A sweeping set of proposed rules on healthcare transactions in California is aimed at addressing rising medical costs, but legal experts say the measures could chase away investors due to public disclosure requirements.
California is looking to join New York, Washington, Minnesota and other states in ratcheting up its oversight of all kinds of healthcare mergers and acquisitions, with most states setting revenue triggers that will easily pull many skilled nursing operators in for additional scrutiny.
Draft regulations released by the California Department of Health Care Access and Information (OHCA) July 31 detail new 90-day notification requirements and information that must be sent to a statewide board to determine if a formal cost- and market analysis should be conducted. These new rules could affect private equity investments in or purchases of nursing homes, experts say.
“The notice requirements will add complexity and expense, particularly on deals at the low range of deals covered,” said Andrew J. Demetriou, senior counsel at Husch Blackwell, who wrote about the new regulations on the firm’s blog. “Whether that will discourage deals is hard to predict at this point, but it may be a factor, as well as the fact that there will be at least some public disclosure of the transaction.”
The proposed rules broadly define a healthcare entity as a provider, a fully integrated delivery system or a payer, and set financial criteria for the size of the entity and nature of the transaction. Size or value triggers start at $25 million in annual revenue or amount of ownership assets or $10 million in revenue or ownership assets if the transaction involves another entity that meets the $25 million threshold. The requirements also would be triggered if the entity serves at least 50% of patients who reside in an area with a shortage of healthcare professionals.
“[The review will] determine whether a proposed transaction will reflect a market failure, increase market power of a party or create a risk of significant impact on market competition,” Demetriou wrote. “All information submitted to OHCA in connection with a material change transaction will be treated as a public record unless the submitting party identifies documents or information as confidential and OHCA accepts the designation of confidentiality.”
The agency will have up to 60 days to determine whether the review is necessary, and that subsequent review could take up to 90 days, Demetriou said in an email to McKnight’s Long-Term Care News on Friday. He noted that it’s difficult to say how the agency will handle smaller deals, and it might consider an expedited process that allows for faster review of small transactions.
“In the case of filings with the [Federal Trade Commission], smaller transactions which do not appear to have anticompetitive effects are often cleared fairly rapidly,” Demetriou said.
The Biden administration has been pushing increased transparency for nursing home ownership structures, particularly those involving private equity, as part of sector reforms announced last year. In February, the Centers for Medicare & Medicaid Services proposed regulations that it said would make clearer for consumers the ownership and management structures of facilities and define private equity and real estate investment trusts that hold an ownership stake. Sector observers have cautioned that the new disclosure requirements could “demonize” private equity and scare off investors who have the resources to make capital improvements or invest in staffing solutions.
States have joined the federal call on increasing transparency of nursing home ownership. Lawmakers in Connecticut recently approved legislation requiring individuals and companies applying for a license to operate a nursing home in Connecticut will now have to disclose information on private equity companies or real estate investment trusts that own any part of the facility.
The law firm Ropes & Gray recently analyzed several new state measures, and found a range of targeted transactions. In almost all cases, though, nursing homes that change hands will face more oversight and potential investigation.
“Whereas Oregon and California look to capture investments by private equity firms, it appeared that the Illinois and Minnesota legislatures were careful to avoid expressly targeting private equity,” Ropes & Gray attorneys noted Monday. “Similarly, a bill in Pennsylvania’s Senate takes an even narrower approach by only capturing hospital, nursing home, and hospice transactions.”
Alice Hall-Partyka, counsel with Crowell & Moring LLP, told McKnight’s that while new rules in California could discourage some transactions, nursing homes and other healthcare entities that receive Medicare and Medicaid funds are already subject to disclosure rules. But, the latest proposal may lay the groundwork for even more rules to come, she said.
“The broader context here is that OHCA is really interested in collecting information on healthcare transparency,” she said. “There is increased scrutiny over mergers and acquisitions. It’s possible that information would inform future regulations.”
