Given the importance and rising costs of healthcare as well as a concern about whether federal authorities have the same interests and incentives to enforce the antitrust laws, recently states have taken actions to be better informed about, challenge, or prevent healthcare affiliations. For example, Connecticut and Washington enacted and California has proposed legislation requiring premerger notification to their respective state attorney general offices of certain healthcare-related deals before consummation. These states can then use the information gathered from these notifications for their investigative and enforcement functions – possibly challenging the transactions. Notably, unlike the federal premerger notification system under the Hart-Scott-Rodino Antitrust Improvements Act (HSR),1 neither the Connecticut nor the Washington statute has a minimum size-of-transaction threshold. Indeed, under Connecticut’s statute, a hospital acquiring a group practice of two physicians must be reported. Therefore, even small transactions, which might have gone unnoticed by federal enforcers, could be subject to antitrust scrutiny by state enforcement agencies.
California Senate Bill 977 (SB 977), proposed earlier this year, required written notification to and the consent of the state’s attorney general before consummation for most healthcare affiliations or change of control transactions.2 Under SB 977, the attorney general would be required to deny consent for transactions that would not lead to (a) clinical integration or (b) the increase or maintenance of access to healthcare in underserved populations. Even if the parties carry their burden of demonstrating such benefits, the attorney general would still have the discretion to deny his or her consent if he or she finds there is a substantial likelihood of anticompetitive effects that outweigh the benefits of anticipated clinical integration and/or increased services to an underserved population. Moreover, SB 977 not only would have applied to transactions among non-profit healthcare entities but also to acquisitions and affiliations by private equity groups and hedge funds with healthcare investments. California’s proposed bill recently died in the legislature, but a new or similar version is likely to be introduced next year.
Colorado is another state that is taking merger control into its own hands. In Colorado, legislators recently expanded the state’s ability to challenge all mergers, not only healthcare transactions, by repealing a statutory provision that curbed its enforcement power.3 Although Colorado did not create a system for premerger notification, it did give the Colorado attorney general the ability to challenge transactions regardless of whether the federal antitrust authorities object to those deals.
Proposed amendments to New York State’s antitrust statute – the Donnelly Act – would expand that law to capture unilateral conduct generally treated as competitively neutral or even procompetitive under current federal antitrust laws. In addition to inserting language virtually identical to the Sherman Act Section 2’s monopolization, attempt to monopolize and conspiracy to monopolize prohibition,4 the pending proposed legislation seeks to add a vague prohibition of firms with a “dominant position” “abus[ing]” that dominant position.5
Although the extent of the states’ future role in antitrust and healthcare affiliations, and, whether a change in the federal administration will affect that role, remains unclear, there is no doubt that a number of states have added or are considering adding to their available enforcement tools, giving them more opportunities to intervene. Understanding these tools and the trend will allow healthcare entities and their counsel to better estimate their deal timelines and better prepare for and predict state intervention.
This article first describes the legislation in Connecticut, Washington, California, Colorado and New York in more detail and then offers guidance for those entities considering entering into healthcare-related deals.
Connecticut and Washington Opt for Robust Healthcare Premerger Notification
Connecticut’s legislation, enacted in 2014, requires that certain transactions between physician group practices and hospitals, captive professional entities, medical foundations, or other group practices be reported to the state’s attorney general.6 Under the law, a group practice can be as small as two physicians operating through the same entity, and transactions that cause a material change to the structure or business of a group practice need to be reported no less than 30 days prior to consummation.7 Transactions constituting a material change are broadly defined and include: (1) merger, consolidation, or other affiliation of a group practice with a hospital, hospital system, or another group practice that results in a practice with eight or more physicians; (2) acquisition of all or substantially all of the assets, stock, or equity interests of a group practice by a hospital, hospital system, or another group practice that results in a practice with eight or more physicians; and (3) employment of all or substantially all of the physicians in a group practice by a hospital, hospital system, or another group practice that results in a practice with eight or more physicians.8 Under the statute, the parties must provide to the attorney general a description of the nature of the proposed relationship and information regarding the physicians, entities, and service locations involved.9 In addition, the statute requires any hospital system or other healthcare provider conducting business in Connecticut that files a premerger notification under the HSR Act to provide written notice of that filing to the Connecticut attorney general.10
With respect to Washington, since January 1, 2020, provider transactions that constitute a material change must be reported to the state attorney general no less than 60 days prior to consummation.11 Under the statute, a material change includes an acquisition, merger, or contracting affiliation. 12 The healthcare material change notice requirement applies when (1) both parties are Washington entities or (2) one party is a Washington entity and the other is an out-of-state entity that generates $10 million or more in revenue from healthcare services for patients residing in Washington.13 Transactions meeting these criteria must be reported regardless of size. In addition to identifying the parties, the notice must include the locations where healthcare services are provided by each party, the anticipated effective date, and a brief description of the nature and purpose of the material change.14 Washington’s attorney general can also request additional information (including documents, interrogatory responses, and oral testimony) within 30 days of the notice being submitted.15 Any party that fails to submit the requisite notice faces penalties of up to $200 per day.16
California’s Proposed Premerger Notification and Approval Legislation for Healthcare Affiliations
California’s proposed SB 977 would have required healthcare systems, private equity firms, and hedge funds to provide notice to and receive approval from the state’s attorney general before closing acquisitions or changes of control with other healthcare facilities and providers.17 The proposed bill covered a wide range of healthcare affiliations, including: (1) the direct or indirect purchases through leases, transfers, exchanges, options to acquire assets, or creation of a joint venture by a healthcare system, private equity group, or hedge fund of a material amount of the assets of a healthcare facility or provider; or (2) any agreement, association, partnership, joint venture, or other arrangement that results in a change of governance or control at a provider or facility by a healthcare system.18 The legislation would have expanded the existing notification requirements, which apply only to transactions with nonprofit health providers.19 The California attorney general announced that the legislation was needed to combat anticompetitive behavior in the healthcare sector, which he claimed is a growing concern and responsible for higher rates and decreased quality of care in California.20
SB 977 required the California attorney general to reject a transaction if the parties failed to show that it “will result in a substantial likelihood of clinical integration, a substantial likelihood of increasing or maintaining the availability and access of services to an underserved population, or both.”21 Even if the parties demonstrated clinical integration and increased access, the legislation gave the attorney general the discretion to reject a transaction if there was a substantial likelihood that the transaction would lead to anticompetitive effects, such as increased prices, diminished quality or access, and reduced choice, that outweigh any benefits of a substantial likelihood of clinical integration or an increase or maintenance of services to an underserved population. For providers serving rural areas, the attorney general would have the authority to waive these standards.22
Although specifics regarding the content of the notice were not provided in SB 977, the bill did state that the notice should contain “information sufficient” for the attorney general to assess the nature of the transaction and whether it will lead to clinical integration or an increase or maintenance of access to underserved populations.23 Once the notice was received, the attorney general would have 60 days to consent to the transaction, grant a waiver, or issue a request for additional information from the parties. If a request for additional information was issued, then the attorney general had 45 days from substantial compliance with the request to grant or deny approval of the transaction. However, these time frames could be extended if the attorney general decided to hold a public meeting about the transaction or if the parties substantially changed the deal.24 Parties could appeal the attorney general’s determination to deny approval for a transaction via writ of mandate to a California superior court.25
In addition to the premerger notification provision, SB 977 also targeted conduct by healthcare systems. The proposed bill made it unlawful for a healthcare system with substantial market power to engage in conduct that had “a substantial tendency to cause anticompetitive effects,” including increased prices, diminished quality or access, and reduced choice.26 Moreover, a system with substantial market power was presumed to be in violation of the law if it engaged in tying (i.e., conditioning the sale of one service on the sale of a second service) or exclusive dealing.27 Violations of this provision could result in civil fines of $ 1 million, or twice the gross gain to the healthcare system or gross loss to any other party multiplied by two, whichever is greater; treble damages; interest; costs; attorney’s fees; and injunctive relief.28
Hospital, physician, and private equity industry groups, however, opposed the legislation. Although the legislative session ended without the State Assembly taking action, it is likely that the same or a similar bill could be reintroduced in 2021.29
Colorado Bill Gives State Attorney General Broader Authority to Challenge Mergers
On March 20, 2020, Governor Jared Polis of Colorado signed SB20-064 into law.30 The legislation repealed Colo. Rev. Stat. § 6-4-107(3), which provided that the “attorney general shall not challenge any merger or acquisition under the provisions of this section which has been reviewed by any federal department, agency, or commission under section 7A of the federal ‘Clayton Act’ and for which all applicable waiting periods have expired or have been terminated without a challenge to such merger or acquisition by that department, agency, or commission.” The Act took effect on August 5, 2020 (90 days after final adjournment of the general assembly). The legislation only applies to mergers “commenced on or after the applicable effective date of this act.”31
The Colorado attorney general is now authorized to challenge transactions when “the effect of such acquisition may be to substantially lessen competition or may tend to create a monopoly” regardless of whether the Federal Trade Commission (FTC) or the Department of Justice (DOJ) challenged the transaction within the HSR waiting period.32 Importantly, the legislation merely gives the attorney general the authority to challenge proposed acquisitions – it neither imposes any additional filing requirements on parties nor creates a standard that differs from that applied under federal law -- Section 7 of the Clayton Act.
Proposed Expansion of New York’s Donnelly Act
Currently, the Donnelly Act prohibits only anticompetitive activities from agreements or conspiracies, like federal law’s Section 1 of the Sherman Act. The amendments proposed to the Donnelly Act, if enacted, would dramatically expand the reach of New York’s state antitrust laws and the ability of the attorney general to pursue claims under state law that it previously was only able to bring under federal law.
Specifically, the amendments would add a provision virtually identical to Section 2 of the Sherman Act. It would make it unlawful under state law:
for any person or persons to monopolize, or attempt to monopolize, or combine or conspire with any other person or persons to monopolize any business, trade or commerce or the furnishing of any service in this state.33
Evidently not satisfied with the way in which the courts and federal enforcement agencies have applied Section 2 of the Sherman Act and seeking more expansive enforcement power over unilateral conduct, the proposed amendments include an ambiguous prohibition against activities of “dominant” firms that might be considered “abus[ive].” Specifically, the amendments would make it unlawful under state law:
for any person or persons with a dominant position in the conduct of any business, trade or commerce or in the furnishing of any service in this state to abuse that dominant position.34
It is unclear what would constitute a “dominant position” under the proposed statute. However, it is reasonable to assume that proof of a dominant position would not require proof of market power because conduct by firms with market power is already addressed by the monopolization section of the amendments. Further, it is unclear what conduct would rise to the level of a prohibited “abuse.”
Perhaps equally concerning, the proposed amendments appear to permit criminal penalties for violations of the abuse of dominance prohibition.35 This is puzzling given that federal law technically provides for criminal penalties for monopolization claims, but as a matter of policy, the Department of Justice Antitrust Division does not seek criminal penalties for monopolizing conduct. Instead, the Antitrust Division typically seeks criminal penalties only for agreements between or among competitors to fix prices or allocate customers or markets.
Although the proposed amendments to New York’s Donnelly Act are not limited in application to the healthcare industry, the contemplated abuse of dominance provision could present significant increased enforcement risk for healthcare providers. Given the narrow geographic market definition applied to providers and the fact that high market concentration among specialists or service lines (e.g., Level 1 Trauma) often exists, physician groups and hospitals will need to proceed with caution when taking actions that are likely to harm their actual or potential competitors.
Healthcare Transactions Guidance
These efforts show that states are taking a more active role in the investigation and enforcement of the antitrust laws, especially in the healthcare sector. Moreover, given the country’s focus on access to and the affordability of healthcare, it would not be surprising if other states attempt to enact antitrust legislation targeting healthcare affiliations. Those entities involved in healthcare-related deals not only need to understand their obligations and risks under the federal antitrust laws but also how involvement by state enforcers may affect their transactions. Accordingly, healthcare providers and counsel to such providers should consider the following:
- Whether a state in which a party to the transaction is located or does business has any notification obligations. Although only a few states currently require certain transactions be notified, this list will likely continue to grow.
- How state reporting obligations affect deal timing. For example, Washington’s reporting statute requires that the notice be submitted 60 days prior to close, which is 30 days longer than the federal HSR waiting period. Since the effective date of a transaction can have a myriad of implications (financing, tax, contractual, regulatory, etc.), the parties need to submit notices in a timely manner so as not to delay close.
- Whether California (or another state) enacts legislation requiring state approval of transactions. California’s proposed bill put the onus on the parties to show the attorney general how the transaction would lead to clinical integration and increased or maintained access for underserved populations. If California (or other states) pass the same or similar legislation, then parties will need to be prepared to explain these outcomes or will risk the deal being denied approval.
- How the proposed transaction affects competition. Regardless of how small a deal is, the parties need to understand the competitive implications. This deal analysis should include talking to business personnel, reviewing relevant documents, and potentially, analyzing patient draw data. Even if not reportable to federal or state regulators, a deal can be challenged, and the parties should be prepared to advocate for their transaction.
- Whether to voluntarily notify state enforcers. Even if states do not have premerger notification requirements, they still can challenge transactions. This strategy must be considered carefully, but can be beneficial depending on the “acquiring” provider’s risk tolerance, market concentration, and the extent and number of competitive overlaps between the affiliating providers. There are circumstances where explaining the benefits of and reasons for a transaction before an agency formulates its independent view can streamline and shorten the timeline of a likely inevitable investigation as well as providing greater certainty to the parties.
As states are taking a more active role in antitrust investigations and enforcement, it is important for healthcare entities, investors in the healthcare space, and their counsel to keep an eye on this trend and how it impacts their deals and conduct.
- 15 U.S.C. § 18(a). The purpose of the HSR Act is to allow federal authorities an opportunity to review, in advance of closing, transactions exceeding a certain size in order to determine whether they might adversely affect competition. The HSR Act thresholds are adjusted annually and transactions and for which no exemptions apply must file a notification with the antitrust agencies and wait 30 days after making this submission before closing. Currently, the size-of-transaction threshold is $94 million. Importantly, however, even if a merger is not reportable under the HSR Act, the federal antitrust regulators still can become aware of (via customer complaints, news reports, trade publications, and the like), investigate, and challenge the transaction.
- Health care system consolidation: Attorney General approval and enforcement, California Senate Bill 977 (2020), available at http://leginfo.legislature.ca.gov/faces/billNavClient.xhtml?bill_id=201920200SB977.
- Senate Bill 20-064 (2020), available at https://leg.colorado.gov/sites/default/files/2020a_064_signed.pdf.
- 15 U.S.C. § 2. Section 2 of the Sherman Act makes it illegal for an entity to monopolize, attempt to monopolize, or conspire to monopolize any market. In addition, pursuant to Section 7 of the Clayton Act, the federal antitrust laws prohibit acquisitions that may substantially lessen competition or tend to create a monopoly. 15 U.S.C. § 18. Although not discussed in this Article, federal antitrust law also forbids agreements that restrain trade, including, for example, price-fixing conspiracies among competitors, under Sherman Act Section 1. 15 U.S.C. § 1.
- Senate Bill S8700A, at § 340.2 (2020), available at https://www.nysenate.gov/legislation/bills/2019/s8700/amendment/a. The bill is currently in the New York Senate’s Consumer Protection Committee.
- An Act Concerning Notice of Acquisitions, Joint Ventures, Affiliations of Group Medical Practices and Hospital Admissions, Medical Foundations, and Certificates of Need, P.A. 14-168(c) (2014), available at https://www.cga.ct.gov/2014/ACT/pa/pdf/2014PA-00168-R00SB-00035-PA.pdf.
- P.A. 14-168(a)(10), (c).
- P.A. 14-168(c).
- P.A. 14-168(d). The website for the Connecticut attorney general provides an Excel form and instructions for the submission. Notice of Material Change Form, available at https://portal.ct.gov/AG/General/Notice-of-Physician-Acquisition.
- P.A. 14-168(b).
- Health Care Market Participants, RCW § 19.390, et seq., available at https://app.leg.wa.gov/RCW/default.aspx?cite=19.390&full=true. Under the law, “provider organizations” are defined as a “corporation, partnership, business trust, association, or organized group of persons, whether incorporated or not, which is in the business of health care delivery or management and that represents seven or more health care providers in contracting with carriers or third-party administrators for the payments of health care services. A ‘provider organization’ includes physician organizations, physician-hospital organizations, independent practice associations, provider networks, and accountable care organizations.” RCW § 19.390.020(12).
- RCW § 19.390.030.
- If the transaction also triggers the HSR filing requirements, the parties can satisfy Washington’s premerger notification requirement by submitting a copy of the HSR filing to the Washington attorney general. RCW § 19.390.040.
- RCW § 19.390.050.
- RCW § 19.390.080. Although Washington has not challenged a healthcare transaction since the implementation of the reporting requirement earlier this year, the state has done so in the past. In 2017, Washington sued CHI Franciscan over two consummated deals with orthopedic providers in Kitsap county. Washington alleged that the transactions combined the largest primary care and orthopedic service providers, resulting in reduced choice and higher prices for consumers. The parties settled prior to trial with CHI Franciscan agreeing to have separate payor contracting for primary care and orthopedic services and to pay $2.5 million to the state. Washington State Office of the Attorney General Past Cases (last visited Nov. 19, 2020), https://www.atg.wa.gov/past-cases.
- Health care system consolidation: Attorney General approval and enforcement, California Senate Bill 977 (2020), available at http://leginfo.legislature.ca.gov/faces/billNavClient.xhtml?bill_id=201920200SB977.
- SB 977, at 1190(a)(2)-(3).
- California Corporations Code §§ 5914 et seq., available at https://oag.ca.gov/sites/all/files/agweb/pdfs/charities/publications/nonprofithosp/new_statutes.pdf.
- Press Release from the California Office of the Attorney General, Attorney General Becerra and Senator Monning Announce That Legislation to Reduce Healthcare Costs, Increase Access to Affordable Care Passes Senate Health Committee (May 13, 2020), available at https://oag.ca.gov/news/press-releases/attorney-general-becerra-and-senator-monning-announce-legislation-reduce.
- SB 977, at 1190.25(a). The proposed statute defines clinical integration as “a reduction in costs to the benefit of consumer care and outcomes or an increase in the quality of care.” Id. at 1190(a)(5).
- SB 977, at 1190.25(d). Similarly, under federal antitrust policy, rural hospital transactions would often, if applied, fall within the FTC and DOJ Antitrust Division’s small hospital safety zone criteria: “The Agencies will not challenge any merger between two general acute-care hospitals where one of the hospitals (1) has an average of fewer than 100 licensed beds over the three most recent years, and (2) has an average daily inpatient census of fewer than 40 patients over the three most recent years, absent extraordinary circumstances. This antitrust safety zone will not apply if that hospital is less than 5 years old.” Statements of Antitrust Enforcement Policy in Health Care, available at https://www.justice.gov/atr/statements-antitrust-enforcement-policyin-health-care
- SB 977, at 1190.10(a).
- SB 977, at 1190.10(b)-(f).
- SB 977, at 1190.30(c).
- SB 977, at 1191(a)-(b). Per SB 977, substantial market power can be shown by either (1) the conduct having a substantial anticompetitive effect, or (2) the health care system having substantial market share in one or more markets (with a system presumed to have substantial market power if it has greater than a 60% share). Id. at 1190.30(c).
- SB 977, at 1190.30(b).
- SB 977, at 1190.30(g)-(i).
- Cumming, C., California Bill to Rein In Private-Equity Health-Care Buyouts Dies, The Wall Street Journal (Sept. 4, 2020).
- Senate Bill 20-064. (2020), available at https://leg.colorado.gov/sites/default/files/2020a_064_signed.pdf.
- SB20-064 § 2.
- Colo. Rev. Stat. § 6-4-107(1). Under the federal merger control regime, both the FTC and DOJ Antitrust Division have the authority to investigate and challenge mergers. Generally, whether a deal is reviewed by the FTC or DOJ depends on the industry and the agency’s history of investigations in that industry. For example, the FTC typically investigates transactions involving healthcare providers, whereas the DOJ reviews insurance-related deals.
- Senate Bill S8700A, at § 340.2 (2020), available at https://www.nysenate.gov/legislation/bills/2019/s8700/amendment/a.
- Id. at § 341.
About the Authors
Barbara Sicalides is a Partner in the Business Litigation practice group at Troutman Pepper. She represents clients in the healthcare industry on a full range of antitrust matters, including provider affiliations and acquisitions, contract negotiations between health systems and payors, litigation against competitors, and advocacy before federal and state enforcement agencies. She can be reached at [email protected].
Daniel Anziksa is a Partner in the Business Litigation practice group at Troutman Pepper. He counsels clients on antitrust issues with respect to mergers and acquisitions; litigates boycott, monopolization, and patent misuse cases; and advises clients on distribution, joint venture, and licensing strategies. He can be reached at [email protected].
Megan Morley is a Senior Attorney in the Business Litigation practice group at Troutman Pepper. She advises healthcare clients on the antitrust implications of transactions, defends hospital systems against allegations of antitrust wrongdoing, and prepares pre-merger notification filings for healthcare deals. She can be reached at [email protected]
Dennie Zastrow is an Associate in the Business Litigation practice group at Troutman Pepper. He represents clients in antitrust class action, consumer protection, and breach of contract litigations in federal and state court. He also counsels clients on the HSR Act. He can be reached at [email protected].