a layer of review concerning reporting and fees of oral healthcare providers. The Massachusetts Bill was passed by the state House and sent to the state Senate, where it was debated and then passed with amendments, reemerging as S. 2881. The Senate's version made substantial changes to the Massachusetts Bill, including making any transactions with private equity firms reviewable and granting the HPC the ability to make adjustments to transactions. Moreover, the amended version added a new section that codified many standard corporate practice boundaries on the operations of MSOs, but also added restrictions that would invalidate many standard contract provisions between MSOs and medical practices. The Senate's version was sent back to the House where it was not accepted. The Senate insisted on its amendment and appointed a committee of conference. The House and Senate failed to reach a consensus by July 31, 2024 (the end of the legislative session). It remains to be seen if the Massachusetts Bill will remerge in some form in subsequent formal or informal legislative sessions.

Minnesota. Minnesota legislation (HF 4206 in conjunction with SF 4392) would have prohibited any private equity company or real estate investment trust (REIT) from acquiring or increasing ownership interest in or financial control over a healthcare provider. A healthcare provider was defined in the statute as "any entity that provides health or medical care services for a fee."¹⁶ It would have included nursing homes, clinics, ambulatory centers, dental organizations and physician organizations. The Minnesota Bill was proposed earlier this year and ended up in the Committee of Commerce Finance and Policy by the end of the 2024 legislative session. The session will not resume until January 2025.

Oregon. The Oregon Legislature introduced a bill this past session that would have prohibited doctors and other healthcare professionals in a healthcare company from owning shares, holding director or officer positions or having a significant role in both the medical practice and an MSO. An MSO would also be prohibited from hiring, firing or telling medical workers how to perform their jobs, and medical professionals would be prohibited from exercising any management or control over the dealings of the MSO. The bill also would have voided any noncompetes, nondisclosures or nondisparagement agreements between any business entity and medical professionals. The bill did not pass during the 2024 legislative session. The 2025 session will begin early next year. See H.B. 4130 B.

Washington. Legislation was reintroduced legislation in Washington to enhance the state's requirements concerning material change notices under its existing law. The bill would have required parties to give notice to the Attorney General 120 days prior to the closing of a transaction instead of 60 days. It also would have broadened the scope of who must give notice, including insurance holding companies and parent organizations of healthcare services providers. It required that any material change transaction must result in improved health outcomes, increased access to medically underserved areas, reduced costs for patients and other various aims for the public good. The bill did not pass in the 2024 regular session and currently sits with the Senate in committee. The legislature will not reconvene until early 2025. See S.B. 5241.

Final Takeaways

Although we anticipate that the FTC and certain states will continue to propose and enforce more stringent measures against private equity firms investing in healthcare organizations, other states are remaining on the sidelines and taking their time to study their markets, transactions filed to date and current regulatory frameworks. With the exception of Indiana, most proposed state legislation has not been successful so far this year. This suggests a more cautious approach from states, which may fear overburdening their healthcare agencies and attorneys general with additional review requirements, as well as greater participation from the industry in crafting legislation and regulations. Many of the stalled bills are not necessarily dead, however, and may resurface during the 2025 legislative sessions.

Holland & Knight will continue tracking these bills and providing updates as information becomes available. For additional information, please contact the authors.

Notes

¹ California, Connecticut, Delaware, Illinois, Minnesota, New Jersey, Oregon, Pennsylvania, Rhode Island, Washington and Washington D.C.

² Indiana Senate Bill 9 will be codified as Ind. Code § 25-1-8.5-1 —25-1-8.5-4.

³ See Indiana AG FAQ.

⁴ See Indiana AG FAQ: "Therefore, if a merger or acquisition involves an Indiana healthcare entity and the sum of the total assets held by each health care entity at the time of the acquisition meets or exceeds $10 million dollars."

⁵ See Ind. Code § 25-1-8.5-2(a)(6). The Indiana law references six types of "Healthcare Entities," including those entities listed Ind. Code § 25-1-8.5-2(a)(1-5) (organizations providing diagnostic, medical, surgical, dental treatment or rehabilitative care, certain health-related insurers, and managed care organizations, and pharmacy benefit managers). A private equity partnership (listed at Ind. Code § 25-1-8.5-2(a)(6)) is a "healthcare entity" only if it is seeking to enter into a merger or acquisition with one the healthcare provider or insurance-related entities listed Ind. Code § 25-1-8.5-2(a)(1-5)

⁶ Indiana AG FAQ states the FAQ may be supplemented as Indiana AG receives future submissions and questions. The public is invited to propose questions about the submission process.

⁷ Cal. Code Regs. tit. 22 § 97435.

⁸ Dep't of Health Care Access & Info., Health Care Affordability Board Meeting (Jun. 26, 2024).

⁹ Assemb. B. 3129 (Cal. 2024).

¹⁰ Assemb. B. 3129 (Cal. 2024).

¹¹ California Constitution Art IV § 10.

¹² California Constitution Art IV § 8.

¹³ H.B. 2012 has passed the House and is sitting in committee in the Senate.

¹⁴ H.B. 2344 passed the House and is sitting in committee in the Senate.

¹⁵ S.B. 548 has not passed and is currently sitting in committee in the Senate.

¹⁶ Minnesota SF 4392 Section 1(f)(2.1)

Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem, and it should not be substituted for legal advice, which relies on a specific factual analysis. Moreover, the laws of each jurisdiction are different and are constantly changing. This information is not intended to create, and receipt of it does not constitute, an attorney-client relationship. If you have specific questions regarding a particular fact situation, we urge you to consult the authors of this publication, your Holland & Knight representative or other competent legal counsel.