Value-based Care Collides with Competition: Recent Developments on the West Coast

On this episode of Ropes & Gray’s Value-based Care Collides with Competition podcast series, health care attorneys Jenn Romig, John Saran and Jaclyn Freshman discuss the deal impacts of new state laws in California, Oregon and Washington focused on regulating health care access, cost and quality.

On the Value-based Care Collides with Competition series, Ropes & Gray attorneys explore 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 examines 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. For more on this topic, please visit our resource center with dedicated resources on the changing regulatory landscape.

Transcript:

Jaclyn Freshman: Hello, and welcome to today’s podcast. My name is Jaclyn Freshman and I am an associate in Ropes & Gray’s health care practice group. With me today are my colleagues in the health care group, partner Jenn Romig and counsel John Saran. Jenn and John represent a variety of health care industry clients and investors in connection with strategic mergers and acquisitions, joint ventures, and the complex regulatory regimes implicated by these transactions. They also represent private equity (“PE”) clients in their acquisitions of a wide range of health care businesses. Jenn and John, thanks for joining me today.

Jaclyn Freshman: Likewise. I wanted to kick off our conversation by talking to you about trends you have been seeing in state regulation of health care access, cost, and quality on the West Coast.

John Saran: Thanks, Jaclyn. Recently, we have seen West Coast states become a new hotbed of active legislation and deal review. In particular, Washington, Oregon, Nevada, and California are among a number of states becoming more involved in reviewing health care deals to ensure that affordable health care, high-quality services, and community access to essential services are available to their residents. What’s particularly interesting, though, is how this has affected national platform deals: we have seen an increased willingness for states to review health care deals that fall mostly outside of their borders. For example, in Oregon, transactions involving large platforms with hundreds of health care providers across the country may be subject to a state’s review simply because one of the platform providers derives revenue from patients within that state.

Jaclyn Freshman: Thanks, John. This represents a fundamental shift in how our clients will need to approach large, national platform deals. As you both know, historically, many health care transactions valued at more than $111.4 million needed to be reported under the Hart‑Scott‑Rodino (“HSR”) Act, but unless operating in the insurance or non-profit health care spaces, health care transactions were not generally subject to state review beyond licensure, change of ownership, and certificate of need rules. New state regulations seem to be capturing lower-value transactions than HSR and are also expanding the scope of transactions traditionally reviewed by states. Notably, these new laws can apply to private equity roll-up and add-on transactions. As background, can you walk us through the development and rollout of these state laws that target health care access, cost, and quality?

Jenn Romig: Absolutely. About a decade ago, we began to see the emergence of state review of material health care transactions in East Coast states like Massachusetts and Connecticut—and, notably, these states required review or notice of transactions involving health care providers beyond non-profit hospitals. These states, however, generally demonstrated a diminished appetite to interfere with large national platform transactions. We will focus on these laws, in addition to some new developments on the East Coast, in the next installment of our podcast series.

Fast forward to January 2020, which was when we began to see state regulation emerge on the West Coast—first, with Washington State, right before the pandemic, establishing a law that requires notice of material transactions between health care entities operating in Washington. And then, in 2021, we saw Nevada establish notice requirements for certain health care entities that entered into transactions that would result in market dominance for a health care service in the state.

In 2022, Oregon implemented the Health Care Market Oversight program that requires health care entities to provide a notice of a material change transaction. Oregon’s law focuses on the impact of transactions on community members, including things like cost, equity, access, and quality of care. After submission of a notice, Oregon has 30 days to take one of three actions: either (i) approve the transaction, (ii) approve the transaction subject to conditions, or (iii) initiate a longer 180-day comprehensive review.

Finally, in the summer of 2022, California enacted a regulatory framework that is similar to Massachusetts which will begin to apply to health care transactions in April 2024. California’s framework gives the state 60 days to either approve a transaction or subject it to a lengthier Cost and Market Impact Review. We are still waiting on further details regarding California’s review process, which will be clarified in subsequent regulation. We have heard unofficial reports that this clarification could come sometime within the next few months, but the timeline is uncertain.

Jaclyn Freshman: Thanks, Jenn. To help us understand these West Coast states’ frameworks, John, can you walk us through exactly what kinds of health care entities are subject to review in each state?

John Saran: Yes. Each state’s law varies. Nevada’s law covers group practices, health carriers, hospitals, and physician group practices, while California’s law targets for review transactions involving payors, providers, or fully integrated delivery systems (specifically, for-profit owners and operators that wouldn’t otherwise be picked up by other California review processes).

Washington’s law covers transactions involving hospitals, health systems, and provider organizations. “Provider organizations” are defined to include entities that represent health care providers in contracting for the payment of health care services—so, management services organizations (“MSOs”) and dental services organizations (“DSOs”) are potentially picked up by this definition, but there are still many open questions as to entities captured under the law, which we discuss more in our podcast series’ episode on MSOs and DSOs coming out later in the series.

Oregon’s law takes the broadest view of entities subject to review, including not only entities that provide health care items or services but also any entity that is the parent company or “closely related” to an entity that primarily provides health care items or services. In fact, Ropes & Gray submitted a comment to the Oregon Health Authority (“OHA”) in October 2022 in response to its proposed rulemaking to get clarity on several vague elements of the rules and definitions, including this “closely related to” language. In that commentary, we expressed our view that Oregon’s framework, as currently enforced, may extend beyond the state’s authority. Oregon responded to our comments by re-asserting its broad interpretation of their standards. Notably, for our clients, Oregon has confirmed that private equity firms holding or acquiring a 25% or greater interest in a health care entity and management services organization are considered “health care entities” subject to review. The typical transaction that we see is a private equity firm acquiring a majority interest in a health care company, which would be picked up by this statute.¹

Jaclyn Freshman: That’s really interesting, John. Next, Jenn, can you help us understand what types of transactions are subject to review? And any relevant materiality thresholds we should be aware of?

Jenn Romig: Happy to, Jaclyn. Again, each state’s standards vary.

In Washington, the purpose of the law was really to cover transactions between Washington providers, so if there’s an out-of-state entity involved, it would need to generate at least $10 million of health care services revenue in Washington in order to be subject to review. This exception is obviously helpful because it excludes deals where a provider organization is going to enter the Washington market or PE sponsors that are acquiring a controlling interest in these entities. Moreover, there are also exceptions for organizations engaging in a transaction that previously had common ownership or a contracting affiliation.

Nevada’s law only captures transactions between entities that would result in a certain percentage market share of a health care service in Nevada, so it’s really quite limited, in practice, to entities with a large Nevada presence.

Oregon, on the other hand, takes a broader approach with its framework. This law captures most transaction types that we see—standard acquisitions, joint ventures, clinical affiliations, and management service arrangements. There are revenue requirements—one party must generate $25 million or more and another must generate $10 million or more. But the revenue thresholds are measured on an overall aggregated basis in an organizational structure—not just dollars generated in Oregon, like the Washington statute—so you can see how it’s much broader.

As an example, if you have a small clinic in Oregon generating $10,000 a year, but its parent companies run a national platform of clinics and they have revenue above $25 million, then one party has met the test. So, in practice, this means the reach of Oregon’s statute is potentially very extensive.

Last, California is still refining its framework, as we mentioned earlier, but it intends to capture what we consider to be majority-control deals involving health care entities that are not otherwise reviewed by California’s non-profit and insurance transaction review processes. As of right now, it is uncertain whether California will adopt more restrained standards, like Washington and Nevada, or cast a broader net, like Oregon.

Jaclyn Freshman: Thanks, Jenn. That provides us with a really helpful framework to understand these laws. Now, I know that California’s law won’t apply to transactions until April 2024, but what have we seen in terms of enforcement in Washington, Nevada, and Oregon?

John Saran: We’ve seen the Washington Attorney General’s Office demonstrate reasonable restraint in enforcement of the health care transactions notification requirement. Washington has had its law on the books for two years and we have not seen much enforcement. We note, however, that Washington recently introduced proposed legislation that would expand the scope of the current review process and enhance the attorney general’s enforcement authority. If this is passed, we could see Washington’s law be more broadly enforced.

Turning to Nevada, we have not seen broad enforcement. As we said, Nevada’s law does not generally seem to capture transactions unless the entities involved have a strong Nevada presence.

Oregon, on the other hand, has more actively enforced its review program, with eight transactions reported to date—including three recent deals in which Oregon imposed conditions to closing. There was also one in February that Oregon decided to subject to a 180-day comprehensive review. In our experience, Oregon has demonstrated an unprecedented willingness to review transactions that have minimal business within the state. Oregon has given the impression that if a transaction involves any patient revenue in the state—no matter how small the dollar amount—it may be subject to review if it meets other statutory requirements. We also have seen Oregon actively monitor press releases regarding transactions with a focus on PE acquisitions and national transactions and actually reach out to the parties if they fail to report. Oregon has shown to be quite aggressive in their approach thus far.

It will be interesting to see if California follows suit in this approach.

Jaclyn Freshman: Thanks, John. Given this active enforcement, it will definitely be important to stay up to date on the latest changes in state regulation. Practically, what impact do you expect this state regulation to have on deals?

Jenn Romig: Yes, very much agreed, Jaclyn—state regulation of health care transactions will be a really important consideration moving forward. In terms of practical deal effects, first, clients should be aware of potential deal delays and costs.

On the deal delay side, state regulation of these health care transactions requires submission of pre-closing notices, with varying timelines for review. Review periods vary, on average, from 60 to 180 days, or even longer in some cases. States have also demonstrated willingness to toll review periods and request additional information if they deem an application to be incomplete. Accordingly, it will be very important to plan ahead and factor these review periods into deal timelines.

On the cost side, there may be extra costs involved with the filing; some states are passing on the cost of review to the transaction parties. If, for example, a transaction undergoes a comprehensive review in Oregon, the parties may have to pay a fee of up to $100,000. If the states hire consultants to conduct market studies, it can be extremely costly.

John Saran: That’s right—and even if entities do report a transaction in compliance with state statutes, state regulators may impose post-closing obligations that follow a deal. Oregon, for example, recently imposed conditions on a deal that required annual reporting for 10 years post-closing to ensure compliance with commitments. We note, however, that OHA had a particularly strong interest in this deal because it involved hospitals and health systems predominantly located in Oregon. Ultimately, compliance with ongoing reporting requirements could be costly and may restrict parties’ ability to conduct business freely post-closing.

Jaclyn Freshman: Those are great points—it’ll be really important to factor these potential delays and costs in to have a realistic sense of deal timeline and budget. I understand that these regulations also could make it more difficult to keep deal terms confidential. How have clients been dealing with this so far?

Jenn Romig: That’s right, Jaclyn. This additional review may affect deal term confidentiality. So, state regulators can make public the transaction information that’s been submitted in a notice application, and they can solicit public feedback. This may include the notice application describing the transactions and the parties involved and deal documents like purchase agreements. As such, businesses subject to state regulation will have to become more comfortable sharing un-redacted deal documents, operational facts, and other information regarding transactions that historically would not have been disclosed in HSR-related submissions. Developing arguments based on trade secret and confidentiality protections will be extremely important in navigating the submission process and in ensuring that confidential deal terms or information contained in initial submission materials or any follow-up materials are not made public.

Jaclyn Freshman: Do you expect private-investor-backed companies to face more scrutiny as a result of these state regulations?

John Saran: While these rules are motivated by the desire to lower costs and improve or preserve access to and quality of health care, they also provide a means to explore broader narratives and agendas raised by special interest groups or other federal or state government authorities. We have seen a particular focus on transactions involving private equity, public companies, management services organizations, and other “corporate”-types of business. As I mentioned earlier, states are proactively monitoring health care transactions involving these types of businesses and reaching out to entities that fail to report.

Jaclyn Freshman: Thanks for these insights, Jenn and John. We’ve covered a lot today, and we really appreciate your time. So, just one last question here: looking ahead, what do you see as the most important takeaways to keep in mind?

Jenn Romig: Jaclyn, it ultimately will be important to keep current with legislative or regulatory updates from states. As we’ve discussed, state regulation of health care transactions could really impact deal structure, cost, and timing. However, the landscape of these laws is still quite uncertain, particularly in California, where much is left to be clarified in regulation. There, we still see a lot of unresolved ambiguity, including around materiality thresholds. Even in other states with a bit more clarity on the actual terms and definitions, however, it remains to be seen how vigorously these requirements will be enforced moving forward or if we’ll see them challenged.

John Saran: Definitely. Looking ahead, a lot will depend on how these uncertainties are tied up. As you mentioned earlier, Jaclyn, we’re seeing states on the East Coast too, such as New York, Maine, and North Carolina, introduce or pass similar legislation for review of health care transactions which will be important to monitor as well. We’ll actually be covering this topic in our next podcast, so be sure to tune in.

Jaclyn Freshman: Thanks again, Jenn and John. If those listening would like more information on this topic or our health care group, please don’t hesitate to contact us or visit our resource center, where you can also find a full list of podcasts in this series. 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.