Ropes & Gray attorneys provide timely analysis on legal developments, court decisions and changes in legislation and regulations.
Jenn Romig: Hello, and welcome to today’s podcast. My name is Jenn Romig, and I’m a partner in Ropes & Gray’s health care practice group. I represent a variety of health care industry clients and investors in connection with strategic mergers and acquisitions, joint ventures, and the complex regulatory regimes implicated by these transactions. I also represent private equity clients in their acquisitions of a wide range of health care businesses. With me today are Debbie Gersh and Tim McCrystal, co-chairs of Ropes & Gray’s health care practice group.
We are excited to launch a follow-up series to our podcast series last year on Value-based Care Collides with Competition. Our new podcast series, Health Care Transaction Laws Unwrapped, will similarly focus on updates to competition, quality, access, and cost laws across the country that are impacting health care transactions.
Debbie Gersh: Thanks, Jenn. Excited to be picking this podcast series back up. There have been a lot of interesting developments in this area since last year.
Jenn Romig: Definitely. In our last podcast, we discussed the Biden Administration’s focus on health care consolidation, and, in particular, its aggressive regulatory and enforcement stance regarding market access and competition. I think it would be helpful to pick up on what’s been happening on the federal agency level. Could you brief us on what we’ve seen here?
Tim McCrystal: Sure, Jenn. The federal government has a stated priority of increasing access to and the quality of health care, as well as lowering the costs of care. Since our last podcast, the Biden Administration has continued to take a strong stance on competition in the health care space. Recently, we have seen the emergence of stronger anti-private equity, or PE, sentiment as well. For example, in March 2024, the FTC held a workshop with speakers from FTC, DOJ, HHS-OIG and CMS which focused on the alleged detrimental effects of private equity investments in health care. The speakers proposed several future pathways to limit the role of private equity in health care, including by expanding corporate practice restrictions, increasing agency collaboration, and enforcing antitrust laws at both the federal and state levels.
Debbie Gersh: That’s right, Tim. And simultaneously with this workshop, the FTC, DOJ and HHS together opened a request for information, seeking public comments on the impact of private equity investment in health care. The parties received over 6,000 comments from health care entities and private individuals and associations, as well as a joint letter from a coalition of 11 state attorneys general expressing concerns about PE involvement. Specifically, the state AGs expressed concern regarding adverse effects of PE investment in health care companies given PE’s focus on short-term gains, and recommended increased transparency, prohibition of certain anti-competitive contractual provisions, and joint agency enforcement against anticompetitive conduct. The response to this request for information is indicative of the adverse attitude that federal agencies have had recently when considering private equity’s role in the health care industry.
Tim McCrystal: I agree. I also wanted to highlight a more specific area of enforcement that the FTC has been focusing on with respect to PE investments. We mentioned in our last podcast that the FTC and DOJ have expressed concerns regarding private equity’s use of “roll-up transactions.” The FTC recently issued an additional request for information regarding the impact of PE serial health care acquisitions and roll-up strategies. The FTC also initiated an antitrust action against PE firm Welsh Carson last year in connection with U.S. Anesthesia Partners, alleging that Welsh Carson had orchestrated a “roll-up” strategy to consolidate anesthesiology practices. A federal court ultimately dismissed these claims against Welsh Carson, finding that the FTC hadn’t adequately alleged that Welsh Carson violated antitrust law. This was a big win for private equity—but the case in general demonstrates the FTC’s willingness to target PE-backed sponsors of health care companies in antitrust actions.
Jenn Romig: Thanks, both. That’s helpful background on what’s been going on at the federal agency level. I also know that there has been some legislation introduced at the federal level targeting PE investments in health care—could you provide us with an overview of that?
Debbie Gersh: Of course. There have been three main bills of focus. The first is the Corporate Crimes Against Health Care Act, introduced by Massachusetts Senators Warren and Markey in June 2024. If passed, it would authorize the Attorney General or state attorneys general to “claw back” executive compensation and issue penalties against managers if portfolio health care entities experience certain financial difficulties caused by “looting,” as they call it, on the part of the private equity firm. There are two similar bills, the Health Care Transparency Act, introduced by Washington Representative Jayapal in March 2023, and the Health Over Wealth Act, introduced by Massachusetts Senator Markey in July 2024. Both bills would empower the HHS Secretary to establish a Task Force to review certain private equity transactions and would impose on health care entities annual disclosure requirements with respect to private equity ownership, among other things. The Health Over Wealth Act also contemplates imposing licensure requirements on PE firms investing in health care entities, but the bill is still in its early stages. Taken together, it’s clear that these federal bills are another mechanism through which the federal government is targeting PE.
Jenn Romig: Thanks, Debbie, for that overview. Switching gears from federal to state updates, I know that state health care transaction laws have been really expanding in the last few years. I know we will cover this in more detail in other podcasts in our series, but could you give us a high-level update of what the current landscape looks like on a state level, and what themes we’re seeing?
Tim McCrystal: We have seen a significant increase in attention to these laws nationwide. Massachusetts and Connecticut have longstanding state health care transactions laws and regulations that have been in effect for over a decade now. Between 2020 to 2022, as we covered in our last series, laws were implemented in Nevada, Oregon and Washington. And since our last podcast in May 2023, new state laws or regulations have been enacted or implemented in New York, Illinois, Minnesota, California, and Indiana—and pending legislation was introduced in California, Connecticut, Massachusetts, Minnesota, Pennsylvania, and Washington. In the past year, we have also seen increased enforcement in states with pre-existing laws, like Oregon. In general, we are definitely seeing increased scrutiny in connection with health care transactions across the nation.
Debbie Gersh: Something interesting about the legislation that’s been introduced recently is that there appears to be a mix of the more traditional health care transaction laws that we discussed in our last series—which focus on state review of health care transactions more generally—and a second bucket of pending legislation that is specifically focused on targeting private equity investments in health care, which certainly aligns with the federal government’s agenda that we just discussed. Even states that already have traditional health care transaction laws—like Connecticut, Minnesota, Massachusetts, and California—they are ratcheting up the scrutiny on private equity by introducing new bills that would require additional review requirements for PE investments in health care. California’s AB 3129, for example, which recently passed in the California legislature at the end of August, would require approval from the California Attorney General for certain PE health care investments in the state. Governor Newsom has until the end of September to sign or veto the bill.
Tim McCrystal: A lot of this anti-PE sentiment on the state level may be driven by the Steward Health Care crisis in Massachusetts. Steward was an unfortunate case, where a once private equity-owned health system filed for bankruptcy in 2024 after experiencing financial difficulties that many politicians attribute to private equity’s mismanagement of the system. We’ll discuss Steward and its impacts in more detail on our East Coast podcast, but many legislators nationwide are using Steward as a case study pointing to alleged detrimental effects of private equity involvement in health care.
Jenn Romig: That is very interesting. It seems like these laws are expanding both in number and in scope, so they will be important for health care investors and health care entities to monitor. For the laws that have already been implemented, can you tell us what you’ve been seeing in terms of enforcement? Have a lot of transactions been subject to review?
Tim McCrystal: That’s a good question, Jenn. While most states do not publicly post the transactions they’ve reviewed, there are a handful of states that do, including Oregon, California, Massachusetts, and New York. Massachusetts continues to actively enforce its review requirements, with the Health Policy Commission reviewing over 15 transactions in the past year—one of which was subjected to a cost and market impact review. New York, on the other hand, has only seen a handful of transactions reported since the law was implemented in August 2023. New York’s health care transaction law is notice only, though, so the law has less teeth than some others.
Debbie Gersh: Yes, that’s right, Tim. And the West Coast states have been a bit more interesting in their enforcement trends. In contrast to New York, Oregon’s health care transaction law is the most rigorous and broad. It requires the regulator to issue a formal approval of the transaction. Oregon’s law has been on the books since March 2022, and the Oregon Health Authority, or OHA, has already reviewed over 20 transactions. Interestingly, during its first year of reviews, OHA was fairly lenient in its reviews and generally approved transactions without conditions. Over time, though, Oregon has become more aggressive in its approach and has increased the frequency with which it orders more intensive comprehensive reviews as well as conditions to closing.
Tim McCrystal: That’s right—and California has been interesting as well. In early 2024, California’s Office of Health Care Affordability, or OHCA, began to review notices for transactions expected to close on or after April 1, 2024. While California’s law and its implementing regulations are written broadly, only a handful of transactions have been reported to date—which is surprising. When questioned about this low volume during a Board Meeting, OHCA stated that it believes many transactions were structured to close on March 31, 2024—or before that time—to avoid being subject to OHCA review. OHCA also noted that while the number of complete notices is low currently, it has received over 50 inquiries from entities regarding submissions. OHCA also recently finalized revisions to its implementing regulations, some of which are aimed at closing loopholes in the law. We will discuss this and other enforcement trends further in our upcoming West Coast podcast.
Debbie Gersh: Interestingly, Oregon and California are certainly the ones to watch. Given trends nationwide, we will likely continue to see new states propose health care transaction review processes. We’ll also likely see states with currently enacted laws continue to attempt to broaden the scope and/or breadth of their existing review processes.
Jenn Romig: It will be interesting to see how these enforcement trends continue to develop. On that note, have there been any efforts to challenge state health care transaction laws, given their novelty and broad enforcement in certain states?
Debbie Gersh: Jenn, that’s a really good question. We have been watching for litigation in this area, and to date, we’re aware of one key challenge and that is, unsurprisingly, in Oregon. The Oregon Association of Hospitals and Health Systems challenged the Oregon Health Authority’s review program on grounds that it was unconstitutionally vague in violation of the federal Due Process clause, and that it impermissibly delegated legislative powers to OHA in violation of the Oregon constitution. The judge sided with OHA on federal grounds—stating that the plaintiff had not met the “heavy burden” to invalidate the statute for vagueness—and declined to rule on the state claims, but this decision is currently being appealed in the Ninth Circuit. We’ll discuss in more detail in our West Coast podcast, but it’ll be interesting to see what the outcome of that case is, and to see if any similar legislation pops up in other states, particularly as new laws are getting off the ground.
Jenn Romig: Very interesting. That will definitely be an important case to monitor. Shifting gears a bit, could you provide us with an overview of what practical effects you have seen these state laws have on transactions?
Tim McCrystal: The emergence of health care transaction laws has certainly added to the list of considerations that health care investors need to take into account for proposed transactions. While the exact impacts will differ from state to state, there are some general themes to keep in mind.
The first is assessing during diligence if any of the health care transaction laws will require notice or approval—this will require an assessment of the entities involved in the transaction, where any health care entities are located or provide services, and how much revenue they derive in each state. To the extent that health care transaction laws do appear to apply, it’ll be important to consult with counsel to understand if there are ways to structure the transaction to potentially take the transaction out of the scope of review. For example, certain laws only require filings if an acquisition exceeds a certain percentage change of control. If it’s possible to structure the transaction under such thresholds, that should be considered.
But if you determine that a health care transaction law applies, it will then be important to understand how this specific law could impact deal timelines. These laws vary, but generally require pre-closing notice of 30-90 days. I will note, though, in practice, these reviews can take longer. Regulators often have broad authority to toll review periods if filings are deemed incomplete, so even if a state’s requirement is technically 30 days pre-closing notice, those periods can be extended. Some states like Massachusetts, California, and Oregon also have authority to initiate more intensive cost and market impact reviews, which could take over six months.
Debbie Gersh: And along those same lines, it’s important to consider the administrative costs and labor associated with these filings. Some states have more intensive filings that require significant effort in gathering the requisite documentation—such as financial information, corporate governance documents, and other details regarding the health care entities involved. In addition, some states have associated filing fees. In Oregon, unsurprisingly, if OHA decides to initiate a comprehensive review, fee amounts vary depending on the revenue of the parties involved, but could be as high as $100,000.
And another point that has often come up during these submissions is navigating confidentiality and what will be publicly disclosed about the transaction. Clients typically expect certain sensitive business and financial documents to remain confidential, but some of the state laws are written quite broadly to give agencies the authority to publicly disclose sensitive deal documents. It will be important to work closely with counsel to strategize on appropriate redactions as well as requests for confidentiality.
Tim McCrystal: That’s right. And one last point here—entities should be mindful of what information they are releasing online about transactions, including press releases. Some state regulators review press releases about health care transactions online and will proactively reach out to entities that have not filed, or compare information received in a notice application against information released online. It’s important to be consistent and accurate in messaging both in the press releases and in the notice applications to the state.
Jenn Romig: It sounds like health care transaction laws will continue to have a growing impact on deals in the industry. Given that, do we anticipate these sorts of laws to chill investment in health care, particularly from private equity firms given the increasing anti-PE sentiment from federal and state governments?
Debbie Gersh: Jenn, it’s really hard to tell how everything will play out, but I will say that investors in the health care space are used to operating in a highly regulated area. These sorts of companies have been subject to other long-existing requirements related to changes of ownership, licensing requirements, certificates of need, and the like. The health care transaction notice and review process is certainly a notable trend and investors don’t—and won’t—take that lightly, but it’s something that I think investors and health care entities will adapt to. There may be some buyers who may be deterred, particularly if an investment is fairly small in one state relative to the burden of these laws, but we have not yet seen any sort of pattern indicating a chilling effect on investments.
Tim McCrystal: Agreed, Debbie. And I’d also note that we may see a change in the trends in this area depending on the results of the upcoming election, when a new administration takes power. We will be monitoring closely.
Jenn Romig: Thanks, Tim and Debbie. I’ve really appreciated our time today, and we look forward to delving more into these topics in our series. This podcast is just the first in a series discussing recent developments and trends in emerging laws addressing health care access, quality, and costs. Our next podcast will address state health care transaction laws in the Midwest. If those listening would like more information on this topic or from our health care group, please don’t hesitate to contact one of us or visit our website at ropesgray.com/healthcaretransactions. 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. Thanks again for listening.