i1. The DOJ and FTC Released New M&A Guidelines That Could Impact Health Care Transactions
On December 18, 2023, the US Department of Justice (DOJ) and the Federal Trade Commission (FTC) jointly published Merger Guidelines that parties can use to assess whether a potential transaction may violate federal antitrust laws. The Guidelines address whether a merger (1) significantly increases concentration in a highly concentrated market; (2) eliminates substantial competition between firms; (3) increases the risk of coordination; (4) eliminates a potential entrant in a concentrated market; (5) creates a firm that may limit access to products or services that its rivals use to compete; (6) entrenches or extends a dominant position; (7) is in an industry trending towards consolidation and, if so, substantially lessens competition or tends to create a monopoly; (8) is part of a series of multiple acquisitions; and (9) involves competing buyers and, if so, if it substantially lessens competition for workers, creators, suppliers, or other providers.
In the past, many types of health care transactions involving roll-ups, consolidation, and vertical and cross-market deals were not subject to antitrust scrutiny because they did not meet the thresholds requiring notice to the DOJ and FTC. With the Guidelines, however, the DOJ and FTC could now focus on various health care transactions, particularly with respect to private equity firms acquiring multiple small health care businesses, as well as large health systems’ and health insurers’ continued acquisition of physician practices. The Guidelines state that the agencies will consider individual acquisitions in light of the cumulative effect and “may examine a pattern or strategy of growth through acquisition by examining both the firm’s history and current or future strategic incentives.” Although the Guidelines are not binding, parties interested in health care transactions should fully evaluate the antitrust risk when considering potential mergers and acquisitions (M&A).
2. The Federal Government Sets Its Sights on Health Care Transaction Regulation
On March 5, the FTC, DOJ, and US Department of Health and Human Services (HHS) jointly issued a Request for Information (RFI) (previously discussed here) seeking public comment on the effect of transactions in the health care industry concerning various types of providers and facilities, such as nursing homes, dialysis clinics, hospitals, hospice providers, home health agencies, behavioral health providers, billing and collection agencies, health insurers, and more. The RFI focuses on health care transactions involving private equity, health systems, private payers, private credit funds, and real estate investment trusts (REITs) or those that would not be disclosed to the FTC and DOJ under the Hart-Scott-Rodino Antitrust Improvements Act. The purpose of the RFI is to gain more information on (1) the effect of health care transactions on participants in the health care market, including patients, payers, employers, and workers; (2) the goals and objectives of these transactions; and (3) patients’ and workers’ experiences after health care transactions. This information will help the agencies identify enforcement priorities and actions they can take to regulate certain health care transactions in the future.
The RFI comes as no surprise because the federal government has scrutinized private equity investment in health care over the past few years. Most recently, in December 2023, two senators launched a bipartisan investigation into the impact of private equity ownership on hospitals. Additionally, in November 2023, the Centers for Medicare and Medicaid Services (CMS) published a final rule requiring the disclosure of certain ownership, managerial, and other information for nursing homes, including information on private equity company and REIT ownership. Without a doubt, the federal government’s focus on private equity ownership in health care will continue throughout 2024 and beyond.
3. More States Push for Oversight of Health Care Transactions
States are also feeling the pressure to enhance oversight of health care transactions, including those that might not trigger federal or licensure reporting requirements. California, Illinois, Massachusetts, New York, Oregon, and Washington, for example, have laws exercising some level of authority over certain transactions. State oversight is on the rise as policymakers look to establish new laws or expand the reach of existing frameworks. Although the specific requirements vary by state, common themes emerge: (1) pre-closing notice to or approval by the attorney general or another state body of the transaction; (2) disclosure of interested parties, including private equity investors and upstream owners; (3) applicability to a broad range of provider types, payers, and other stakeholders, such as long-term care facilities, hospitals, clinics, laboratories, physician practice groups, and health insurers; and (4) an emphasis on quality of care, cost control, and market competition. Proposed state legislation calls common structures, like sale-leaseback arrangements, into question, so parties should consult regulatory counsel at the outset of deals. What was a non-event yesterday may require state approval tomorrow.
4. Facing Higher Operating Costs, Health Care Organizations May Streamline Services Through Health Care Transactions
Health care organizations, such as hospitals, nursing homes, and senior living operators, continue to face escalating operating costs, including increased labor costs resulting from workforce shortages and higher prices for drugs and medical supplies. These rising costs are further compounded by advancements in technology and artificial intelligence (AI), which offer great potential benefits related to quality and effectiveness of care, but also bring with them significant financial investment and additional ongoing expenses.
To remain competitive and optimize efficiencies, health care organizations are evaluating their operational models and implementing measures to reduce expenses. As health care organizations implement various strategies to deal with rising operational costs, they should be mindful of the related legal risks associated with such strategies and seek appropriate legal counsel to mitigate these risks. For example, as health care organizations move towards focusing on core services and reducing non-essential offerings as a way to increase profit margins, they should consider whether these changes disproportionately impact certain patient and resident populations, potentially leading to allegations of discrimination or denial of care. Additionally, as the trend towards consolidation by health care companies (via M&A) as a way to create economies of scale and reduce costs continues, it is important to ensure compliance with licensure and certification requirements in structuring the transactions. As discussed above, they should also be mindful of potential antitrust issues such transactions could raise.
5. Increased Medicare and Medicaid Audit Activity Makes Compliance Even More Imperative for Sellers and Buyers
Medicare and Medicaid audits were thwarted during the pandemic, but since early 2023, federal and state agencies have resumed their audit activity in full force. Federal and state governments are also bolstering their audit resources and efforts to recoup improper payments, which could help them recover billions of dollars. For example, in January 2023, CMS announced an aggressive plan to audit Medicare Advantage insurers over the next ten years, with the goal of clawing back $4.7 billion. The increased audit activity will continue for the foreseeable future, bringing more risk to sellers and buyers. In health care transactions, especially those involving successor liability, we expect buyers to focus more on payer and billing compliance, with the need for internal and third-party billing audits, and sufficient indemnification under the transaction documents.
