Federal agencies and lawmakers in several states are attempting to rewrite the rulebook for private investment in health care in the U.S.
California and other states are considering new regulations reinforcing state prohibitions against the corporate practice of medicine (CPOM). Federal agencies and state legislatures are advocating greater oversight of investor-backed health care companies and health care transactions involving private investors.
These developments could have significant and disruptive consequences for the U.S. health care industry. Private investment plays a significant role in the industry. It fuels innovative models seeking to expand access to care, improve clinical quality and transform health care delivery for the better.
It is imperative for investor-backed health care companies to familiarize themselves with this evolving landscape as they explore efforts to scale and enter new markets. The same is true of investors conducting diligence on potential investments.
State Level Review of Investor-Backed Health Care Transactions
Several states are increasing their oversight through new or expanded mechanisms requiring companies to notify the state prior to closing certain transactions.
A new Indiana law requires health care entities to provide notice of mergers and acquisitions.
- Effective July 1, 2024, health care entities must notify the state attorney general of certain mergers or acquisitions prior to closing.
- The law defines a health care entity as including “a private equity partnership seeking to enter into a merger or acquisition” with various health care providers and insurance companies.
Massachusetts has confirmed that some registration and notification requirements apply to management services organizations (MSOs).
- Massachusetts has long required provider organizations to complete registration requirements and provide pre-closing notice of certain transactions to the Commonwealth’s attorney general, Health Policy Commission and Center for Health Information and Analysis.
- Guidance released in January 2024 clarified that provider organizations include management services organizations that negotiate payor agreements on behalf of providers.
- The clarification in Massachusetts does not expressly highlight private investors. Yet MSOs are the key vehicle enabling private investors to participate in the business of health care delivery in CPOM states, so investor-backed health care delivery models should take note of this guidance.
Massachusetts legislators also have considered expanding the scope of review.
- The proposed expansion would have encompassed transactions with a “significant equity investor.” That term includes any investor (including private equity) or other entity with 10% or more direct or indirect possession of equity in a provider or provider organization.
- Though the bill did not pass, it received significant attention and may re-emerge.
State Laws Strengthening Corporate Practice of Medicine Prohibitions
State CPOM laws prohibit private investors from investing directly in a professional entity. Often referred to as a professional corporation (PC), professional entities deliver medical or other health care services. Investors typically invest in MSOs, which manage PCs. MSOs involved in health care innovation typically provide technology and practice management services.
A California proposal would focus on private equity and venture capital investment in health care.
California’s AB3129 envisions heightened oversight and review of certain transactions involving private equity. The bill would:
- Require affected companies to notify the Attorney General 90 days prior to closing. (This is separate from a recent California law that requires companies to submit plans for certain transactions to the Office of Health Care Affordability for review prior to closing.)
- Address the relationship between management services organizations and physician and dental practices, which are professional corporations (PCs). It focuses on the “PC-MSO” business model that investor-backed health care companies often use to offer tech-enabled virtual care and other services.
In particular, proposed California Health & Safety Code 1190.40 appears to focus on limiting the role of a private equity group or hedge fund that manages or otherwise is involved with medical or dental practices. It would codify guidance from the California Medical Board with respect to the state’s prohibition on the corporate practice of medicine. It would prohibit a lay entity from:
- Interfering with a physician’s independent professional judgment or otherwise dictating particular diagnostic tests or the volume of patients a physician must see in a given time.
- Exercising control over or being delegated the power to take other actions, such as hiring or firing clinicians and setting the parameters for contracts with third party payors.
A previous version of the bill included a provision that, while far from clear, could be interpreted to prohibit management services agreements altogether. Legislators deleted that provision in June 2024.
Additionally, legislators in Massachusetts and Oregon have focused on the corporate practice of medicine.
- Massachusetts
- The state house passed a bill addressing CPOM concerns.
- The state senate introduced a version that would have codified prohibitions against MSOs improperly controlling the clinical decision-making of a health care practice.
- The legislature did not pass a final version of the bill, but it may come up again.
- Oregon
- Legislators considered a bill in 2024 that would have affected doctors or other health care professionals who are shareholders, officers or directors of professional entities.
- It would have prohibited them from serving in a similar role, or otherwise being an employee or contractor of, an affiliated management services company (with some exceptions).
- It also would have added restrictions on the corporate practice of medicine.
- The legislation passed the house, but the senate has not adopted it as of the date of this summary.
The concerns outlined in these bills are not new. Medical boards and other health care regulators have referenced the concerns in sub-regulatory guidance and enforcement actions. However, the recent focus by state legislatures indicates renewed scrutiny and the potential for greater enforcement activity.
Increased Scrutiny Among Federal Agencies
Federal regulators are also concerned about potential negative impact of private equity in health care, such as market consolidation and impact on quality of patient care. (As with the states, federal regulators take a broad view of “private equity.”)
- The Centers for Medicare & Medicaid Services issued a final rule in November 2023 requiring skilled nursing facilities to make additional disclosures, including about whether an owner or management entity is a private equity company or real estate trust.
- Members of Congress have launched investigations and proposed legislation in recent months focused on private investment in health care.
- In March 2024, the Federal Trade Commission, Department of Justice and Department of Health & Human Services announced a joint inquiry into private equity’s increased involvement in health care. The agencies sought public comments on the impact of various acquisitions involving private investment on patient safety, cost and quality of care.
Key Takeaways for Health Care Innovators and Investors
1. Focus on compliance.
- Health care companies should assess their compliance infrastructure in anticipation of heightened scrutiny. (They may want to consult general compliance guidance from the HHS Office of Inspector General.)
- They should ensure compliance with CPOM prohibitions and state and federal anti-kickback and self-referral laws. They also should review billing practices.
- Investing the time to build an effective compliance program can significantly reduce risk.
2. Avoid any appearance of investor involvement in actual care delivery.
- In any business model that involves health care delivery, clinicians must use their independent professional judgment in all clinical decision making.
- The best way to avoid unwanted scrutiny is to establish practitioner-patient relationships and deliver care that complies with state laws and meets or exceeds the applicable standard of care.
3. Factor in additional time for proposed transactions.
- Proposed transactions could take longer to get to closing.
- Changes could require additional diligence to assess potential filings or meet other regulatory requirements.
- Companies also should invest the time necessary to determine whether they need to submit a particular deal for review, given that requirements vary by state.
- In cases where companies must notify regulators before closing, the parties must allow time for that review.
4. Monitor legislative and regulatory changes across markets.
- Efforts to oversee private investment in health care could inform a company’s investment strategy, pacing of transactions or other compliance considerations. Tracking these changes can facilitate communications with investors and avoid unwanted surprises.
If you have any questions, please contact the authors (Amy Joseph and Jeremy Sherer) or another Orrick Team member.