Increased Oversight of Private Equity Investments in Health Care

Private equity investments in health care to be subject to increased oversight from federal and state regulators, including antitrust officials

Federal and state government regulation of health care transactions continues to increase rapidly. At the federal level, there is increased focus on the role of private equity involvement in health care and the perceived impact on access to care, quality of care and pricing. At the same time, a growing number of states have passed and continue to propose legislation that increases state oversight of a variety of types of health care transactions. As a result of this increase in regulatory scrutiny at the federal and state levels, parties interested in conducting health care transactions must consider various regulatory requirements and the factors regulators take into account when analyzing (and in some cases, deciding whether to approve) proposed health care transactions. Parties should at the very least expect delayed closings and longer transaction timelines. 

Increased Federal Oversight of Private Equity in Health Care

On March 5, 2024, the Department of Justice’s (DOJ) Antitrust Division, the Federal Trade Commission (FTC) and the Department of Health and Human Services (HHS) jointly launched a cross-government public inquiry into “private-equity and other corporations’ increasing control over health care.” The agencies released a joint Request for Information regarding private equity and its involvement in health care. Specifically, the Request for Information solicits public comment on deals conducted by health systems, private payers, private equity funds and other alternative asset managers that involve health care providers, facilities or ancillary products or services. The Request for Information also requests information on transactions that would not be reported to the DOJ or FTC for antitrust review under the Hart-Scott-Rodino Antitrust Improvements Act.

That same day, the FTC hosted a panel entitled “Private Capital, Public Impact: An FTC Workshop on Private Equity in Health Care,” in which a number of government officials, academics and health care providers spoke at length regarding their experiences with private equity involvement in health care. The panel focused largely on the impacts of the “roll-up” strategy employed by private equity firms, a strategy by which private equity firms acquire a series of health care providers and facilities within a geographic area. This panel and Request for Information come on the heels of the FTC’s growing focus on private equity involvement in the health care space, including a highly publicized lawsuit in September 2023 against a private equity backed Texas anesthesia services provider. The lawsuit alleges the provider and the private equity firm executed a multi-year anticompetitive scheme to consolidate anesthesiology practices in Texas, drive up the price of anesthesia services provided to Texas patients and boost their own profits. In May 2024, a federal court dismissed the lawsuit against the private equity firm. 

On June 6, 2024, a multistate coalition of 11 attorneys general submitted a comment letter in response to the Request for Information. The letter advocates for federal and state enforcers to have access to information on organizational structure, quality of care and enhanced payments to providers that participate in federal and state health programs, with no exclusions for organization structures in which an investor owns less than 25% of a holding entity or health care asset. The coalition also calls for prohibiting participants in federal and state health care programs from using anticompetitive contracting practices that can be detrimental to patient access and quality of care, among other actions. 

In addition to these federal agency actions, federal legislative committees have also increased their focus on private equity involvement in health care. On April 1, 2024, the U.S. Senate’s Homeland Security and Governmental Affairs Committee sought information from several private equity firms regarding their involvement in hospital emergency departments and potential associated impacts on patient care. On April 3, 2024, Senator Ed Markey of Massachusetts held a field hearing for the Senate’s Committee on Health, Education, Labor & Pensions, Subcommittee on Primary Health and Retirement Security entitled “When Health Care Becomes Wealth Care: How Corporate Greed Puts Patient Care and Health Workers at Risk,” in which he, Senator Elizabeth Warren and several health care providers delivered remarks addressing the impact of private equity on health care, and more specifically, in relation to the ongoing operation of a Massachusetts health system backed by private equity that filed for Chapter 11 bankruptcy on May 6, 2024. In conjunction with the remarks provided during this hearing, Senator Markey proposed a bill named the “Health Over Wealth Act,” which would require certain providers backed by private equity firms and other for-profit providers to send annual reports to HHS related to specific finance and operational items. The proposed bill includes several other requirements, including requiring private equity firms to establish escrow accounts for operating and capital expenditures, mandating that private equity firms obtain a license from HHS to directly or indirectly invest in health care entities and creating a task force under HHS to monitor health care marketplace changes and to address and limit the role of private equity and consolidation in health care.

Proposed State Regulation of Private Equity Health Care Transactions

As of May 1, 2024, several states have proposed legislation scrutinizing private equity investments in health care. Examples include the following:

• California – In California, there is a bill (AB-3129) that would significantly impact private equity and hedge fund investments in the California health care industry. The bill requires private equity firms and hedge funds to provide written notice to, and for some transactions, obtain consent from, the state’s attorney general prior to proceeding with a transaction involving an acquisition or change of control of certain health care facilities, providers, provider groups and non-physician providers. Significantly, the bill also prohibits physician practices from entering into management services agreements with any entity controlled in part or in whole directly or indirectly by a private equity group or hedge fund in exchange for a fee. This aspect of the bill would prohibit agreements commonly utilized in “friendly PC” arrangements. As of the date of this post, the state assembly voted to advance the bill, which is now under review by the state Senate. The bill is currently working its way through various committees and the new law, if passed, would take effect as of January 1, 2025.
• Connecticut – An act in Connecticut (Raised HB 5319) introduced in early 2024 requires the executive director of the Office of Health Strategy to develop a plan addressing private equity firms acquiring or holding ownership in health care facilities in the state. This includes development of a recommendation for information disclosures for private equity ownership and an assessment of whether Connecticut should adopt certificate of need laws or other limitations specific to private equity ownership. 
• Massachusetts – A proposed law in Massachusetts (H.4653) would subject private equity investments in providers or provider organizations to pre-closing notice requirements. The government may also conduct a market impact review that would cause significant closing delays. 
• Minnesota – Minnesota has introduced legislation (HF 4206) in early 2024 that would prohibit private equity firms and real estate investment trusts (REITs) from acquiring direct or indirect ownership in, or increasing an ownership interest in, certain health care providers after August 1, 2024. The proposal also prohibits private equity firms and REITs from acquiring or increasing any operational or financial control the private equity firm or REIT has over a health care provider after August 1, 2024. 

Expansion of State Notification/Approval Laws for Health Care Transactions

In addition to proposed legislation addressing health care transactions involving private equity, several states have already enacted a series of notification laws that require extensive document disclosures, state review and, in some circumstances, state approval, in order for a health care transaction to proceed, regardless of whether there is private equity involvement. The foundation for many of these state laws is based on a model act provided by the National Academy for State Health Policy, which created a framework for state regulators to draft laws and regulations with the goal of increasing government oversight of health care provider mergers and acquisitions. Not every state has passed a notification law to date, and among the states that include notification laws, many are specific to hospital transactions and not more broadly applicable to other health care-related entities. However, there is a nationwide trend of state legislators considering and passing laws that apply more broadly to a variety of health care transactions.

A brief overview of some of the states that are considering or have already adopted notification and/or approval requirements for health care transactions is included below. Please note that these summaries are high-level. If you have any specific questions regarding any of the requirements summarized below, please contact us. 

• California – In addition to pending AB-3129 for private equity and hedge fund transactions, California currently requires that certain health care entities provide the state with written notice of any agreements or transactions after April 1, 2024 involving certain sales, transfers, leases or other transfers (including transfers of control) of a material amount of the assets or operations of a health care entity at least 90 days prior to entering into such arrangements.(1) If the agreement or transaction is likely to have a risk of a significant impact on market competition or costs for consumers, the state is required to conduct a review analyzing various potential impacts.
• Colorado – Colorado requires that parties to a “covered transaction” provide written notice to the state’s attorney general no later than 60 days prior to the transaction closing or the effective date of the transaction.(2) A “covered transaction” includes any transaction that results in the sale, transfer, lease, exchange or other disposition of 50 percent or more of the assets of a hospital.(3) “Covered transactions” also include the sale, transfer or other disposition of the control of a parent company, holding company or other entity controlling a hospital.
• Connecticut – Connecticut requires that health care entities undergoing a health care transaction “result(ing) in a material change to the business or corporate structure of a group practice” provide at least 30 days’ prior notice to the state’s attorney general.(4) This notification requirement also extends to mergers involving hospitals and hospital systems.
• Hawaii – Hawaii law requires that the parties to certain acquisitions resulting in the change of ownership or control of a hospital provide notice and submit an application seeking approval from the State Health Planning and Development Agency prior to the effective date of the change of ownership.(5) The parties must also provide advance notice to the state’s attorney general at least 90 days prior to the transaction occurring. In some cases, approval may be required for the transaction to proceed.
• Illinois – Illinois requires (effective January 1, 2024) that parties provide written notice and certain requested information to the state’s attorney general no later than 30 days prior to the closing of the transaction for mergers, acquisitions or contracting affiliations of certain health care facilities and provider organizations.(6) For covered transactions between an Illinois health care entity and an out-of-state health care entity, this notice requirement applies if the out-of-state entity generates $10 million or more in annual revenue from patients residing in Illinois.
• Indiana – On March 13, 2024, Indiana enacted legislation (Senate Bill No. 9), effective July 1, 2024, requiring health care entities (defined to include private equity firms) involved in certain transactions to notify and provide certain information to the state’s attorney general at least 90 days prior to the closing of the transaction.(7) Transactions subject to the notice requirement include any change of ownership, including stock transfers effectuated by a merger agreement, mergers and acquisitions of a health care entity with a combined asset value of at least $10 million. The law broadly defines health care entities to include not only hospitals and health care providers but also certain health care insurers, health maintenance organizations and pharmacy benefit managers. Indiana’s attorney general may also provide a written analysis of any antitrust concerns within 45 days of the notice and has the right to issue a civil investigative demand for additional information.
• Massachusetts – For any transaction resulting in material changes to a health care provider or provider organization’s operations or governance structure, including but not limited to a corporate merger, acquisition or certain affiliation changes, Massachusetts law requires the health care provider or provider organization to provide notice to the state’s attorney general, Health Policy Commission and Center for Health Information and Analysis no less than 60 days prior to the date of the proposed material change occurring.(8) The state’s Health Policy Commission is responsible for conducting a preliminary review of the impact of the material change, taking into account several economic factors. In some cases, material changes may not occur until the issuance of a final report by the regulators. In addition, some material changes may be referred to the state’s attorney general, who has the option to conduct an investigation to determine whether the provider or provider organization engaged in unfair methods of competition or anti-competitive behavior in violation of applicable law.
• Minnesota – Minnesota requires that parties to a transaction that (1) involves a health care entity averaging revenue of at least $80 million per year or (2) will result in an entity with a projected revenue of at least $80 million per year once the entity is operating at full capacity, provide notice and certain requested information at least 60 days prior to the completion date of the transaction to the state’s attorney general and commissioner of health.(9) Transactions subject to this requirement include, but are not limited to, a single action or series of actions within a five-year period constituting a merger, sale or transfer of 40 percent or more of the assets of a health care entity to another entity, creation of a new health care entity and any other transfer of control of a health care entity to, or acquisition of control of a health care entity by, another entity. Health care entities involved in transactions with an average or projected revenue between $10 million and $80 million per year must also provide certain transactional data to the commissioner of health at least 30 days prior to the proposed completion date of a transaction.(10)
• Nevada – Nevada requires parties to certain transactions involving a hospital or physician group, including certain mergers, acquisitions, joint ventures or contracts for management, to provide written notice and certain requested information to Nevada’s Department of Health and Human Services no later than 60 days after the completion of the transaction or execution of the management contract.(11) Parties to certain health care transactions are also required to provide notice to the state’s attorney general at least 30 days prior to the closing.(12)
• New Mexico – On May 1, 2024, New Mexico legislation (S.B. 15) titled the Health Care Consolidation Oversight Act went into effect. Under this new legislation, New Mexico’s Office of Superintendent of Insurance has the authority to review and approve/disapprove transactions involving hospitals. Transactions subject to this requirement include mergers, acquisitions, affiliations that result in a change of control (including with a management services organization), sales, purchases, leases or formations of similar corporate relationships (e.g., a partnership or joint venture) for state hospitals. The law requires that at least one person that is party to the transaction provide written notice of the transaction to the state’s Office of Superintendent of Insurance. The notice must include certain transaction information in addition to copies of all transaction documents and a statement describing the goals of the transaction and its potential effect on health care services in New Mexico. Within 120 days of receiving the completed notice and materials, the office must complete the review and either approve the transaction, approve it with conditions or disapprove the transaction. If the transaction is approved, the hospital will also be required to submit reports to the state annually for three years. 
• New York – New York requires that a health care entity (including management services organizations) undergoing a merger, acquisition, partnership, joint venture or similar “material transaction” (including the formation of a management services organization for the purpose of administrating contracts with health care providers) submit written notice and various documents to the state’s Department of Health at least 30 days prior to the closing date of the transaction.(13) This notice requirement does not apply to clinical affiliations for the purposes of collaborating on clinical trials or medical education programs or “de-minimis transactions” in which a health care entity’s New York gross revenue is increased by less than $25 million as part of a single transaction or series of transactions over a 12-month period. The new law requires the Department of Health to promulgate regulations regarding this requirement. We will monitor the status of the promulgation of these regulations and provide updates. 
• Oregon – Oregon requires that certain health care entities undergoing “material change transactions” provide at least 180 days prior written notice to the Oregon Health Authority. The parties are authorized to proceed with the transaction only upon receiving approval or conditional approval from the Oregon Health Authority, after it has had the opportunity to conduct a preliminary review no later than 30 days after receiving the notice.(14) Whether a transaction is a “material change transaction” depends on whether certain past or projected revenue thresholds are met. 
• Pennsylvania – Pennsylvania legislators introduced a bill in May 2023 (SB 548) that would require health systems, including hospitals, hospice agencies and nursing homes, to provide notice and certain documentation to the state’s attorney general and observe a waiting period prior to entering into certain material transactions. During this waiting period, the state’s attorney general would review any relevant documentation and determine whether the transaction is against the public interest, and if so, determine whether an action should be commenced in state court to enjoin the transaction.
• Rhode Island – Rhode Island requires that parties to any transaction resulting in a change of ownership, control or possession of 20 percent or more in a hospital obtain prior approval from both the state’s Department of Health and the attorney general.(15) The law gives the reviewing agencies 180 days to make a decision on the application. 
• Vermont – Vermont requires any hospital acquiring a medical practice of one or more physicians to provide notice to the state’s attorney general at least 90 days prior to the effective date of the transaction.(16) 
• Washington – Washington requires parties to a transaction involving two or more hospitals, hospital systems or provider organizations undergoing a “material change” to provide written notice to the state’s attorney general no less than 60 days prior to the effective date of the transaction.(17) A “material change” includes any merger, acquisition or contracting affiliation between two or more hospitals, hospital systems or provider organizations. The state senate is also in the process of reviewing a bill (SB 5241) that may expand and revise the existing notice laws and requirements for hospital-related transactions.

Additional Antitrust Considerations

The FTC and DOJ have focused recently on private equity and health care transactions in the application of the revised Merger Guidelines, which emphasize enforcement against mergers that continue a trend toward consolidation in an industry, or are part of a series of multiple acquisitions, or involve partial and cross-ownership considerations, or involve multi-sided platforms (like the health care insurer-provider-patient relationship).(18) Despite the agencies’ focus on these issues, courts may not be as willing to back them as the agencies had hoped. On June 5, 2024, a court denied the FTC’s motion to enjoin Novant Health’s acquisition of two hospital systems in North Carolina from Community Health Systems Inc. (CHS). Although the hospitals competed with one another and the market shares involved would have triggered a presumption of illegality, the court ruled that Novant’s acquisition would spur investment in the CHS hospitals, likely reversing a downward spiral that would result in the “proverbial wheels fall(ing) off.”(19)

The FTC, DOJ and HHS continue to take additional steps to increase regulatory scrutiny of health care transactions. On April 23, 2024, the agencies jointly announced the launch of an online portal, HealthyCompetition.gov, which allows members of the public to report health care practices that may harm competition. Submissions through this online portal will be reviewed by the FTC and DOJ. If a complaint raises sufficient concern under the antitrust laws or is related to HHS authorities, the appropriate agency will investigate the complaint, which may lead to the opening of a formal investigation.

Takeaways

Federal and state agencies and legislators will continue to scrutinize health care transactions through various mechanisms. Regulators are particularly focused on private equity investments in health care. Parties considering entering into health care transactions must be aware of current and proposed federal and state notification, approval and information disclosure requirements in addition to monitoring any relevant regulatory enforcement actions. Private equity firms should expect continued regulatory scrutiny of their investments in health care and should be prepared to navigate through additional regulatory hurdles such as the submission of detailed information regarding transactions and their expected impact on competition, costs and patient care. This new regulatory landscape will at the very least lead to delayed closings and longer transaction timelines. 

The health care and antitrust attorneys at Vedder Price are monitoring these various federal and state initiatives and would be happy to assist clients in navigating these regulatory changes. 

(1) Cal. Health and Safety Code § 127507.

(2) C.R.S. § 6-19-103.

(3) C.R.S. § 6-19-102.

(4) Conn. Gen. Stat. Ann. § 19a-486i.

(5) See Haw. Rev. Stat. § 323D-72.

(6) 740 ILCS 10/7.2a.

(7) See Senate Bill No. 9, available at https://legiscan.com/IN/text/SB0009/2024.

(8) Mass. Gen. Laws ch. 6D, § 13.

(9) Minn. Stat. § 145D.01.

(10) Minn. Stat. § 145D.02.

(11) NRS § 439A.126.

(12) NRS § 598A.390.

(13) N.Y. Pub. Health Law §§ 4550 et seq.

(14) ORS § 415.501.

(15) R.I. Gen. Laws § 23-17.14-6-7. 

(16) 18 V.S.A. § 9405c.

(17) RCW § 19.390.030.

(18) United States Dep’t of Justice and Federal Trade Comm’n, Merger Guidelines (2023), available at https://www.ftc.gov/system/files/ftc_gov/pdf/2023_merger_guidelines_final_12.18.2023.pdf.

(19) FTC v. Community Health Sys. Inc., et al., No. 5:24-c-0028 (W.D.N.C.).