Rising Medical Costs Force Greater Scrutiny of Health M&A Deals

Major health-care business deals will undergo greater oversight from state regulators as part of a larger effort to rein in soaring health spending.

California will release draft regulations July 31 on how the state will implement notice-and-review requirements for mergers and acquisitions under a health-care affordability bill enacted last year (SB 184). A similar law in New York to review material transactions in health-care is slated to take effect Aug. 1. Minnesota, Rhode Island, Nevada, Massachusetts, Oregon, Connecticut, and Washington also have comparable laws, according to a tracker by Ropes & Gray LLP.

States are passing these requirements as the nation is putting more money into the health-care system while getting less out of it. Health spending climbed to 20% of GDP from 8% over the past four decades. The US spends more on health care compared with other rich nations, yet it has some of the worst health outcomes, according to the Commonwealth Fund.

Meanwhile, private equity investment in the health sector ballooned, totaling $750 billion in deals from between 2010 to 2019. While deals fell slightly in 2022, their $90 billion value last year still marked the second highest year on record for health deals, according to Bain & Co. Some studies linked these increasing investments to higher costs and raised concerns about the quality of the care.

“Health-care costs are the biggest impetus” for these laws, along with concerns about increasing private investments in the health space, said Alexis F. Bortniker, a health-care transaction lawyer in Foley & Lardner LLP’s San Diego office.

The emerging state laws also may signal a return toward greater oversight of health care, after the Trump administration moved to decrease regulations and the Covid-19 emergency led to waivers and other loosened restrictions, Bortniker said.

“Some people think we’ve had too little regulation for too long, and so there’s a push to continue to regulate this space that has always been pretty heavily regulated,” Bortniker said.

Transactions Won’t Stop

Bortniker, who practiced in Boston before moving to San Diego, said the Massachusetts law decelerated transactions but never stopped them.

“We maybe saw a slowdown of deal work for very little time, until people realized what their ask was. And then I don’t think it hampered it.”

“You have to be a little more thoughtful, and there’s more of a process,” Bortniker said, but more deliberate practices when structuring transactions “is not necessarily a bad thing.”

California Law

The California law established a new agency called the Office of Health Care Affordability. Beginning April 1, any health-care entity that makes a major change in its governance structure must provide the new office with a 90-day advance notice. The office then has 60 days to decide whether it should conduct a formal review on the cost and impact of that transaction.

That cost and market review is usually a six- to 12-month process, Bortniker said. “The goal is to be able to file a notice, so that the state is on notice and doesn’t want to go into cost and impact review.”

While the state agency can’t block a transaction, it can forward its findings to the attorney general’s office.

The law seems to cover a wide swath of health-care entities, Ashley Osak, an attorney in Polsinelli Law Firm’s Los Angeles office, said, “everything from payer organizations to hospitals and health systems to pharmacy benefit managers to clinical laboratories.”

Historically, the state has reviewed a limited number of health deals, such as nonprofit hospitals transactions, Mintz attorney Lara D. Compton said. That “really represents a small part of the overall health-care ecosystem in California.” The new law “really opens things up substantially.”

However, it leaves a number of questions, such as which transactions will qualify as “material” under the law, and therefore warrant a review.

While the new agency must conduct certain reviews, it can also review transactions that aren’t deemed mandatory. “The regulations are supposed to spell out the parameters of what might trigger a review under the permissive authority of the agency,” Compton said.

The regulations also need to clarify exactly when the 90-day clock starts, Osak said. It’s not clear whether that means the closing date or the signing a purchase agreement, which would make the potential sale public mid-negotiation.

“It almost creates an RFP situation,” Osak said, referring to requests for proposals. “You have additional buyers that are now aware that this is a seller on the market where that seller may not have wanted that information to be publicly available.”

The Office of Health Care Affordability will host a public workshop Aug. 15 on the draft regulations, office spokesman Andrew DiLuccia said. The agency will receive comments through the end of August and plans to adopt the regulations before the end the year. It expects to begin receiving notices of material change transactions in January.

New York

The New York law requires a 30-day notice of material transactions, with a de minimus threshold of $25 million in gross in-state revenues. The law covers mergers and acquisitions, new agreements, and contracts. However, it leaves out collaborations to run a clinical trial or graduate medical education programs. The law also exempts insurers and PBMs.

“The parties to this type of transaction are now going to have to give some thought to the transaction itself to certain aspects of the transaction that they never really previously considered,” Nili Yolin, a health-care attorney in Holland & Knight’s New York office, said.

Entities must describe the impact on cost, quality, access, health equity, and competition in the marketplace, which Yolin said was the most important piece. Those are factors that licensed entities—but not private practices—are forced to consider, she said.

“That is a big deal, in terms of how they have to think through the transaction.”

Similar to California, Yolin said the law needs clarification through regulations, such as outlining the time period for determining if a transaction meets the de minimus threshold. “The definition of material transaction refers to a rolling 12-month period. The assumption is for purposes of determining whether it’s de minimis would probably be the same. But it’s certainly ambiguous.”

New York regulators also need to spell out whether a management services organizations—or the business service groups created for a lot of these M&A transactions—are still considered in-state if they’re incorporated in Delaware but provide services in New York.

“New York and California are very strict corporate practice of medicine states,” Yolin said, meaning they want provider entities to be owned and operated by physicians and not the business corporations. Even though these MSOs don’t control patient care, she said there’s a concern that they’ll move “too hard, too fast, too strong.”

“That has always served as sort of a backdrop to laws like this that go into effect.”