Growing Number of US States Target Private Equity Transactions in Healthcare

Driven by a growing wave of enforcer skepticism toward further healthcare consolidation, some state legislatures have begun to propose “mini-HSR” laws explicitly targeting healthcare transactions involving private equity firms or sponsors.

Over the last few years, a growing number of states have proposed or enacted premerger notification laws scrutinizing healthcare transactions.[1] These “mini-HSR Acts” reflect efforts by states to identify, review, and potentially challenge transactions that might consolidate healthcare markets. At the same time, 11 attorneys general submitted a public comment to the US Department of Justice (DOJ) and Federal Trade Commission (FTC) expressing concerns about how private equity involvement in healthcare could increase costs, decrease quality, and reduce access to care.[2]

IMPACT ON PRIVATE EQUITY FROM EXISTING STATE MINI-HSR ACTS

So far, only one state—Indiana—has enacted a law explicitly mentioning private equity transactions in healthcare as part of a broader state mini-HSR Act. Under Indiana’s mini-HSR Act, which became effective on July 1, 2024, a transaction involving a “private equity partnership” and a “health care entity” (such as a healthcare provider, payor, health maintenance organization, pharmacy benefit manager, or third-party administrator) is likely reportable.

The relatively low size-of-person threshold of $10 million in total assets counts the value of any healthcare assets or holdings of the private equity firm, including those located outside Indiana. As a result, Indiana’s law could be read to capture acquisitions by out-of-state private equity sponsors of healthcare assets located in Indiana.[3]

Some state mini-HSR laws do not expressly target private equity transactions but contain language that affects private equity sponsors and portfolio companies—even those that are not parties to a reportable transaction.

For instance, Washington’s mini-HSR Act, in effect since January 1, 2020, broadly defines a “hospital system” to include not only a parent company (e.g., a private equity sponsor) of a hospital that is a party to the transaction, but also any entities affiliated with that parent company through ownership or control.[4] Therefore, a hospital system owned by a private equity sponsor may be required in its Washington mini-HSR filing to identify healthcare assets of other portfolio companies of the sponsor, even if those other portfolio companies are not parties to the transaction at issue.[5]

Other states also have broad definitions in their mini-HSR Acts that could implicate private equity sponsors and their other healthcare portfolio companies in certain parts of the premerger notices.[6]

LEGISLATION FOCUSED ON PRIVATE EQUITY HEALTHCARE TRANSACTIONS

Multiple other states have proposed legislation focused on targeting healthcare transactions involving private equity firms. These states—California, Connecticut, Massachusetts, Minnesota, and Oregon—already have healthcare mini-HSR Acts in effect; these mini-HSRs would be supplemented by the new private-equity disclosure requirements, should they pass.

• California’s proposed law, Assembly Bill 3129 (AB 3129), would require a “private equity group” to provide written notice to the California attorney general at least 90 days before closing on any transactions involving healthcare facilities (except hospitals), provider groups, or providers. The 90-day waiting period may be extended up to 59 additional days if the attorney general believes further review and public input are warranted. The attorney general must then provide a written determination approving or disapproving the transaction. If the parties wish to challenge the attorney general’s disapproval of the deal, they may proceed through an administrative hearing before an administrative law judge (ALJ) that could take many months to resolve. The attorney general then has the ultimate authority to adopt or overrule the decision. Dissatisfied parties may then seek judicial review, which would add many months yet again to the deal timeline. The parties may not close until the review—including potentially litigation—is resolved. Under the proposal, the attorney general may also toll the running of any waiting periods under AB 3129 while other state or federal agencies review the deal, which may extend timelines even further.[7]
• Connecticut’s proposed law, House Bill 5319, has been substituted with a proposal to require the state’s Office of Health Strategy to “develop a plan” that might include subjecting private equity deals to certificate-of-need laws or limiting private equity firms’ ability to acquire or hold ownership interests in healthcare facilities. Such a plan is likely to require disclosures by a health facility if a private equity firm acquires or holds an ownership interest in the health facility.
• Massachusetts’ proposed law, Senate Bill 2871, would require that a provider or provider organization give notice to the Massachusetts Health Policy Commission 60 days prior to a private equity firm’s “investment in, acquisition of the assets of or ownership or direct or indirect control of a provider or provider organization.” To the extent that the Commission determines that the proposed transaction may have a negative impact on the competitive market, the Commission may conduct a cost and market impact review that requires the provider to submit documents and information and may also require for a period of five years following the completion of the transaction the submission of data and information to assess post-transaction impacts. Once the commission issues a preliminary report following the cost and market impact review, there is a process for provider response prior to the Commission’s final report. The process for this review can take upwards of 205 days.
• Minnesota’s proposed law, House Bill 4206, would prohibit any private equity firm from acquiring or increasing (1) any direct or indirect ownership interest or (2) any operational or financial control, with respect to any healthcare entity in Minnesota.
• Oregon’s proposed law, House Bill 4130 (HB 4130), passed in the Oregon House but failed to receive enough support in the Oregon Senate; the bill’s sponsors plan to reintroduce the bill in future legislative sessions. HB 4130 would require, among other things, that physician practices be (1) majority-owned by physicians licensed to practice in Oregon, and (2) governed by a board of directors, a majority of whom must be physicians licensed to practice in Oregon. The proposed law also prohibits sponsor-affiliated shareholders, directors, or officers of the physician practice from serving in other roles that are common in private equity structures, such as participation in management services organizations that have contracts with the physician practice. While HB 4130 never mentions “private equity” by name, the effect of HB 4130 could be to limit private equity firms’ ability to own or control healthcare portfolio companies in Oregon.

KEY TAKEAWAYS

Laws requiring more extensive disclosure of private equity involvement in healthcare transactions and in-depth reviews of these transactions will likely continue to be introduced in state legislatures. Healthcare providers and private equity investors should take note of these enhanced legal requirements as they contemplate expansions or changes to their existing holdings.