We are pleased to introduce a new podcast series, Value-based Care Collides with Competition, that explores how aggressive federal and state enforcement of antitrust and other competition laws appears to be in tension with the nationwide shift to value-based care models.
The series will examine how the adoption of new state competition, quality, access and cost laws is creating additional burdens on health care entities, including private equity-backed entities and management services organizations, that are considering new transactions—and how to mitigate the impact of these potential impediments.
On this opening episode, Ropes & Gray health care attorneys Debbie Gersh, Tim McCrystal and John Saran discuss the impact on health care transactions of current federal and state activity (legislative and regulatory) focused on competition, broadening access, reducing cost and improving quality.
For more on this topic, please visit our resource center with dedicated resources on the changing regulatory landscape.
John Saran: Hello, and welcome to today’s podcast. My name is John Saran and I’m a counsel in Ropes & Gray’s health care practice group. My practice focuses on advising health care companies and private equity investors on mergers & acquisitions and public offerings. With me today are Debbie Gersh and Tim McCrystal, co-chairs of Ropes & Gray’s health care practice group.
Debbie and Tim, the Biden Administration has made a focal point of its agenda to “expand Americans’ access to quality, affordable health care and to reduce health care costs.” Hadn’t this been a focus of prior administrations, as well? After all, President Trump’s stated vision for health care was “to provide Americans with more choice, better care, and lower costs.” But before President Trump, President Obama signed the Affordable Care Act (“ACA”) into law, which, among other things, established a new agency, CMMI—it had the specific mission of improving patient care and lowering costs through development of alternative health care payments and service delivery models. Tim, so what’s new with respect to President Biden’s efforts?
Tim McCrystal: John, you’re right—improving care, including access to care and lowering costs, is a consistent priority for the federal government, and, in fact, enjoys bipartisan support. There are two things, however, that are noticeably different this time. First, we are seeing a more aggressive regulatory and enforcement stance regarding market access and competition. This is also reflected in an increased alignment and cooperation among federal agencies with respect to enforcement.
Second, states are also taking aggressive action, including implementing new laws and regulations—and often creating new agencies—seeking to address cost, access, and competition issues. The idea is that creating a marketplace more conducive to competition will result in more affordable health care, higher quality services, and better access to essential services for patients.
These developments are important not just for their impact on dealmaking and ongoing compliance, but because they can create tension with acquisitions, consolidation, and efforts to build integrated delivery systems to address the shift towards value-based care payment models. Since the enactment of the ACA, a major focus of this and past administrations has been combating rapidly rising health care costs by pushing towards the adoption of value-based care payment models. Value-based arrangements can take many forms (capitation, bundled payments, gain/loss sharing, etc.), but a main element consists of linking reimbursement to both financial and quality targets instead of reimbursing providers for each service.
So, on the one hand, federal and state lawmakers are trying to control costs by pushing health care providers to take more risk and manage the continuum of care for large populations with the consequence—intended or not—of pushing the industry towards consolidation and integrated delivery systems. On the other hand, we see new regulations that may hinder acquisition activity. These two policies seem at odds with each other, and are creating challenges for health care providers, payors, and investors from both a strategy and compliance perspective.
John Saran: So, Tim, are you saying that there is a link between the push towards value-based care and market consolidation?
Tim McCrystal: Yes, the transition from volume to value-based care and the corresponding move to population health management requires major capital investments and sophisticated management expertise. Providers can address certain of the challenges posed by value-based risk arrangements, particularly lack of resources and unpredictability of revenue streams, by consolidating and benefiting from economies of scale. Increased M&A activity is a natural consequence of this shift, as providers consolidate to achieve efficiencies and build scale to manage population health.
John Saran: Hasn’t market competition though been a focus for a while? I think that states have long embraced the idea that creating a marketplace more conducive to competition will make health care more accessible and affordable for patients. I think that as many as 15 states have repealed “certificate-of-need” (CON) laws in an effort to promote competition. In addition, some states have begun to implement legislation banning anti-competitive contract terms, including gag clauses (so, prohibitions on the release of negotiated payment amounts), most-favored nation clauses (that would mean prohibitions on providers from offering services to other payors at lower prices), and anti-tiering and anti-steering clauses (such as prohibitions on activities that could encourage a patient to seek care from another health care provider, including putting the provider into a less favorable tier that requires higher patient cost sharing). So, what are the new developments in this area?
Debbie Gersh: John, you are correct—market competition has been addressed before by federal and state regulators. What’s new, however, is how aggressively federal and state regulators are now pursuing this objective, and the significant new burdens imposed on health care entities and investors with respect to transactions and compliance. The other novel element is that all agencies—not just CMS—are now issuing regulations purporting to promote competition and the inter-agency cooperation that is starting to coalesce around enforcement. As part of its overall strategy to reduce costs, last year, the Biden Administration issued an Executive Order that was titled “Promoting Competition in the American Economy,” and that Order instructed all federal agencies to issue policies that promote competition. So, what we’ve seen is various agencies from CMS to the Department of Treasury coming out with statements about how they are going to help promote competition. Take for instance, the U.S. Federal Trade Commission’s proposed rule published in January on non-compete clauses. If finally issued, the rule would prohibit post-employment non-compete clauses in agreements between employers and their employees or other workers and would even void those clauses in existing agreements. If passed, this rule would have a far-reaching impact on business and HR practices in the health care industry. If you missed it, I would encourage you to read our recent article on this topic.
Another good example is CMS’s recent rulemaking addressing competition and transparency in health care. This past summer, CMS released a “Request for Information” (or what we commonly refer to as an “RFI”) that it said was related to enhancing “competition and transparency” in the health care system. Through the RFI, CMS asked interested third parties for feedback on how it could use ownership data it has been collecting on mergers, acquisitions, and changes of ownership relating to nursing homes and hospitals enrolled in Medicare in order to “promote competition.” It also asked whether releasing this ownership data for other types of health care providers could help further that goal. CMS has recently expanded the entities on which it publishes ownership information. In an April 2023 notice, HHS stated that it will release ownership data of all Medicare-certified hospice and home health agencies to benefit researchers, enforcement agencies, and the public. CMS also recently issued a rulemaking proposal to make all Medicare-certified entities provide more detailed information about their ownership status in a form required for Medicare participation. Also, at the end of last year, the Justice Department’s Antitrust Division and the Department of Health and Human Services Office announced that the two enforcement agencies will increase their efforts to collaborate in connection with investigations of health care providers. Even more significant, DOJ indicated that it would use, as one of its remedies, the exclusion of health care providers from federal health care programs, that historically has typically been used only by the OIG and is often the equivalent of what we call a “death sentence” for providers. And more recently, the Department of Justice has withdrawn longstanding policy statements regarding antitrust and health care providers.
John Saran: In your opinion, Debbie, what is the significance of CMS making ownership data public? Isn’t this data already public anyway?
Debbie Gersh: John, you’re correct—that information is often public, but piecing it together can be difficult, especially for smaller transactions. Making this information readily available to the public could help the public and health care stakeholders better understand and appreciate the impact of both consolidation and mergers & acquisitions in the health care industry.
John Saran: Aren’t large transactions already subject to review by federal antitrust authorities? So, in essence, the release of this information could potentially have a greater impact on smaller transactions. In your opinion, Tim, what is prompting this new scrutiny on smaller deals?
Tim McCrystal: John, that’s a good point. Typically, many health care providers have grown through serial acquisitions. This type of incremental growth is hard for antitrust agencies to detect. So, empowering stakeholders to flag these type of acquisitions would allow regulators to investigate transactions that may have otherwise flown under the radar.
One target of federal and state legislators appears to be private equity investments in the health care sector. Private equity companies’ acquisition strategies usually involve the acquisition of multiple smaller companies to create a single, large player.
Both the FTC and the DOJ have expressed concerns regarding private equity’s use of these so-called “roll-up transactions.” The DOJ is concerned that roll-ups can substantially lessen competition and potentially lead to a monopoly.
Private equity firms with health care investments should be aware that antitrust enforcement agencies may review their portfolio board appointments and transactions, regardless of whether they make a filing pursuant to the HSR Act.
For example, the state of California has, on several occasions, considered legislation expanding state approval requirements for private equity and hedge fund acquisitions of health care entities. The newly created Oregon Health Authority program in one of its transaction reviews acknowledged concerns about the negative impact of private equity investments in the health care industry.
John Saran: You mentioned California and Oregon, so let’s talk about states: What should health care providers, payors, and investors be aware of?
Debbie Gersh: John, health care access, cost, and quality are under profound consideration in state legislatures across the country. The West Coast states—in particular, California, Oregon, and Washington—have become a hotbed of active legislation. In addition, since 2020, Illinois, Maine, Minnesota, and North Carolina have legislation yet to be passed regarding health care consolidation. The idea of states regulating health care costs and competition is not a new one, and a number of states have in fact established oversight commissions to review the impact of market consolidation or to keep an eye on health care prices, including, for instance, the Health Commission in Delaware, the Health Policy Commission in Massachusetts, and the Health Care Cost Containment Council in Pennsylvania, just to name a few. Also, Connecticut, Massachusetts, and Nevada actively monitor health care access, cost, and quality concerns. Our second podcast in this series will discuss new legislation in West Coast states and its impact on transactions in more detail, but let me just give you some general highlights.
These are some important developments to consider, and include:
- Connecticut, Massachusetts, Nevada, Oregon and Washington have established notice and/or approval requirements intended to catch deals that might have otherwise escaped review and provide a way for state regulators to force public disclosure and potentially to delay or prevent a deal from closing. California has similar requirements that will go into effect in 2024.
- State Attorneys Generals are also taking a closer look at health care deals in terms of competition but are also increasingly assessing the cost and access considerations of M&A and contracting affiliations.
In sum, any stakeholder interested in investing in health care providers or health plans should be prepared for lengthier licensing approval processes that can include “up the chain” reviews.
As I mentioned earlier, our second podcast will cover in detail the specific provisions of the California, Oregon, and Washington laws, and will discuss their impact on transactions and possible mitigation strategies, so be sure to tune in.
John Saran: Tim and Debbie, I’ve really appreciated our time today. And if those listening would like more information on this topic or from our health care group, please don’t hesitate to contact either one of us or visit our website Navigating Emerging State Regulation of Health Care Transactions. This podcast is the first in a series discussing recent developments and trends in health care access, quality, and costs. Our next podcast will address new state laws enacted by several West Coast states and their impact on dealmaking and compliance. You can also subscribe and listen to other Ropes & Gray podcasts wherever you regularly listen to your podcasts, including on Apple and Spotify. Thanks again for listening.
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