Private Equity Spotlight: New state notices and consent requirements in healthcare transactions

In this episode of our Private Equity Spotlight series, life sciences and healthcare partners Carol Loepere and Nicole Aiken-Shaban discuss the new state laws requiring notices and consent from state regulatory authorities prior to completing healthcare transactions.

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Intro: Hello and welcome to Dealmaker Insights, a podcast brought to you by Reed Smith's corporate and finance lawyers from around the globe. In this podcast series, we explore the various legal and financial issues impacting your deals. Should you have any questions on any of the content please contact our speakers.

Carol: Welcome back to Dealmaker Insights. I'm Carol Loepere, a partner in Reed Smith's Healthcare and Life Sciences Group and I'm joined today with my partner Nicole Aiken-Shaban. We both help companies navigate regulatory considerations for deals in the health care space. Today, we're discussing recent enactment of state laws requiring notice and in some cases approval from state regulatory authorities prior to completing a health care transaction. These are notable as they are separate from long-standing laws regarding changes of ownership or CHOWS as they're often referred to at the state level, governing state licensure and certificate of need. And also they're different from federal laws governing health care transactions such as Hart- Scott-Redo and Medicare, Nicole. Why are we seeing these laws? What are they designed to achieve?

Nicole: That's a great question, Carol. There are a number of different motivations and some states are focused on local concerns as a group. However, these laws broadly are meant to address a perceived gap in oversight for the majority of health care providers within a state that have not historically been subject to more intense certificate of need and or licensure processes. Uh think about hospitals and other hospices or entities like that. In that latter bucket, one question I have asked myself is why now as our listeners likely know, health care is a priority at the federal level right now with increased scrutiny on antitrust and anti competitive enforcement efforts, there's also a related effort to target private equity investment specifically in health care, both by federal agencies, Congress and also the press. Not surprisingly, that focus has trickled down to state legislative action when you take that focus and combine it with the proliferation of nontraditional providers that occurred during the pandemic. Just a couple of years ago, a number of states have started to look to exert more oversight over the provision of health care and who's providing it in their borders. Carol, what is a snapshot of the current landscape of these laws?

Carol: As of April 2024 there are 14 states with health care transaction notice and or approval requirements. Some of these have been on the books a long time while others are brand new and some are just taking effect later this year. One of them is Indiana and we'll talk a little bit about that later. Importantly, though there is legislation pending in several other states including California, for example. So it's very important to check state law as well as pending legislation and regulations that are implementing these laws as you consider health care transactions in various states. Before we discuss a couple of examples of these laws, Nicole, are there certain characteristics or themes that people should keep in mind in reviewing these laws?

Nicole: Yes, I know we are both a fan of lists and for our listeners, I've put together three key points to keep in mind when assessing these laws. First, they are very fact dependent. Many laws have threshold limits that define material transactions or the types of transactions and affiliations subject to the laws. They have varied effective dates, sometimes different effective dates within the same state based on the type of transaction. And there is specific language in those laws on their applicability to particular health care providers and entities in the space as well as obligations on those providers and their different types of notices. Second, definitions are key, not only are they fact dependent, but you have to understand what the definitions are for the law and to understand how it might apply to your facts. In a particular case, some state laws define health care entities subject to the law narrowly. Others are much broader. For example, in some states, the law is focused on health care providers, including even individual practitioners like physician groups and examples of those are Minnesota and Connecticut in other states, health care entities are even more broadly defined to include health insurers like in Indiana and California. And it's important to understand how they are defined in the particular state or states in which you are looking at doing a deal in order to know whether your deal may come within the purview of the particular law. Third on our list, some states have regulations or sub regulatory guidance that provides additional information on the application of the actual statutes and, and legislation such as Illinois is a good example. Washington has template notice forms that are available and the Attorney General's office is available to answer questions via email if you're not sure how to submit um a particular notice or have a question about applicability in other states regulations forms and FA Qs are or maybe forthcoming. A good example of that is New York where for now, um If you're doing a deal subject to the requirements in New York, you need to submit the notices based solely on what you the information provided in the legislation itself. Um but New York is planning to issue FAQs specific forms and additional information in the future. So it's important to really dig into that regulatory guidance and forms and FAQs where you have it, it's, it might add more color to what you need to provide in a particular notice how it should be submitted. And some of those logistics working through a deal. Let's take a deeper dive into a couple examples of some of these laws. Carol, why don't you get us started?

Carol: Thanks Nicole. Let's start with Indiana. I mentioned it earlier. It's one of the more recent laws that was just passed and it becomes effective July 1 2024. So here we are in April. If the parties are well on their way to doing a deal, they may be able to get a deal done even before the law becomes effective. Um So that's possible. And as we talked about, it's important to look at the effective dates if not. And if you're in a transaction that may take place later this year in, in Indiana, it's important to take a look at this law to see if it might apply. So the law adds a new title entitled Reporting of Health Care Entity, Mergers and Acquisitions to the laws and essentially parties must provide notice to the Indiana Attorney General 90 days prior to closing. So it's a 90 day notice requirement. It's important to keep in mind for this one that it's really a notice only requirement. Um The attorney general does have the authority to review the information that's submitted it. The attorney general can request additional information about the transaction and also can issue a civil investigative demand and issue a written opinion about the transaction, the parties to the transaction and whether it implicates any antitrust concerns. And under the law, the attorney general is supposed to do that within 45 days of submitting the notice. However, at least on its face, the attorney general does not appear to have the authority to block the deal from going forward. So what's covered under this law? So as I mentioned, it's, it's a discussion of transactions involving a merger or acquisition of a quote, health care entity, end quote. And that, that's a defined term as we talked about. Very key to look at that and I'll come back to that in a minute about what is a health care entity, but it's a merger or acquisition of a health care entity having assets of at least $10 million. If that's a transaction in which the parties are involved, the 90 day notice trigger may apply. Uh The term acquisition is also very broadly defined in the law. It's defined as any agreement, arrangement or activity, the consummation of which results in a person acquiring directly or indirectly the control of another person. So this would cover for example, asset acquisitions, equity deals and so forth. It's very broad. I mentioned that the law uh applies to a quote health care entity and, and in this law, it's is defined very broadly to include providers, payers, PBMs and private equity companies, which as we've discussed has been a focus of many of these laws. So the term of a health care entity is in an organization or business that provides diagnostic, medical surgical, dental treatment, or rehabilitative care. So that's gonna cover a lot of different kinds of providers. It applies to an insurer that issues a policy of accidental and sickness insurance, a health maintenance organization, a pharmacy benefit manager or, and here again, the focus on private equity, a quote, private equity partnership, regardless of where the private equity partnership is located seeking to enter into a merger or acquisition with any of these entities. Again, very broad. And we see that focus again here while the law does cover insurers, not surprisingly, the term does not include Medicare or Medicaid program. And also our listeners will note that there's no reference in this law to pharmaceutical or medical device manufacturers. Otherwise it's hitting a broad range of uh parties in the in the health care continuum. So again, uh an example of a very broad law, the law um does include specific information for parties to include in their notice. And importantly includes that the information submitted must be kept confidential. And of course, this is often a very key concern for parties doing a health care transaction. So stay tuned to see how Indiana law operates in practice. And again, whether there will be any sub regulatory or other guidance on how it will actually be implemented. But it is one of the ones that has been added to our list and should be on your list of states requiring prior notice of a healthcare transaction. Nicole let's take a look at another law. How about Connecticut?

Nicole: Thanks Carol. So Connecticut, while a smaller state has a health care review law that's been around for a few years actually, since 2018 and provides an interesting combination of considerations and applicability definitions that we've seen in a few different States rules. So I think it's a good test case to run through with our listeners today. Specifically, there are two types of transactions targeted by the law that are very different in scope. First, there are group practices in hospitals or other licensed health care providers and entities in the state that are parties to a transaction that involves a Hart-Scott\-Rodino or HSR filing with the FTC or DOJ. And then there's a separate group of transactions subject to the law for material changes to the business or corporate structure of a group practice. So that's a physician group practice regardless of whether there's an HSR filing. The first category of deals is a clear expression in the other state's interest in reviewing transactions within the state that would otherwise be subject to the federal antitrust review more broadly. Um And so there, I think it's more an aspect of Connecticut wanting a chance to review what's happening within its borders in tandem with the review happening at the federal level under those federal antitrust laws. The second on the other hand, seems aimed at those changes that by themselves will not trigger HSR thresholds and go through a traditional HSR review but could result in the consolidation of practices in a way that impacts the local market. And that's the state's attempt to start to look at some of these transactions that typically would not have been subject to that regulatory review. While the focus on group practices also could be viewed as aimed at private equity, given increased activity by private equity investment in the physician practice space. And it does require notices of mergers, consolidations or affiliations of group practices with other practices that results in more than eight physicians. So you know, potentially taking aim at some of those tuck ins where you grow from a number of smaller acquisitions into a much larger practice. Note that it's by its terms, affects by hospitals and health systems to form friendly PCs and or expand their group practice presence as well. So it's not targeted specifically at private equity, although you might have um some impact for those doing deals within the state and the physician practice space specifically with those tuck in practices with smaller acquisitions. adding on. From a timing perspective, it also matters what type of deal you have in Connecticut. So for those undergoing HSR review contemporaneously with the submission to the state notice is required to be submitted to the Connecticut Attorney General at that same time for the group practice changes. However, the notice is required to be submitted to the Attorney General at least 30 days before the effective date of the transaction. There are some detailed requirements for what goes into that written notice in the law itself. But in a nutshell, the goal is for the AG to better understand the party's proposed deal structure, location of affected service area and similar market related facts that are going to be impacted by whatever the particular transaction is. And as we see in many of these laws, Carol, the attorney general will review the notice and that gets submitted and then can institute any action it's otherwise permitted to do under Connecticut law if it needs to based on its review. So for example, you know, consumer protection rules that allow the AG to take certain action within Connecticut may be relied upon if the attorney general feels that that's necessary for a particular transaction. I think one final note on Connecticut for our listeners, that's interesting that there's a recent bill that was passed in committee late in March and is currently working its way through the legislative process in Connecticut, not fully approved and signed into law yet, but um has been progressing in a positive trend that may impact private equity investment within the state. The law itself does not implement restrictions on private equity investment or transactions within the state but instead instructs the Executive Director of the Office of Health Strategies to develop a plan to evaluate and address private equity investment in health care in the state. Um So more of a directive to that office of Health strategies to review the issue and then come back to the table to the legislature with a potential proposal, including any restrictions or additional notice and review requirements by early in 2025. So I think the final word on Connecticut is stay tuned. There might be more to see here, Carol. Do you have any closing thoughts for our audience as we work to wrap up our podcast today?

Carol: Yeah, Nicole, I think that you've really um made a great point in terms of talking about what's pending in Connecticut just to underscore that there is a lot of legislative activity in this area and the landscape is changing very rapidly. We are tracking a lot of different activities in various states, some proposed laws and you know, some additional guidance that we expect to see forthcoming in the coming months. So for all of our listeners, it's really important to keep on top of these and keep checking back as to where a particular state is in terms of potential notice or approval requirements, particularly for longer running deals. You might have a deal that, you know, you signed a letter of intent at the end of 2023 and are now just um dusting it off and getting going with the actual terms. It's a really good idea to check to see where, where these different states are or where your transaction may implicate various state laws and continue to monitor them as your transaction goes because we've seen some of these pop up pretty quickly. We here at Reed Smith, Nicole and I and our teams will continue to monitor these laws and publish onr updates. So please reach out if there are any questions on how they may apply to your deals. I know it is keeping a number of us very busy. Thank you so much for joining us today and please tune in to future episodes of Dealmaker Insights on more updates on these topics.

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