New State Laws Could Complicate Behavioral Health Dealmaking

State governments are casting an increasingly critical eye on health care dealmaking, likely making it harder for the behavioral health industry to transact deals.

The impact of these laws will be uneven across the U.S. as some state legislatures take up or resist these laws. Today, about a dozen states have some form of disclosure and review laws. The increased expenses and complexity of dealmaking in these states will disadvantage behavioral health operators.

On the surface, these laws are troublesome because they make the timeline for doing deals much longer, opening up the deal to a greater degree of chaos.

“There are a lot of people involved. No one has a crystal ball [showing] what’s coming in the future. Anything could happen,” Tommy Spiegel, vice president at investment bank Provident Healthcare Partners, told Behavioral Health Business. “So, it’s best to close as efficiently and correctly as possible.”

Mounting discourse about antitrust, anticompetitive and health care issues has led policymakers to point the finger at for-profit health health care organizations backed by monied interests or questionable dealmaking by nonprofit hospital systems for playing a role in the affordability and availability of health care services.

A recent example could be the challenges of Steward Health Care, once owned by Cerberus Capital Management, a private equity and hedge fund. The organization is working through bankruptcy and is facing accusations of shoddy care and poor compliance by regulators in Massachusetts. More generally, officials are seeing attempts by nonprofit hospital systems to merge as an attempt to eliminate patient choice and increase revenue. Some research has found that private-equity-backed hospitals see a 25% increase in hospital-acquired conditions and appear to select younger, less-risky Medicare patients.

More lawyers

New state laws requiring disclosure and review will make deals more protracted and more expensive considering that many professionals brought in to facilitate a deal — attorneys, bankers, quality-of-earnings experts, etc. — charge largely based on time.

The expansion of these laws also highlights the importance of local legal experts to account for and navigate state-specific quirks.

“[Local attorneys] can utilize their knowledge and local relationships to help the process along,” Robert Aprill, managing director at the M&A firm Physician Growth Partners, told BHB.

Lawyers will also have to spend considerable time interfacing with the state to ensure compliance with the notice laws and address any questions during the state’s process.

Indiana, the most recent addition to the pack of states with these laws, requires health care deals where the assets of the health care entity, post-combination included, totals $10 million or more to be disclosed to the state attorney general’s office 90 days before the close date. The law also covers health care deals that constitute a private equity investment, naming private equity specifically.

The attorney general is authorized to take one of two actions: issue an analysis of antitrust concerns within 45 of the submission or issue a civil investigative demand for more information. However, the law does not authorize the attorney general to have the power to enjoin the deal on its own.

State Republicans say the bill, signed into law on March 13, 2024, is about bringing transparency to and ensuring competition in health care, according to a news release. 

In California, the fifth largest economy on the planet, policymakers are attempting to go even hard on health care deals. The state already requires health care entities to give state regulators 90 days’ notice before closing while the state decides within 45 days to waive a “cost and market impact review” or within 60 days to conduct such a review that could extend up to eight months. 

The California state legislature is considering a bill that targets private equity and hedge funds, requiring deal disclosure and permission from the state attorney general to complete the deal.

“In addition to granting or denying approval of the transaction, the AG would be empowered to impose conditions on the transaction if the transaction would have a substantial likelihood of anticompetitive effects or may create a significant effect on the access or availability of health care services in the affected community,” the law firm Polsinelli wrote on its blog.

Paul Gomez, co-chair of the behavioral health practice at Polsinelli, told BHB that this addition may be duplicative of the previous law requiring disclosure and review. The specific targeting of private equity may open the door for industry lobbying pushback and potential legal action.

“As similar efforts around the various states pop up, I would not be surprised to see legal challenges,” Gomez said.

A known challenge

Several experts say the proliferation of these laws is more of an inconvenience to be planned for, rather than a Mission: Impossible task. Still, it may sway buyers away from comparable assets where these laws exist to states where they do not.

“All other things being equal, that could lead at least some decisions and some cases to say, ‘I think we’ll make our investment in [this state] instead of [that state],” Gomez said. “Not every case, but I imagine that happening.”

He added that investors and operators that have especially focused expertise or investment focus will be less dissuaded by these laws as they pursue a narrower set of assets.

Investors and operators may consider pushing back on these laws. With one impetus of these laws being access challenges, the behavioral health industry could easily make the case that limiting capital through these laws exacerbates the issue, Spiegel said.

In part, private equity investors have led to significant expansions of new sites of service. This is especially true in the autism therapy space.

“No other group has helped expand access to care more than private equity in autism services,” Spiegel said.

Still, the flood of private equity into behavioral health needs to be justified. The scrutiny of state regulators further encourages companies to invest heavily in outcomes-data collection and establish industry standards for care quality, Spiegel added.

It remains to be seen what will happen at the federal level when it comes to private equity and deal making in health care. Earlier in the year, the Biden administration launched an investigation into the matter. While the federal review and new state laws may not directly tamp down dealmaking, they may cool eagerness for the space.

Nonetheless, the high demand for deals in the behavioral health space are often squeezed by tough economic considerations.

“We typically do not look at those hoops as deal blockers: they are just another hoop,” Aprill said. “We’ve not experienced in those states where those laws exist for them to be deterrents or barriers to deals. They are not shutting deals down. They are just an unfortunate step that can delay the process.”