Is now the right time to merge your healthcare?‎ | Schwabe, Williamson and Wyatt P.C

Health care leaders looking to grow their businesses in the Pacific Northwest through mergers and acquisitions must make difficult timing decisions. On the one hand, many larger healthcare systems and hospitals have just begun to recover from the financial and emotional wreckage of the Covid-19 pandemic(1). There may therefore be a temptation to maintain the status quo for a while, enjoying the rare opportunity to rest and take a deep breath after years of treading water. On the other hand, legislative efforts to restrict private equity-backed deals and, more generally, consolidation in the healthcare industry raise the specter of stormy seas. The conclusion may be that when it comes to healthcare mergers and acquisitions, it’s now or never. This article discusses some of the reasons why leaders may choose to take advantage of this brief period of calm before an approaching storm.

The regulatory environment can be as good as it can be

One of the most compelling reasons to initiate mergers and other healthcare-related transactions now is that regulatory hurdles are likely to become higher and more common in the near future. The Washington Senate recently approved a bill that, if passed, would give the state’s attorney general broad discretion to reject mergers or impose conditions that are deemed potentially harmful to consumers. The bill, known as the “Keep Our Care Act,” is Washington’s response to Oregon’s Health Care Marketplace Oversight (“HCMO”) program, considered one of the nation’s most aggressive corporate merger oversight initiatives. Indeed, the HCMO just survived a challenge to its constitutionality brought by hospitals, arguing that it gives the Oregon Health Authority too much discretion to meddle in health care transactions.

The HCMO program and the Keep Our Care Act are not the only legislative efforts to investigate health care transactions. Oregon officials introduced HB 4130 during the 2024 legislative session to place even tighter limits on private equity investments in health care. The bill failed when it failed to pass before the session ended on March 7, 2024. But supporters vowed to renew the fight in 2025. Meanwhile, California lawmakers are considering AB 3129, a bill that proposes giving the state an attorney general with the power to control foreclosures in the healthcare sector with participation of private equity groups and hedge funds.

Federal agencies are also getting into the fight. On March 5, 2024, the Federal Trade Commission (“FTC”), the Antitrust Division of the U.S. Department of Justice (“DOJ”), and the U.S. Department of Health and Human Services (“HHS”) announced their joint intention to investigate “Corporate Greed in Health Care .”(2) The agencies will take some time to review public comments submitted in response to their request for information. But the agency’s findings seem a foregone conclusion, especially when their stated goal is to “understand how certain transactions in the health care market can increase consolidation and generate profits for companies while threatening patient health, worker safety, quality of care, and affordable health care.” for patients and taxpayers.”(3).

The financial environment may be improving

In May 2024, the American Hospital Association released a report with the ominous title: “America’s hospitals and health systems continue to grapple with rising operating costs and economic pressures as they care for patients and communities.”(4) Though, of course, they were intended to influencing public opinion and legislative opinion in favor of policies and regulations that support hospitals, the report cites some sobering statistics, including the finding that the number of cash-free days available in the average U.S. health care system or hospital has dropped by 28.3 percent from the beginning of 2022(5). not all financial news is so bleak.

In particular, recent reports point to a stabilization in interest rates and inflation rates, which peaked at the end of 2023(6). They also indicate a return to profitability for health systems and hospitals with annual revenues exceeding $500 million, although smaller providers continue to (7) The result may be that larger health systems and hospitals, driven by significant growth in their investment portfolio in 2023 , will be increasingly able to purchase at a time when smaller hospitals and hospitals located primarily in rural areas are increasingly interested in selling.(8) The upside potential can be particularly attractive when acquirer targets have a solid surgical offering outpatient and outpatient. In this regard, research shows that outpatient revenue growth continues to outpace inpatient revenue growth.

Antitrust enforcement authorities may be hesitant

Recent decision in the case FTC v. American Anesthesia Partners may provide an additional reason for healthcare leaders to consider acquisition options now.(9) This case was brought by the FTC to challenge defendants’ alleged attempts to consolidate the hospital anesthesia market in Texas. The FTC indicated that US Anesthesia Partners (“USAP”), formed by a private equity firm called Welsh, Carson, Anderson & Crowe (“PE Company”), managed through targeted acquisitions to gain control of “nearly 70% of the insured commercially the inpatient anesthesia market in Houston, a similar share in Dallas and over 52% in Austin.”(10)

Despite this dominance, the court found that the PE Company had not necessarily committed antitrust violations. Specifically, the court noted that the antitrust laws do not prohibit a PE firm from receiving profits or owning USAP stock. He also pointed out that having the ability to facilitate consolidation in the health care market is not tantamount to engaging in anti-competitive activity. On this basis, the court granted the PE Company’s request to dismiss the lawsuit filed against it.

It is unclear whether a federal court located in the Pacific Northwest would reach the same conclusions as the Texas-based federal court that ruled in the US Anesthesia Partners case. Suffice it to say that this decision means a victory in the fight of private equity investors to maintain their position in the healthcare market. It could also represent a turning point in the war because it undermines the FTC’s efforts to challenge so-called “roll-up” strategies, which involve pursuing multiple small acquisitions instead of one larger one, which would require reporting and scrutiny under the Hart-Scott-Rodino Act. (11) This law requires parties to report to the FTC before engaging in a transaction valued at $119.5 million or more.

Application

There is no magic crystal ball that predicts the best time to undertake a healthcare merger. However, an improving economy coupled with the possibility of more burdensome regulatory requirements just around the corner could make the next few months as good a time as any to pull the trigger. The case for immediate action may even become stronger when another source of uncertainty is taken into account – the upcoming US presidential election.

(1) See e.gChristian Wihtol, “Oregon Hospital Revenues Rebound, But Costs Rise, Too,” OPB (March 23, 2023), accessed June 5, 2024, at https://www.opb.org/article/2024/03/23 /oregon-hospital-revenuesrebound-costs-surge/#:~:text=Collectively%2C%20the%2061%20hospitals%20as,Report%20by%20the%20hospital%20association.

(2) FTC, “Federal Trade Commission, Department of Justice, and Department of Health and Human Services Launch Intergovernmental Investigation into the Impact of Corporate Greed on Health Care,” FTC website, accessed June 5, 2024, at https: //www. ftc.gov/news-events/news/press-releases/2024/03/federal-trade-commission-department-justice-department-health-human-services-launch-cross-government.

(3) ID.

(4) American Hospital Association, “America’s Hospitals and Health Systems Continuous to Face Escalating Operational Costs and Economic Pressures as They Care for Students and Communities,” AHA, accessed June 5, 2024, at https://www.aha .org /care costs.

(5) ID.

(6) See e.gFederal Reserve Bank of St. Louis, “30-Year Fix Rate Mortgage Average in the United States,” accessed June 5, 2024, at https://fred.stlouisfed.org/series/MORTGAGE30US.

(7) Alan Condon, “Hospitals With Revenues Under $500M Likely to Struggle This Year,” Becker’s Hospital Review (Jan. 8, 2024), accessed June 5, 2024, at https://www.beckershospitalreview.com/finance /hospitals-with-revenue-less than 500 million-will likely struggle this year.html.

(8) See OPB, above No. 1.

(9) Federal Trade Commission v. US Anesthesia Partners, Inc. et al., 4:23-CV003560, Doc. 146 (SD Tex. 2024), accessed June 5, 2024, at https://www.hklaw.com/-/media/files/insights/publications/2024/05/20240513usapmemorandumandorder.pdf?rev=0f26fda79a8b4a20a267a4c5567e2b44&hash= BF5C1 A2B030FD75AFC82C6417C7A4850.

(10) ID. at 4.

(11) See Department of Justice and FTC, “Merger Guidelines” (Dec. 18, 2023), accessed June 5, 2024, at https://www.ftc.gov/system/files/ftc_gov/pdf/2023_merger_guidelines_final_12.18.2023.pdf . See also Henry Liu, “Slow the Roll-Up: Help Shine a Light on Serial Acquisitions,” FTC (May 23, 2024), accessed June 5, 2024, at https://www.ftc.gov/enforcement/competition -matters /2024/05/slow-roll-help-shine-light-serial-acquisitions.