Massachusetts Gives Private Equity in Health Care New Burdens

In this article for Bloomberg Law, Dennis Williams, Will Richmond and Kelly Kluka discuss the impacts of Massachusetts House Bill 5159, a new law aimed to add further oversight of private equity investment in the Commonwealth's healthcare sector. 

A new Massachusetts law will further increase existing oversight of private equity investments in its healthcare sector, making the commonwealth’s transaction review process and reporting requirements for private equity investors among the most stringent in the country.

House Bill 5159, which will go into effect April 8, is the latest legislative effort to scrutinize healthcare transactions, including those that fall below the Hart-Scott-Rodino Antitrust Improvements Act’s filing threshold. It joins similar transaction oversight requirements in 14 other states. State lawmakers in at least five states are considering legislation that would strengthen or implement new healthcare transaction review requirements.

The law significantly expands Massachusetts’ existing healthcare oversight process by adding new types of transactions subject to pre-closing filings, and by creating continuous reporting obligations for healthcare providers, management services organizations, and their private equity owners and affiliates.

It also grants Massachusetts’ regulators broad authority to request information from healthcare providers, private equity owners, pharmaceutical manufacturers, pharmacy benefit managers, and commercial payers. Regulators will have to promulgate key definitions and thresholds, which will play a critical role in the law’s ultimate impact.

Under existing law, the Massachusetts Health Policy Commission, or HPC, requires healthcare providers with more than $25 million in annual Massachusetts revenue and involved in a merger, acquisition, or affiliation to file a 60-day pre-closing notice.

The new law expands that review to include:

1. Transactions that significantly expand the capacity of a provider or provider organization
2. Transactions involving significant equity investors (such as private equity) that cause a change of ownership or control of a provider, provider organization, or carrier
3. Significant acquisitions, sales, or transfer of assets, including but not limited to real estate sale lease-back arrangements
4. Conversion of a non-profit to a for-profit entity
5. Mergers or acquisitions of provider organizations that will cause the provider organization to have a dominant market share in a service or region, to the types of transactions triggering a notice and consent application.
6. Management services organizations and significant equity investors (collectively, investor groups) will need to submit detailed information on their organizations, management, and financial structure in connection with a required filing.

Significant equity investors is broadly defined to include any private equity company with a financial interest in a provider, provider organization, or management services organization; or any investor, group of investors, or other entity with 10% or more ownership in a provider, provider organization, or management services organization other than a venture capital firm exclusively funding startups or other early-stage businesses.

Besides requiring more information for transaction review filings, the law clarifies that the 60-day pre-closing period starts running only once the HPC determines the filing is complete. Once approved, the HPC will monitor the effects of the transactions and investments for five years.

The law also requires healthcare providers to submit an annual registration to the Center for Health Information and Analysis with ownership information, financial statements, and information on their corporate affiliates and out-of-state operations. This registration will require investor groups and management services organizations affiliated with a registered provider to submit similar information.

The Center for Health Information and Analysis can request more information from registered providers and may require investor groups to report relevant information quarterly. Failure to comply with the reporting requirement may lead to penalties of up to $25,000 per week.

The law amends the Massachusetts False Claims Act to hold liable investor groups and other upstream owners of Massachusetts healthcare providers for violations of the statute even if they didn’t cause the violation. Investors, including private equity owners, must report any violations within 60 days of identifying them.

The new law specifically codifies the Attorney General’s authority to make a civil investigative demand of a healthcare provider to investor groups.

Current and prospective owners of Massachusetts’s healthcare entities should carefully review these new requirements to understand if they will impact future transactions. Critically, transacting parties should bear in mind that although the law requires a 60-day pre-closing notice for an initial review, the HPC can require a cost and market impact review that can extend up to nine months.

In addition to the uncertainty with timing, parties involved in implicated transactions should expect to incur additional expenses associated with the review process.

While regulations will clarify what is required for the initial transaction review filing requirements, parties ultimately will need to contend with the HPC’s broad authority to request information that they deem necessary to conduct their review. In some cases, this may mean providing more detailed information than what has been historically required for other regulatory filings, including those under the Hart-Scott-Rodino Act.

The Massachusetts review and reporting processes will run concurrently to those in other state and federal transaction reporting requirements. An adverse outcome by one regulator may influence the decision of another.

As private equity investment in the healthcare space continues to be attractive, understanding the applicability of these laws is a foundational issue for healthcare transactions and arrangements.