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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Transcript: 

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 sp