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Ropes & Gray attorneys provide timely analysis on legal developments, court decisions and changes in legislation and regulations.
Shanzeh Daudi: Hi, and welcome to today’s podcast series, Health Care Transaction Laws Unwrapped. Today, we will be focusing on state health care transaction laws in the Midwest region. My name is Shanzeh Daudi, and I am an associate in Ropes & Gray’s health care practice group where I focus on health care transactions and regulatory matters. With me today are Debbie Gersh and Jenn Romig, partners in the health care practice group. We are all based out of the Chicago office. Debbie and Jenn, would you mind providing a brief overview of your practice for our listeners?
Debbie Gersh: Thanks, Shanzeh, for the introduction. I co-chair the health care practice group here at Ropes & Gray, and part of my practice focuses on advising health care industry clients, private equity (PE) clients and investors in connection with strategic transactions, including navigating state health care material transaction filings. I am excited to discuss this topic with you and Jenn today.
Jenn Romig: Similar to Deb, I’m also a partner in the health care group here in Chicago, and in my practice, I advise on both strategic and private equity transactions involving health care matters. We are delighted to be here.
Shanzeh Daudi: Thank you both for the introductions. Looking forward to discussing this topic with you both today. As we covered in our last podcast series, we have seen a concentration of states on the East and West coasts implementing state-based health care transactions review processes—from as early as 2013 for the East Coast, and as late as 2020 on the West Coast. More recently in the past year and a half, states throughout the Midwest region in the U.S. have begun implementing similar regimes. Jenn, can you start by giving us an overview of what the current landscape looks like?
Jenn Romig: That’s right, Shanzeh—in the past year and a half, Illinois, Indiana and Minnesota have all enacted state health care transaction laws. There are also bills pending in Pennsylvania that would introduce health care transaction review processes, and we anticipate an anti-private equity bill may be re-introduced in Minnesota during the state’s next legislative session.
Shanzeh Daudi: That’s really interesting—it sounds like the Midwest is catching up. Debbie, starting with your home state of Illinois, what does the process look like?
Debbie Gersh: The Illinois law is fairly new, as it became effective on January 1, 2024. It requires health care facilities and provider organizations to notify the Illinois Attorney General 30 days before the closing of any mergers, acquisitions or contractual affiliation between two or more health care facilities or provider organizations. With that said, the law’s notice requirements only apply to health care facilities or provider organizations within the state of Illinois, or to out-of-state entities that generate $10 million or more in annual patient revenue in Illinois.
Shanzeh Daudi: Got it—so the Illinois law only applies to transactions between certain types of entities in Illinois and has a materiality threshold of $10 million for out-of-state entities. Is there any flexibility on how covered entities satisfy the notice requirement?
Debbie Gersh: Yes, there is. The Illinois law is unique in that entities can satisfy the state’s notice requirement under this new law in three ways: one way is, to the extent the entities have provided premerger notice under the Hart-Scott-Rodino (HSR) Act, they can file a copy of the notice submitted to HSR to the Illinois Attorney General (AG); the second is, if the entities have filed for change of ownership in compliance with the Illinois Health Facilities Planning Act, the Health Facilities Service and Review Board will automatically notify the Illinois Attorney General and no additional steps are necessary; and lastly, for all other transactions, entities would need to provide a new separate notice to the Illinois Attorney General using the Health Care Transaction Notice Form posted on its website.
Shanzeh Daudi: That is good to know. And, is the Attorney General approval required to close the transaction?
Debbie Gersh: Explicit approval is not technically required, but filing parties are required to wait 30 days from the date of their submission to close the transaction (or longer, if the Attorney General decides to toll the review period—for example, if the AG finds the notice to be incomplete). Noncompliance with the notice requirement opens the door to fines of up to $500 per day and the possibility the AG could file for a temporary restraining order or injunction to prevent the transaction from moving forward, essentially pausing the whole process. The Illinois AG also has discretion to open an investigation and challenge any conduct it thinks is anti-competitive.
Shanzeh Daudi: Thank you for that overview. Jenn, we understand that this law applies to certain transactions among “provider organizations” and “health care facilities”—can you provide further color regarding what entities and transactions this captures?
Jenn Romig: Health care facilities are what we typically think of: licensed hospitals, ambulatory surgical treatment centers, kidney disease treatment centers, as well as any other institution used for any service covered by the Illinois Health Facilities Planning Act, including outpatient surgical procedures. Provider organizations, on the other hand, include any entities in the business of health care delivery or management that represent 20 or more health care providers in contracting with health carriers or third-party administrators for the payment of health care services.
And with respect to the types of transactions captured, the idea is similar. Mergers, the consolidation of two or more entities, acquisitions, and contracting affiliations are covered under the law. This is typical of the types of transactions covered by most health care transaction laws. Worth noting is that contracting affiliations may capture any relationships formed between two or more entities that permit the entities to negotiate jointly, or one entity on behalf of the other, with health carriers or third-party administrators over rates for professional medical services.
Shanzeh Daudi: Got it. So, how does this compare to other state transactions laws?
Jenn Romig: The Illinois law is overall fairly typical in terms of what we’ve seen in other states—the law is probably most similar to Washington’s health care transaction law enacted back in 2020 in that it captures provider organizations and more traditional institutional health care entities, and it requires notice for transactions between two health care entities. This makes the law more targeted in comparison to other laws that only require the involvement of one health care entity with a third party that isn’t a health care entity. Neighboring states, like Indiana, have enacted broader laws.
Debbie Gersh: That’s exactly right. The Indiana law, effective as of July 1, 2024, will require any “Indiana health care entity” involved in a merger or acquisition with another health care entity that has a value of at least $10 million, to provide 90-day pre-closing notice to Indiana’s AG. Similar to Illinois, the AG does not have approval rights, but the parties must wait out the applicable 90-day waiting period, and the Indiana AG has the authority to issue a CID for additional information. The law is a bit broader than the Illinois law in a few ways. First, the 90-day waiting period is longer and could have an impact on transaction closing timelines. The Indiana law also captures a much broader net of health care entities—beyond traditional provider types. Notably, it is one of the first state health care transactions laws to explicitly capture private equity partnerships that enter into transactions with health care entities as a type of covered “health care entity” subject to review. We’ve really only seen this once before in Oregon’s health care transaction review process, and in Oregon, the treatment of PE investors as “health care entities” was clarified in guidance—not in the actual statute, as it is here for Indiana’s law.
Jenn Romig: Yes, and in addition to the Indiana law capturing private equity partnerships, it also captures health maintenance organizations, pharmacy benefit managers, health insurance administrators, insurers that issue accident and sickness policies, and any organizations or businesses that provide rehabilitative care, or diagnostic, medical, surgical or dental treatment.
Shanzeh Daudi: The scope of entities captured seems very broad. Do we have any insight into how Indiana will interpret some of these terms?
Jenn Romig: Not exactly. For example, we understand this definition of “health care entity” to include dental providers but we do not believe it captures management and dental service organizations. And although the law, as mentioned, captures private equity partnerships, we do not think it would capture private equity partnerships investing in management or dental service organizations. However, there is ambiguity in how the state will interpret what constitutes an “organization or business that provides diagnostic, medical, surgical, dental treatment or rehabilitation care,” such as whether psychologists, optometrists, behavioral health professionals, pharmacies and others are captured.
Shanzeh Daudi: Debbie, you had mentioned the materiality threshold of $10 million—does this apply with respect to the revenue of the health care entities located in Indiana?
Debbie Gersh: Shanzeh, that is a really good question, but unfortunately, this is not yet clear. Indiana has not issued any regulations or clarifications on whether the $10 million threshold is assessed by the value of the entity entering the transaction, the combined values of the entities in the transaction or the value of the transaction itself. And, we do not yet have clarity on whether this $10 million has any nexus to activity conducted within Indiana. We hope Indiana clarifies this threshold soon.
Shanzeh Daudi: And without this clarification, it appears this law could apply pretty broadly.
Debbie Gersh: Exactly. I would also note that unlike other health care transaction laws we’ve seen, Indiana’s review process does not purport to review transactions for their impact on cost, quality and access to care but instead focuses primarily on antitrust concerns—which we found interesting.
Shanzeh Daudi: Thanks, Debbie. And how does this compare to the law in Minnesota?
Debbie Gersh: The Minnesota law is similar to Indiana in that it casts a wide net for what entities are captured—while Minnesota’s law includes more traditional entities such as licensed hospitals and health systems, provider group practices and medical foundations, it also includes “any entity controlled by, or that exercises control over, any health care entity.” This concept of “control” extends to any entity with direct or indirect ability to guide the management or policies of a health care entity, including by management contract.
Jenn Romig: That’s right—management service organizations could therefore be captured by the law. Notably, though, Minnesota’s law seems to only pick up medical practices and does not appear to apply to other professions such as dental. I’d also like to mention that the law is unique in that the process is two-pronged, with varying requirements for entities depending on their in-state revenue.
Shanzeh Daudi: Can you explain further what you mean by two-pronged?
Jenn Romig: Sure—review requirements under Minnesota’s law depend on whether the health care entities involved in the transaction meet certain revenue thresholds. Specifically, a covered transaction that involves a health care entity with projected “average revenue” of at least $80 million per year must provide notice to the Minnesota Attorney General and Minnesota Commissioner of Health 60 days before the transaction closes. The parties don’t need formal approval, but the Minnesota Attorney General will have authority to enjoin the transaction if it determines it is not in the public interest. But, if average revenue of a health care entity is between $10 million and $80 million per year, the entity involved in the transaction only needs to provide notice to the Minnesota Commissioner of Health 30 days before the transaction closes, and the Attorney General does not have authority to enjoin the transaction, but will use the data received to analyze impact on equitable access, cost and quality of health care services more generally.
Shanzeh Daudi: That is interesting. And can you also provide an overview of what types of transactions are covered under Minnesota’s law?
Debbie Gersh: Sure—transactions covered under this law include your typical M&A transactions as well as transfers of control of 40% or more of a health care entity. Minnesota’s law only captures transactions that occur, in part, within Minnesota or involve health care entities formed or licensed in Minnesota. I will mention, though, that Minnesota looks to more than just the transaction at issue in the notice. The law permits any triggering transactions that have occurred within the past five years to be analyzed along with the transaction at issue to determine the overall impact of the transaction, or series of transactions, on the cost and quality of health care services.
Shanzeh Daudi: Wow, that seems potentially concerning. So, this could open up scrutiny to past transactions?
Debbie Gersh: That’s right—we’ve seen other states, like California and New York, similarly seek to lump in prior “series of related” transactions as a part of their review process, in an effort to deter entities from breaking up transactions into multiple smaller parts in order to avoid triggering review.
Shanzeh Daudi: With a broad law already in place in Minnesota, can you tell us about the failed anti-private equity legislation in the state that you expect may be re-introduced in the next legislative session?
Jenn Romig: Yes, the failed Minnesota bill is quite interesting in that it didn’t take the form of the traditional state health care transaction laws we’ve been discussing here. We’ve been starting to see the emergence of proposed state legislation that is specifically targeted at regulating private equity investments in health care. The Minnesota proposed law was one of them, and this is something our colleagues will discuss further in our upcoming podcast on private equity, management service organizations (MSOs) and dental service organizations (DSOs).
Shanzeh Daudi: That’s really interesting. So, how exactly did this Minnesota bill target private equity investments?
Jenn Romig: The bill proposed to prohibit private equity investments and real estate investment trusts from acquiring or increasing, either directly or indirectly, their ownership interest in providers such as nursing homes, hospitals, physician organizations and dental organizations. The bill would have also prohibited private equity companies and real estate investment trusts from acquiring or increasing any operational or financial control over a provider.
Shanzeh Daudi: This legislation sounds like it would have been extremely restrictive if passed and will be important for private equity investors to monitor any renewed interest among Minnesota legislators in 2025. Regarding other pending bills in the Midwest, what else should we be keeping on our radar?
Jenn Romig: With respect to other pending bills, Pennsylvania has three bills pending that are more along the lines of traditional state health care transaction laws. The first and second bills would require notice to the Pennsylvania Attorney General 90 days before entering into certain transactions or agreements that result in a material change—one focuses on provider organizations and for-profit entities who own or operate hospitals, hospice agencies or nursing homes, while the other more broadly focuses on provider organizations and health systems. The third bill would require notice to the Pennsylvania Attorney General 120 days prior to the effective date of a merger, acquisition or contracting affiliation between two or more Pennsylvania health care facilities, systems or provider organizations, including home health agencies, home care agencies and birthing centers. The latest version of the third bill explicitly calls out private equity-backed entities as being captured as a type of “health care facility system,” and it expanded the definition of “health care services” to include dental services, which would capture dental clinics and dental service organizations. It will be interesting to see if any of these pass. Pennsylvania does not yet have a state health care transaction law in place—however, we know this has been a priority of the Pennsylvania Attorney General for some time. We expect that even if none of these three pending bills are passed this year by the Pennsylvania legislature, a similar bill will likely be introduced in the next session.
Shanzeh Daudi: This is all great to know, and I appreciate you both for providing this update. If those listening would like more information on this topic or from our health care group, please do not hesitate to contact one of us or visit our website. Our website’s interactive map provides detail about the various pending and enacted state health care transactions laws nationwide. You can also subscribe and listen to this and other Ropes & Gray podcasts wherever you regularly listen to your podcasts, including on Apple and Spotify. Thank you for listening.