As previously discussed here, a growing number of states are increasing oversight and regulation of healthcare transactions involving private equity (PE), hedge funds and other investors, as well as agreements between management services organizations (MSOs) and physician groups. The stated rationales for such oversight are concerns over quality of patient care, increased consumer pricing, and, in general, priority of “profits over patients.”[1]
Earlier this month, the California Office of Health Care Affordability issued regulations to broadly implement a law that establishes a framework for review of healthcare investor transactions. These regulations address both large and small investments and require significant upfront financial and organizational disclosures by the investing entity and its principals, as well as affirmatively requiring a statement of how the transaction will affect quality, equity, access and cost. The regulations also require review of MSO arrangements to ascertain the level of governance and control by the investor-based MSO over the clinical operations of the healthcare practice or entity, which is a key issue in states like California that restrict the corporate practice of medicine.
Many covered transactions are subject to a 90-day pre-closing notice requirement, with a 60-day timeframe for the agency to determine the level of review required. This timeframe can be further extended until the agency determines that its review is complete. Thus, this review process can delay transactions for months. These delays can wreak havoc on the ability to get deals done in a timely basis, and may necessitate further due diligence by the parties to see if there have been any material changes during the months required by this review.
State initiatives like California’s could materially affect PE and other investor-based healthcare deals. We will continue to keep of you abreast of these kinds of developments as they evolve.
Sign up to receive Rivkin Rounds at www.RivkinRounds.com.
[1] We note that, as a firm, we believe that PE investments in healthcare could bring important benefits, such as access to capital required for expensive technology and expertise to assist in growth and management.