Navigating Varying State Transaction Laws in Healthcare

Healthcare market concentration and competition continue to cause significant uneasiness among state authorities, particularly as these issues impact individual consumers. 

While some may contend that the consolidation of health care provider entities produces indisputable benefits (e.g., increased quality of care, access to specialty providers, etc.) and, in fact, is essential for the sustainability of small providers, state policymakers remain concerned about how transactions involving healthcare providers may decrease the availability of necessary medical services and contribute to rising healthcare costs.  Of particular concern are transactions involving private equity investment and how the profit-driven motives of private equity firms may interfere with the primary goal of providing affordable and quality health care to patients.

As such, in recent years, states have begun enacting statutory regimes requiring healthcare entities that intend to engage in certain transactions to notify, and in some cases obtain approval from, state agencies prior to consummating the deal.  With nearly 20 states having already adopted such laws and others, like Texas, with pending legislation, this trend shows no sign of slowing.

The state-level premerger notification and reporting requirements (commonly referred to as “mini-HSR” laws) vary from state-to-state, and the distinctions among states should be taken into account by stakeholders when they are considering entering into a transaction as a health care entity or with a health care entity.  Even the definition of what constitutes a “health care entity” subject to the mini-HSR laws differs among states. 

While some laws pertain exclusively to transactions involving not-for-profit healthcare entities, or are limited to certain provider types, others apply more broadly to all healthcare entities, including HMOs, pharmacy benefit managers, and businesses that provide general medical care.  Where the express language of a state’s transaction review law pertaining to the scope of applicable health care entities is ambiguous, it may require the parties to a transaction to conduct a more in-depth examination of the applicability of the law to the subject transaction and the participating parties.  In such instances, review of legislative materials preceding the enactment of the given law, and even outreach to the regulatory agency, may be necessary.

The laws may also differ in terms of what transactions will trigger the notification or approval process.  For example, in Illinois, any “merger, acquisition, or contracting affiliation between two or more health care facilities or provider organizations not previously under common ownership or contracting affiliation” will implicate the state’s transaction review law.  Conversely, Oregon’s review and approval statute is triggered by “material change transactions,” in which each party to the arrangement meets certain revenue thresholds.

Similarly, transaction review laws will also diverge in terms of timing.  Some states require parties to provide notice 30 days prior to the transaction closing, whereas other states, like New Mexico (120 days) and Oregon (180 days), will call for notice to be provided much earlier in advance of closing.

Another disparity between states’ transaction review laws—and one that is often overlooked by stakeholders—is the amount of information that parties to a transaction are required to disclose.  At a minimum, every law requires that the parties provide basic information regarding the terms of the transaction (e.g., parties’ names, anticipated closing date, brief description of the transaction). 

However, some states’ transaction review laws obligate the parties to disclose extensive, highly detailed information regarding the transaction and also produce voluminous documentation to support responses.  For example, California’s statutory and regulatory provisions, which are overseen by the Office of Health Care Affordability (OHCA), require the submitter to include specific information regarding each party to the transaction, including governance and operational structure, number of staff, geographic service areas, and number of patients served in the state in the preceding year.  Moreover, entities are required to submit documents to supplement their narrative responses, such as copies of the agreements governing the transaction, documentation to show the valuation of the transaction, pre- and post-closing organizational charts, corporate governance documents, and financial statements.  A notice will not be deemed complete, and thus start OHCA’s review period, until all of the required information and documentation has been submitted. To the extent an entity does not have ready access to this information and these materials, it could cause significant hardship and delays in the submission process and impede the timely closing of the subject transaction.

Healthcare entities should also be wary of the confidential treatment, if any, that state regulatory agencies will afford information and materials produced in response to transaction review laws. 

Certain states, like Indiana, make it clear that all nonpublic information will not be released to the public without the notifying party being required to take any action. Other states may take a different approach.  California, for example, will treat all information provided to OHCA as public record unless the submitting entity designates documents or information as confidential and provides detailed justifications as to why such materials should be afforded confidential treatment.  The submitter is then obligated to provide versions of each document to OHCA with only those confidential portions removed or redacted.

While the exercise of requesitng confidentiality and redacting documents can be a time-consuming and arduous part of the submission process, it also critical that the submitting entity closely adhere to the requirements to ensure that its sensitive information is not publicly disclosed.

Not only have states recently enacted healthcare transaction review laws, but they are also quickly modifying and, in most cases, expanding the scope of such laws.  Currently, at least 10 states have legislation pending before their respective legislative bodies that purport to amend their transaction review laws. 

For example, Connecticut has introduced legislation aimed at strengthening its current review law by (a) increasing the requisite notice period from 30 to 60 days prior to the effective date of any qualifying transaction; and (b) requiring that parties to a transaction submit survey analysis, study documents, and reports that were prepared for the purpose of evaluating the transaction with respect to market shares, competitors, potential for sales growth or expansion into product or geographic markets. 

Similarly, an Indiana bill would broaden the state’s oversight authority over health care transactions by removing current asset threshold eligibility requirements and requiring the disclosure of any transaction involving Indiana health care entities.  Further, several states are considering bills that would broaden their mini-HSR laws to include qualifying arrangements and transactions involving management services organizations, private equity groups, and hedge funds. 

It is imperative that healthcare entities that are considering entering into a transaction—whether an acquisition, merger, or other form of corporate restructuring—closely analyze whether the healthcare transaction review laws of a particular state apply to that transaction, paying particular attention to the scope of health care entities and transactions implicated by those laws. 

Given the speed with which these laws are being adopted and amended by states, health care entities should also ensure that they stay fully updated on the current requirements of enacted laws and any pending legislation that could modify such requirements or introduce new notification obligations.  Once a health care entity determines that a mini-HSR law is triggered, it should keep the following considerations in mind:

·      The transaction agreement between the parties should clearly identify the review laws that will impact the transaction to align the parties’ expectations.  The parties should understand that the transaction will undergo increased scrutiny that may not have been the case even a few years ago.

·       Early in the process, the parties to the transaction should identify the factors that will be analyzed by the regulatory agency (e.g., market impact, anticompetitive effects, etc.) and consider ways to mitigate these factors.

·      At the outset, the health care entity should determine what information and materials will need to be disclosed in response to a transaction review law to cut down on unnecessary delays during the notification submission process.

·      The entity should meticulously comply with all filing requirements set forth in the transaction review law and also be prepared to quickly respond to follow-up inquiries from regulatory agencies or requests for additional information following an initial submission.  Any delays in responding to such requests will cause tolling of the review period.

·      State transaction review laws are separate and distinct from any required federal antitrust filing obligation.  While a state may require that any federal filing be produced as a supplement to the state filing, the state law will often have different requirements than federal regulations.

·      The entity should anticipate that transaction timelines will increase dramatically.  The parties to the transaction should both work to submit all required state filings as soon as possible after signing the transaction agreement to trigger the start of the review period.

·      Be flexible when interpreting the language of a state’s transaction review law and interacting with the regulatory agency overseeing the notification process.  As a result of the novelty of these laws and their ever-changing nature, these agencies have limited experience working with such laws.  Moreover, certain states may not have adopted regulations to assist the regulatory agency with interpreting ambiguous statutory language.

Jaya White is a Chicago-based Health & Life Sciences partner at Quarles & Brady who represents a wide range of health care clients — primarily in the long-term care industry — in regulatory and transactional matters. She also has ample experience advising pharmacy, physician, wholesale distribution and infusion providers in a broad array of issues.

Kiel Zillmer is a Milwaukee-based Health & Life Sciences associate at Quarles & Brady who advises clients on a broad range of commercial real estate, tax and corporate matters, as well as offering practical legal counsel designed to help hospitals and health care providers achieve their business objectives while minimizing unnecessary risk.

Quarles & Brady is a national law firm. As the firm’s website notes, “Quarles is a multidisciplinary Am Law 200 firm with approximately 550 attorneys practicing at the top of the profession in Chicago, Denver, Indianapolis, Madison, Milwaukee, Minneapolis, Naples, Phoenix, St. Louis, San Diego, Tampa, Tucson and Washington, D.C. Our clients include major national and multinational corporations, emerging companies, educational and research institutions, municipalities and government agencies, charitable organizations, industry executives and high-net-worth individuals. They are industry leaders in technology, energy, financial services, health care, insurance, pharmaceuticals, real estate and manufacturing, to name just a few.”