AMARILLO, TX – At both the state and federal levels, the question of private equity’s impact on healthcare has garnered significant buzz over the past few years, and we are now seeing the early results of what that may mean for various healthcare industries. From the recent resolution of the FTC enforcement action against U.S. Anesthesia Partners to the passage of a new material change law in Massachusetts at the end of 2024, healthcare transactions involving private equity are being placed under the microscope across the country.
While the primary focus of this increased scrutiny has been on hospitals and large provider orgs, DME may have escaped notice, but it has not totally escaped increased regulation. Additionally, while the prospect of federal action is uncertain in the face of a new administration, many states are plowing ahead, creating a patchwork of regulations that will present new compliance concerns.
Going into the 2024 election, we saw federal administrative agencies and Congress poised for increased regulation, enforcement, and interagency cooperation. This is evidenced by (i) a 2022 Memorandum of Understanding between the DOJ and HHS reflecting an intention to share information and coordinate enforcement to limit anticompetitive behavior, (ii) a 2024 joint request issued by the DOJ, FTC, and HHS soliciting public comment on transactions in the health care industry, and (iii) the creation of a new DOJ task force on Health Care Monopolies and Collusion (HCMC) in 2024.
The final days of the Biden administration saw the aforementioned resolution of the FTC action against U.S. Anesthesia Partners, as well as a release of a report from HHS on the effects of consolidation and private equity on health care markets. Finally, last year a letter signed by 11 state attorneys general urged federal action to mitigate the impact of private equity investments in the healthcare space. Legislatively, Congress has undertaken research efforts regarding the impact of private equity on health care and a few bills have been introduced, though they have not gained any significant traction at this time. Under the new administration, it is unclear whether regulatory and legislative action will continue to gain momentum or fizzle out quietly.
While the likelihood of further federal action against private equity in the healthcare industry is unclear, states are stepping up to take a swing at regulation in the here and now. A report from the National Conference of State Legislatures reflects that 20 states have passed laws impacting healthcare transactions involving nonprofit organizations, while 15 more have passed laws impacting both nonprofit and for-profit healthcare organizations.
Of those 15 states, a handful have passed laws broadly defining the healthcare entities subject to these laws in a manner that either clearly includes or may include DME companies. In particular, Indiana, Massachusetts, New York, and Oregon now have laws that require that either the state Attorney General or a state agency be notified in the event of a “Material Change,” and either explicitly apply to or may be interpreted to apply to DME companies. The most recently adopted of these laws, in Massachusetts, was signed into law mere weeks ago.
While model legislation has been proposed by the National Academy for State Health Policy, such model legislation has not been uniformly adopted. Rather, each state has put its own special twist on when, how, and to whom Material Changes should be reported, what constitutes a Material Change, as well as whether or not such Material Changes must be approved by the state. For example, in Indiana, the threshold for reportable transactions is if the entities involved have over $10 million in combined holdings.
However, in New York, reporting is only required if gross in-state revenues are expected to increase by $25 million or more as a result of the transaction. Indiana and NY also only require that notice of the transaction be timely provided prior to closing, while Massachusetts has a mandatory review process, and Oregon reviews all transactions and must provide approval before the transaction may proceed.
In addition to the different reporting thresholds and notice, review, and approval requirements, the types of transactions that each law applies to are very similar, but also differ in important ways. A “Material Change” that is reportable in Massachusetts may not be reportable in Oregon, and vice versa. Therefore, when a transaction broadly fits into the categories of a merger, acquisition, affiliation, management services agreement, or the formation of a partnership, joint venture, management services organization, or parent organization, it would be wise to check for Material Change laws in states where the business operates.
This is doubly true if the transaction is expected to result in significantly increased revenue or where one or both of the parties has pre-existing revenues in the millions, as such transactions are more likely to have reporting requirements. Finally, however phrased, if the transaction results in a change of ownership or control, even if the change of ownership or control is indirect, it will be important to be aware of any applicable material change laws. This ownership or control aspect encompasses many transactions involving private equity and management services organizations that were not previously subject to significant scrutiny.
While the trend toward regulation of private equity investments in healthcare at the federal level is presently rather uncertain, in just the last few years, the trend toward increased regulation at the state level is quite certain. Several states have adopted legislation requiring increased reporting and transparency regarding the ownership and control of healthcare entities, and we can anticipate that additional states are likely to join in by adopting new legislation, adapting old legislation to account for private equity and management services organizations, and by more fully fleshing out the rules and administrative processes associated with the more recent legislation.
For the DME industry, this creates a new need to be mindful of state law and legislative changes when considering major transactions. While only four states at the moment have adopted laws potentially affecting the DME industry, the pace of legislative change in this arena is surprisingly quick, and keeping a weather eye out for new reporting requirements will be advisable.
Jeffrey S. Baird, JD, is chairman of the Health Care Group at Brown & Fortunato, a law firm with a national health care practice based in Texas. He represents pharmacies, infusion companies, HME companies, manufacturers and other health care providers throughout the United States. Mr. Baird is Board Certified in Health Law by the Texas Board of Legal Specialization and can be reached at (806) 345-6320 or [email protected].
Amanda F. Hobbs, JD, is an attorney with the Health Care Group at Brown & Fortunato, a law firm with a national health care practice based in Texas. She represents pharmacies, infusion companies, HME companies, manufacturers and other health care providers throughout the United States. Ms. Hobbs can be reached at (806) 345-6312 or [email protected].