Prepare To Be Under the Microscope: Transaction Review Laws in Healthcare and Private Equity M&A

08/13/2024|7 minute read

A recent wave of state legislation is changing the course of healthcare transactions, and organizations (particularly private equity-backed organizations) that engage in mergers and acquisitions in the healthcare industry should prepare for increased scrutiny. Specifically, several states have adopted new transaction review laws (TRLs) that subject healthcare and private equity entities engaging in mergers and acquisitions to hefty notice obligations and, in some cases, pre-closing regulatory approval.

While transaction review by federal and state regulators is not a novel concept in the healthcare industry,[1] TRLs bring regulatory scrutiny to another level, and their impact should not be underestimated. Prior to the current wave of TRL legislation, regulatory review was often limited to transactions among industry giants. By contrast, TRLs apply to more entities and capture a broader range of transactions. This means that smaller businesses and other organizations that are not accustomed to regulatory transaction review and may be conducting deals in the middle-to-lower market can be pulled into a transaction review process, which frequently requires voluminous disclosures, sensitive antitrust review and, generally speaking, more time and expense.

The TRL trend is accelerating. Only 12 states have adopted TRLs to date, but more than half of these TRL statutes have been adopted in the past three years, while still other states[2] have flirted with but have not yet passed TRL legislation. These state TRLs ride the coattails of a noticeable shift in Federal Trade Commission and Department of Justice antitrust policies,[3] and they are further supported by rising public interest and frustration over cost, quality and access to care. As federal antitrust interest and enforcement in the healthcare industry continue, states may adopt TRLs at an increasing pace.

Below is a list of FAQs and key points to help organizations navigate the TRLs.

What is a healthcare TRL?

TRLs are state laws that require certain entities conducting identified types of transactions in the healthcare industry to notify state regulators and, in some cases, obtain approval before the transaction may be closed. TRLs aim to address regulatory concerns over healthcare consolidation, maintaining access to quality care and transparency in ownership.

Many TRLs are based on the Model Act for State Oversight of Proposed Health Care Mergers, from the National Academy for State Health Policy (the Model Act)[4] and contain similar concepts, definitions and procedures. For states that have built their TRLs around the Model Act, the central requirement is for "health care entities" to submit notice of specific "material change transactions" to a designated state oversight authority before consummating or closing the transaction. Some state TRLs may also require approval from the oversight authority prior to closing.

While many TRL states have used the Model Act as a basic framework, TRLs can and do deviate from the Model Act in significant ways that materially change the types of entities and transactions that come within the TRL's purview. At least one state adopted TRL legislation because of similar policy concerns but with an explicit focus on private equity,[5] and still others have contemplated a private equity-focused TRL in addition to existing, broadly applied TRLs.[6] So, the Model Act is a helpful tool for understanding the intent and use of TRLs generally, but it is not a substitute for a state-specific analysis.

Which states have adopted a TRL?

The following states have adopted a TRL as of August 6, 2024

• California:[7]
  • See Cal. Health & Safety Code § 127500 and Cal. Code Regs. Tit. 22, §§ 97431, et seq.
  • Regulating authority: California Office of Health Care Affordability.
  • Key date: Applicable to certain transactions that close on or after April 1, 2024.
• Colorado:
  • See Col. Rev. Stat. §§ 6-19-101, et seq.
  • Regulating authority: Office of the Colorado Attorney General.
  • Effective since 2008.
• Connecticut:
  • See Conn. Gen. Stat. § 19A-4861.
  • Regulating authority: Office of the Connecticut Attorney General.
  • Effective since Oct. 1, 2013.
• Illinois:
  • See 740 Ill. Comp. Stat. § 10/7.2(a) and 20 Ill. Comp. Stat. § 3960.
  • Regulating authority: Office of the Illinois Attorney General.
  • Effective as of Jan. 1, 2024.
• Indiana:
  • See IC 25-1-8.5.
  • Regulating authority: Office of the Indiana Attorney General.
  • Effective as of July 1, 2024.
• Massachusetts:
  • See Mass. Gen. Law C. 6D § 13 and 958 CMR 7.00.
  • Regulating authority: Massachusetts Health Policy Commission.
  • Effective since Jan. 1, 2013.
• Minnesota:
  • See Minn. Stat. § 145D.
  • Regulating authority: Office of the Minnesota Attorney General and the commissioner of health.
  • Effective since May 25, 2023.
• Nevada:
  • See NRS § 439A.126 and NRS § 598A.290, et seq.
  • Regulating authority: Nevada Department of Health and Human Services and the Office of the Nevada Attorney General.
  • Effective since Oct. 1, 2021.
• New Mexico:[8]
  • See the Health Care Consolidation Oversight Act at N.M. Admin. Code 13.2.2.12.8.
  • Regulating authority: New Mexico Office of Superintendent of Insurance.
  • Effective since May 15, 2024.
• New York:
  • See NY Pub. Health Law Art. 45-A.
  • Regulating authority: New York State Department of Health.
  • Effective since Aug. 1, 2023.
• Oregon:
  • See Or. Rev. Stat. § 415.500, et seq., and Or. Admin. R. 409-070-000 - 0085.
  • Regulating authority: Oregon Health Authority.
  • Effective since Jan. 1, 2023.
• Washington:
  • See Wash. Rev. Code §§ 19.390, et seq.
  • Regulating authority: Office of the Washington Attorney General.
  • Effective since Jan. 1, 2020.

What types of entities can be captured under a TRL (i.e., what is a "health care entity")?

Most TRLs limit reporting or approval requirements to defined "health care entities." "Health care entities" typically include providers, facilities, payers (or carriers) and pharmacy benefit managers. Many states expanded the definition of a "health care entity" to include vague categories like third- party administrators,[9] may specifically call out private equity groups, or may also pull in parents, subsidiaries and affiliates of other "health care entities."

What types of transactions can be captured under a TRL (i.e., what is a "material change transaction")?

Most TRLs limit their application to certain "material change transactions." These typically include mergers, acquisitions, changes of control, affiliations, transfers of a material amount of assets or new joint ventures. TRLs often include exceptions for affiliate transactions or other thresholds for determining whether a transaction is "material."

Are there thresholds (i.e., what is "material")?

Most TRLs include some sort of "threshold" for determining whether a transaction is "material;" however, the form and size of these thresholds vary drastically between states. Some TRLs also include a threshold applicable to the "health care entity" involved. To paraphrase a few examples:

• Massachusetts' TRL excludes any provider or provider organization with less than $25 million in net patient service revenue.
• Colorado's TRL is not triggered unless certain facilities transfer 50 percent or more of their assets.
• California's TRL applies to eight identified transaction scenarios generally referred to as "material change circumstances," which focus on the size of the transaction or the amount of assets involved. California's TRL also separately includes certain geographic and size thresholds and excludes certain "health care entities" that operate in certain geographic locations or fail to meet certain size thresholds.
• Indiana's TRL takes an entirely different approach and broadly applies to any "merger" or "acquisition" involving an "Indiana health care entity" and another "health care entity" with total assets, including combined entities and holdings, of at least $10 million.

What type of disclosures do TRLs require?

Most TRLs require the notifying entity to disclose a description of the transaction, the entities involved and details on the services provided by the "health care entity" involved. Many TRLs also require the notifying entity to submit a copy of any other transaction-related filings (like a Hart-Scott-Rodino Act filing, which is expressly referenced in some TRLs), reports and analyses used to determine the consideration for the transaction. Some TRLs require submission of expert materials or reports on a party's market share or the expected competitive impact of the transaction, making it imperative that parties carefully consider the information that is included in these disclosures and ensure they are aligned (or alternatively, consider separate submissions to preserve appropriate antitrust boundaries between transaction parties).

Given the level of disclosure involved, confidentiality is one of the top issues in the TRL process. Notably, some TRLs declare that all materials submitted with the TRL notice are public unless the notifying party successfully asserts and defends its confidentiality rights. Sensitivity over confidentiality concerns is heightened by the fact that most TRLs incorporate a public comment and hearing process.

Where will notices be filed?

The Model Act contemplates that the TRL process will proceed under and through the state attorney general's office. Some state TRLs have incorporated a different state authority;[10] however, given the antitrust focus of TRLs, notifying parties may reasonably expect state attorney general interest or involvement.

What does a TRL mean for deal timing?

Most TRLs incorporate specific periods for notice and review. However, as with any agency filing, reviewing authorities usually have significant discretion over critical determinations like whether a filing is "complete" or can "toll" certain statutory periods while the agency waits for additional information. These agencies can therefore extend the review period well beyond express statutory periods. To compound this issue, most TRLs have limited agency history to educate submitting parties on prior agency practices and performance. Thus, the time a TRL may add to a transaction can be difficult to predict.

Noticing parties may safely assume that a TRL is likely to add several weeks or a few months to a transaction timeline. In some states and for transactions of particular interest to regulators, a TRL could easily add more than a year to the overall deal timeline.

Further, in some cases, a new TRL may impose an approval requirement or may outright prohibit certain transactions. In these instances, parties must also ask whether a transaction may proceed at all or whether authorities may condition their approval of the transaction on specified requirements.

What are the potential consequences of a TRL notice?

In some cases, the consequences of a TRL may simply be a longer period between signing and closing a transaction. However, notifying parties should closely examine the state TRL involved and consider the reviewing authority's duty to review certain topics or report certain findings to other authorities. Depending on the parties and the transaction, a state TRL could result in regulatory action against one or more of the parties or efforts to block the transaction.

Organizations should also consider the impact of TRL public disclosure requirements and whether any outside parties may take advantage of publicly disclosed information.

What are the consequences of not filing when a TRL notice is required?

Because most TRLs are new, the issue of enforcement is still unclear. Some state TRLs incorporate express penalties and actions for failure to file a notice or obtain approval, while others reference enforcement concerns but do not provide for express penalties. Other TRLs fail to mention enforcement altogether.

However, changing patterns in federal antitrust enforcement actions, which have shifted from primarily civil enforcement to both civil and criminal[11]enforcement actions, suggest that parties should proceed with extreme caution.

Please contact Sarah Browning [email protected] or Elise Barajas [email protected] if you have questions related to this alert.

[1] For example, many states require hospitals or healthcare nonprofit organizations to obtain state attorney general approval before closing a merger or acquisition.

[2] Notably, Maine, Florida and North Carolina.

[3] See BakerHostetler's antitrust webinar, available at https://www.bakerlaw.com/insights/how-healthcare-companies-and-others-can-avoid-antitrust-issues-despite-recent-doj-and-ftc-actions/

[4] Available at https://nashp.org/a-model-act-for-state-oversight-of-proposed-health-care-mergers/.

[5] Indiana.

[6] Minnesota, Oregon, California, Washington and Massachusetts.

[7] Notably, California's legislature is currently reviewing and is expected to pass expanded TRL legislation specific to private equity organizations.

[8] This TRL only applies to hospitals and is only effective through July 1, 2025; however, New Mexico legislators are expected to develop and propose a more fulsome TRL in next year's legislative session.

[9] As seen in California's TRL.

[10] California, Massachusetts, Minnesota, Nevada, New York and Oregon.

[11] See BakerHostetler's antitrust webinar, available at https://www.bakerlaw.com/insights/how-healthcare-companies-and-others-can-avoid-antitrust-issues-despite-recent-doj-and-ftc-actions/

Public link

Please use the above public link if you want to share this noodl on another website.