Health Care Transaction Laws Unwrapped: Deal Impacts for Private Equity Firms, MSOs & DSOs

On this episode of Ropes & Gray’s Health Care Transaction Laws Unwrapped podcast series, health care attorneys Christina Bergeron, Devin Cohen and Natalie LaRue discuss recent developments in state health care transaction laws and their impacts on private equity investments in health care. With an increase in transaction laws specifically targeting private equity, including passed legislation in Indiana and bills that were considered in California, Massachusetts, Connecticut and Minnesota, Christina, Devin and Natalie discuss the effects these laws have on the dealmaking landscape and key takeaways for these investors.

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Transcript:

Natalie LaRue: Welcome to our podcast series, Health Care Transaction Laws Unwrapped. Today, we are discussing the impact of emerging state health care transaction laws on private equity firms, management service organizations, and dental support organizations. I’m Natalie LaRue, an associate in Ropes & Gray’s health care practice group. With me today are Christina Bergeron and Devin Cohen, partners in our health care practice group. Christina focuses on health care transactions and regulatory work—advising private equity health care portfolio companies, management services organizations, and dental services organizations. Devin represents providers, payors, management service organizations, vendors and industry investors in value-based care collaboration, alternative payment models, and vertical integration transactions.

Christina Bergeron: Thank you, Natalie. We’re looking forward to revisiting this topic after our podcast last June. Since then, there have been a lot of new developments we’ll discuss today.

Natalie LaRue: Great, let’s get started. We’re going to cover both state and federal health care transaction laws. Devin, can you tell us about some key themes in these laws?

Devin Cohen: Sure. Traditionally, these laws were aimed at overseeing all types of investments in health care. However, more recent laws and proposed legislation have begun to specifically target private equity, including PE ownership and investment in health care through management services organizations (MSOs) and dental support organizations (DSOs)—those type of structures resulting from state-based corporate practice laws and related restrictions.

Natalie LaRue: Interesting, and do we know what’s causing this shift in focus?

Christina Bergeron: Yes, we believe the shift in focus is being driven by PE investments in health care that have failed due to management strategy. For instance, the Steward Health Care bankruptcy this year, whereby—allegedly—PE investors created deals that enriched themselves at the expense of the hospital, resulting in the hospital network filing for bankruptcy, is an example of what’s driving some of the focus here on PE in health care. Another example we’ve heard the federal government speak to is the Leonard Green & Partners investment in the hospital chain Prospect Medical. States want more oversight and control over for-profit investment in health care to ensure they oversee how the investment impacts things such as cost, quality, and access in their respective state. Now, whether these laws will accomplish this important aim is yet to be seen.

Natalia LaRue: In what ways are these laws targeting PE-backed investments in health care?

Christina Bergeron: States—as opposed to the federal government per se—are really leading the charge. Over the past year, as we’ve seen an increase in state laws targeting PE investment in health care (predominantly through PE investment in management services organizations or dental services organizations structures), there are a few states that stand out: California, Massachusetts, Connecticut, Minnesota, Oregon, and Indiana, to name a few, all of which we’ll discuss today.

For instance, Indiana and Oregon have review processes that specifically call out and apply to private equity firms. Indiana’s process is a lot less arduous than Oregon. For instance, in Indiana, there’s a notification requirement—specifically, before certain transactions are completed in the state, it requires health care entities, including but not limited to medical and dental providers, insurers, administrators, and PE partnerships, before entering into transactions with health care companies, to notify the Indiana Attorney General (AG) 90 days before undergoing a merger or acquisition with another health care entity with a value of at least $10 million. Indiana is distinguishable from a few other states because it specifically, in its law, includes “private equity” in the definition of “health care entity.” It specifically captures, as a health care entity, any “private equity partnership, regardless of where it is located, seeking to enter into” a transaction with a more conventional health care entity if at least one of the entities is located or provides services in Indiana. Interestingly enough, MSOs and DSOs, which are typical platforms for PE investment, are not included in the statute’s definition of “health care entities.” Since this law came into effect in July of this year—so, very recently—we are still seeing how PE firms are implicated by the law, but given the breadth of the statute, it is picking up a number of transactions. Devin, do you want to address Oregon?

Devin Cohen: Of course. Oregon is one of the more arduous states with respect to its requirements and is an approval, as opposed to a notice state, such as Indiana. If the health care transaction involves a site or any business in Oregon, it will be important to analyze how the law could impact the transaction and be able to really strategize that up front.

Now, Oregon’s Health Authority (OHA) guidance states that private equity investors that own 25% or more of a health care entity subject to review are subject to notice requirements. That agency has also stated that MSOs and DSOs are included because they are “closely related” to health care entities subject to review. By maintaining relationships with local counsel in Oregon, we’re really able to stay clued in on regulators’ thoughts and interpretations as they develop.

Natalie LaRue: We know a handful of the notices filed with OHA to date involve MSOs and DSOs. What can we learn from these filings?

Christina Bergeron: Sure. So, about a fifth of the 30-plus notices filed with OHA did involve MSOs or DSOs. Three of those proposed transactions were approved, one was exempt, and one was approved with conditions. The conditions range from requiring the practice to retain decision-making authority over employment matters and clinical decisions affecting patients (to no surprise) to preventing the MSO from negotiating payor contracts with other entities that it owns or is affiliated with. Many MSOs and DSOs likely comply with many of these restrictions, as they are similar to those under corporate practice laws and similar regulations.

Natalie LaRue: Thanks for sharing. It seems that states are charting their own paths in reviewing private equity and MSOs and DSOs. Are we seeing similar trends with proposed legislation elsewhere?

Devin Cohen: Absolutely, though the approaches vary. For instance, California’s current law does not apply specifically to MSOs or DSOs or private equity per se, although the recent proposed bill that did not pass was specifically targeted at these structures.

That proposed bill, AB 3129, it really caused a stir among our clients due to its potential to limit private equity groups’ abilities to control or contract with certain professional practices. The bill would have required parties to provide pre-closing notice to and obtain consent from the California Attorney General for a change of control or an acquisition of a health care facility or provider group by a PE group or a hedge fund. The definition of “change of control” was very broad and captured any arrangement where a private equity group assumed direct or indirect control over a health care facility or a provider. Additionally, the bill would have imposed restrictions on a PE firm’s ability to control physician, psychiatric, dental practices (in the MSO/DSO structure) and restricted the inclusion of non-competes and non-disparagement clauses in management contracts.

Natalie LaRue: Interesting. And why did this bill ultimately fail?

Christina Bergeron: Sure, so the bill, even though it passed both the California Senate and House, Governor Newsom ended up vetoing it due to concerns of its redundancy with California’s current law and the review process by the Office of Health Care Affordability (OHCA). It was a bit of a surprise for everyone since the bill had gained so much momentum, but as we’ve discussed, California does have a law currently on the books that does review certain health care transactions.

Devin Cohen: That’s right. And certain industries, like dental, they really lobbied to exclude their industry from being covered by the law and were quite successful in doing so.

Christina Bergeron: That’s right. In California, we’ve seen dental practice and DSO models specifically carved out from health care transaction laws, mostly through effective lobbying.

Natalie LaRue: Thanks, Christina. Now, going cross-country to Massachusetts, Devin, can you catch us up on any developments there?

Devin Cohen: Yes, a few things jump out here. Since its oversight law was first implemented in January 2015, Massachusetts has required “covered entities” to provide 60-day pre-closing notice of certain “material change” transactions to the Health Policy Commission (HPC), the Massachusetts Attorney General, and the Center for Health Information and Analysis. These “covered entities” provide a wide range of services, including medical and dental. Under this regime, the HPC can order a cost and market impact review of a given transaction or refer it to the Attorney General for further action. Historically, the HPC really hasn’t been very aggressive, having ordered only 10 cost and market-impact reviews in the past nine years, though it has referred its reviews to the Massachusetts Attorney General, including the merger that created Beth Israel Lahey Health, one of the largest health systems in Massachusetts. Earlier this year, the Commonwealth issued new guidance that really expands on the types of transactions that constitute material changes and the categories of entities required to file notice.

Natalie LaRue: I’m guessing that the guidance implicates at least some of the entities that are the focus of our discussion?

Christina Bergeron: Yes, it absolutely does. The guidance states that MSOs representing a Massachusetts provider in payor contracting are considered “provider organizations” subject to material change notice filing requirements, even if the MSO is not a party to the third-party payor contract. So, to put it more directly, if the MSO has employees that assist the PC with payor contracting negotiations, etc., it gets picked up and is implicated. MSOs are implicated in other ways as well. For example, the guidance for Massachusetts clarifies that the materiality thresholds for covered entities require aggregating revenue across entire provider platforms, including that of all Massachusetts providers represented by the MSO in payor contracting, even if not owned by that MSO or generated through contracts with other payors without MSO involvement. DSOs can also be implicated in the same way if they negotiated with payors on behalf of dental services providers. Bottom line: you’re seeing Massachusetts really wanting to be clear on more expansive than less in terms of how they interpret their guidance.

Natalie LaRue: Given that, it seems like MSOs could potentially fall within the Massachusetts HPC review process even when they have minimal contact with a state.

Devin Cohen: That’s spot-on. Out-of-state MSOs should really be thoughtful about other states’ review processes as regulators continue to refine their reach through all types of legislative amendments, rulemaking, and other guidance. It’s extremely important for MSOs and DSOs, particularly those backed by private equity, to seek guidance early in Massachusetts to navigate this process.

Natalie LaRue: I understand that a bill that would have increased Massachusetts’s oversight even more in this area was introduced but failed to pass this year. Could you share a bit more on what happened there?

Devin Cohen: Sure. H4653 was introduced in the Massachusetts House in February 2024. The bill aimed to enhance regulatory oversight of private equity investments in health care and restrict the use of the friendly PC model in the state, by limiting the ability of MSOs to control or guide certain contracting, financial decisions, and clinical decisions on behalf of health care entities. The bill died in August when the House and Senate were unable to reach a compromise, though legislators may revisit the bill later in 2024 or again in 2025. And should it be reintroduced and passed, we’re prepared to move quickly to address the implications for our clients.

Natalie LaRue: Thanks, Devin. It seems that each state is taking a nuanced or different approach from one another, particularly with respect to MSOs and DSOs and their relationship to the health care industry.

Christina Bergeron: Yes, exactly. As mentioned, California’s health care transaction law does not capture the dental industry or MSO models. However, some states, such as Massachusetts, Oregon, and Indiana—as we’ve discussed—do pick up dental practices and DSO/MSO models in their relevant state law. In some states, like Connecticut, Minnesota, and New York, it’s unclear, and we’re staying tuned to evolving guidance and interpretations, including continuing lobbying efforts to modify the list of impacted health care entities. Not to mention, each state has different thresholds for whether there is enough “contact” with the state to trigger the relevant state law, often expressed in terms of revenue. Therefore, it’s important when analyzing transaction models involving MSO and DSO structures, a careful state-by-state analysis is required, particularly as there are developments in interpretation and subsequent legislation and regulations.

Natalie LaRue: And adding to that nuance is the fact that we are also waiting to see which other states will pass similar laws.

Devin Cohen: Yes, and we are keeping track of bills that are cropping up across the country. For example, the Pennsylvania legislature is considering three different bills to introduce health care transactions review processes, and two cover arrangements with provider organizations. The state’s legislative session concludes at the end of November, so we’re really watching it very closely for any last-minute movement.

In Connecticut, this year, the state legislature considered a bill to develop a plan to address PE investment in health care facilities. Going even further, in Minnesota, a bill sought to prohibit private equity companies or real estate investment trusts from acquiring or increasing ownership interest in, or operational or financial control over, health care providers. Neither the Connecticut nor the Minnesota bill passed in the 2024 legislative sessions, but they could be re-introduced in 2025—although, we think from what we’ve heard from these legislative sessions, less aggressive versions of the bills would likely be introduced in those states.

Natalie LaRue: I know we’ve covered a lot of the movement at the state level to oversee health care transactions, but what about at the federal level?

Christina Bergeron: Yes, it’s a good question. At the federal level, nothing has passed yet; however, in March 2024, simultaneously with a workshop on PE investments in health care, the Federal Trade Commission (FTC), Department of Justice (DOJ), and Department of Health and Human Services (HHS) issued a Request for Information (RFI) seeking public comments on the impact of private equity on health care providers. In May 2024, the FTC and DOJ issued another RFI regarding private equity serial acquisitions and roll-up strategies in health care and other industries. Our colleagues Tim McCrystal and Debbie Gersh discussed this in the first podcast in our series. So, in sum, it’s absolutely a focus of the federal government and multiple agencies.

In terms of proposed legislation, we saw the Corporate Crimes Against Health Care Act introduced by Massachusetts Senators Warren and Markey in the U.S. Senate in June 2024—that would authorize state AGs to claw back compensation from PE companies and portfolio company executives, and impose civil and criminal penalties on managers, if portfolio health care companies experience financial difficulties caused by “looting” of the company by the PE sponsors. In response to the Steward Health crisis, Senators Warren and Markey, along with others, also recently re-introduced the Stop Wall Street Looting Act, with updated text. This bill includes provisions to limit the role of real estate investment trusts in health care and would require more extensive public disclosures by PE funds. The bill has been introduced twice before but failed to pass in Congress each time, which is likely to be the case here as well.

Natalie LaRue: Thanks, Christina. We know Senator Markey and Washington Representative Pramila Jayapal have also introduced other bills at the federal level. Could you tell us a bit more about those, Devin?

Devin Cohen: Both Senator Markey’s Health Over Wealth Act and Representative Jayapal’s Health Care Ownership Transparency Act would require the Department of Health & Human Services to establish a task force to limit the role of private equity and consolidation in health care. They would also empower HHS to impose a moratorium on certain mergers and acquisitions that are pending review. The Health Over Wealth Act also seeks to require private equity firms to obtain a license to invest in health care entities. And the Health Care Ownership Transparency Act, introduced in March 2023, while it hasn’t really moved much, Senator Markey’s bill was introduced only this past July, and we are really continuing to monitor its progress.

Natalie LaRue: In addition to the proposed legislation that we discussed, are we seeing movement in other areas on the federal level?

Devin Cohen: That’s a good question. The Biden administration has prioritized improving patient care quality and affordability and reducing health care costs. Legislators and the Biden administration argue that private equity investments in the health care industry can drive up patient care costs and adversely affect the health care workforce and patient outcomes. To that end, they have expressed willingness to increase regulatory oversight of health care transactions across the board.

Natalie LaRue: Thanks, Devin. On the federal level, it will also be interesting to see the impact of the new administration in this area.

In sum, it sounds like private equity firms should anticipate further action on both the federal and state levels. How would you both advise private equity companies seeking to continue working in the health care industry?

Christina Bergeron: It’s increasingly important for private equity investors to track these laws and their development closely and work with counsel to ensure continued compliance, including for their portfolio company investments and transactions. That said, these regulatory regimes shouldn’t deter private equity investors. We’ve successfully navigated instances with clients where thoughtful regulatory interpretation avoided unnecessary notice filings and minimized excess disclosures.

Devin Cohen: Private equity firms really can partner with counsel for purposes of assessing the current investment plans and contracts with health care entities across their platforms. By ensuring ongoing activities align with key themes in these laws and bills—such as promoting better quality of care and increasing access—private equity firms can position themselves for continued activities in the industry exceedingly well, and we are here to help them think through their opportunities for doing so.

Natalie LaRue: Thank you both again for all of your time and insights. For more information on this topic or our private capital transactions or health care groups, please contact us or visit our resource center, which includes a list of every podcast in this series. Our website’s interactive map also details various pending and enacted state health care transactions laws nationwide. Other Ropes & Gray podcasts are available on Apple and Spotify. Thanks again for listening.