September 9, 2024

By Grace Totman, co-head of Capstone’s healthcare practice

There is a war being waged against institutional investment in healthcare—one we expect to broaden. In March, the Justice Department, Federal Trade Commission, and Department of Health and Human Services announced a joint investigation into private equity’s (PE) increasing control over health care. The investigation—looking at transactions that could potentially harm patient health, worker safety, and the quality of care—is ongoing but made waves for its inaugural workshop, which turned into a six-hour roast of private equity’s role in healthcare.

However, Capstone believes the more important, but less appreciated battleground is at the state level, where legislators are increasingly empowering attorney generals (AGs) with the power to outright block PE and hedge fund transactions in healthcare.

Capstone believes the more important, but less appreciated battleground is at the state level.

Just last weekend, the California legislature passed a bill that will require most PE and hedge fund healthcare transactions in the state to receive AG approval. If Governor Newsom allows the bill to go through- which Capstone believes is likely- California will join Oregon as the only two states with such a requirement. Several additional states, including Washington, Minnesota, New York, Illinois, and Indiana, have notice or disclosure laws that could be stepping-stones to the more restrictive approval requirements.

The new California law is extreme. The AG will have 90 days to approve or deny a transaction but can delay the process by an additional 45 days at any point. This ability alone will complicate the investment process, likely dragging out transactions and increasing costs associated with legal counsel to get through review processes. Investors can secure exemptions from these requirements, but only under specific conditions such as the threat of bankruptcy or reduced patient access to care. The worst-case scenario is a complete block on a transaction, which would likely lead to litigation.

How actively the California AG will use this new power remains unclear. It may be the case that the legislation is enacted but never utilized. In either scenario, it’s a real enough threat to make most investors nervous, and rightfully so.

Previously, we would’ve said that scrutiny of PE in healthcare was primarily a concern in blue states. However, even states with conservative leanings, like Indiana and North Carolina, are moving towards similar regulations.

So, is there any good news for private equity? The only proxy we have is Oregon, where the state has been approving transactions since the beginning of this year. Oregon has reviewed 22 transactions thus far, and all 22 have been approved, most with few, if any, changes. While California is a very different environment, the Oregon case study suggests that having the power to block might not mean it is actively used.

The Oregon case study suggests that having the power to block might not mean it is actively used.

There are also emerging opposition efforts to these restrictive measures. During the California vote, several state lawmakers spoke against the bill, touting positive interactions with PE-owned providers. Ongoing litigation in Oregon may provide further ammunition for providers and investors to push back on the new requirements. Despite the current uncertainty, Capstone remains dedicated to helping our clients navigate these evolving risks. In a few weeks, we will be hosting a joint event with Drew Maloney, President and CEO of the American Investment Council (AIC) private equity lobby. We will discuss where investors should be looking, how real the California/Oregon risks are, and what mitigation tools are available. Additionally, we will be launching an online tracker to allow investors to monitor state-level developments. Please reach out to us if we can be helpful. The battle over healthcare investment regulation is far from over.

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