Transaction Considerations and Regulatory Updates for Hospital Executives: Five Key Takeaways

Hospitals and health systems continue to navigate an environment in flux, one consistently impacted by a significant amount of transactional and regulatory activity. During a Nov. 2, 2021, webinar titled “Key Transaction Considerations and Regulatory Updates for Hospital Executives,” McGuireWoods healthcare lawyers Amber Walsh, Bart Walker, Kayla McCann Marty and Timothy Fry discussed these topics, presented on current trends and reviewed key considerations for hospital, medical practice and ancillary services transactions.

Below are five key points drawn from the webinar discussion:

1. Transaction volumes during 2020 decreased with respect to hospitals and health systems, but transaction values increased and the COVID-19 pandemic will likely act as a catalyst for increased deal activity going forward. Although the pandemic caused transactional activities to temporarily slow, transactions continue to move forward, primarily the high-dollar-value transactions with average seller revenues of more than $600 million. One driver of this activity is that COVID-19 exposed gaps in healthcare infrastructure. It also revealed advantages in scaling and integration which, coupled with potential financial and tax implications, will likely increase transaction activity as hospitals and health systems capitalize on these opportunities. In fact, many hospital administrations indicated that their organizations are highly likely to make one or more acquisitions in the next couple of years to scale upward. For instance, there is greater interest in expanding on alternative care sites such as ambulatory surgery centers (ASCs), urgent care clinics, pharmacies and independent physician practices. This focus will likely cause more horizontal and vertical integration across the healthcare industry as entities consolidate and expand.
   
   
2. Hospitals and health systems contemplating transactions should take into account several key issues, including restrictions on the corporate practice of medicine, capital and economic considerations, license and authorization requirements, stakeholder outreach, and antitrust concerns. Structuring transactions appropriately involves taking economics, state and federal laws, and other factors into account, including the performance of due diligence and timing considerations. For instance, many states have laws that restrict the corporate practice of medicine, meaning that licensed professionals (rather than corporate entities) must own the entity providing clinical services. Often, a corporate entity would set up a medical management company to perform the administrative and management services of a practice while a professional corporation owned by a licensed professional provides the clinical services. With respect to licenses, permits and certificates of need, changes of ownership may require submitting applications or notices significantly in advance of a transaction closing. With respect to antitrust approval timing, the Federal Trade Commission (FTC) has also experienced delays processing Hart-Scott-Rodino Act (HSR) applications, in light of high transaction volumes, which may impact entities considering a merger or acquisition. Instead of the typical 30-day advance submission for HSR filings to obtain FTC approval on a letter of intent or a signed purchase agreement, entities are increasingly submitting HSR filings up to 60 days in advance to account for potential refiling submissions.
   
   
3. Practice and ancillary services acquisitions by hospitals are increasing as the COVID-19 pandemic acts as a catalyst for consolidation. The pandemic accelerated the pace of physicians retiring or choosing to join another employer. Drivers of consolidation that existed pre-pandemic also continue to motivate consolidation, including potential technological investments, reduced administrative burdens, and access to payor and referral networks. Likewise, the COVID-19 pandemic demonstrated potential growth areas with respect to ancillary service lines, as the provision of outpatient surgical procedures increased and large health systems partnered with or acquired ASCs across the country. Hospitals and health systems considering expanding ancillary service lines may consider partnerships with management companies, employed and independent physicians, and other stakeholders. However, any entity considering consolidation or growth should also recognize that regulatory scrutiny of these relationships is increasing at state and federal levels.
   
   
4. Updates to the physician self-referral rule (Stark Law) became effective Jan. 19, 2021, and hospitals and health systems should ensure that they comply with the Stark Law changes and consider any additional flexibilities under its new exceptions. Specifically, the updates created new requirements related to physician compensation arrangements. For instance, beginning Jan. 1, 2022, entities must pool all ancillary services revenue from designated health services, as defined under the Stark Law, prior to any profit-sharing or distribution. Separately, the updates also provide entities with flexibilities by creating new exceptions for value-based arrangements, limited remuneration and cybersecurity, and by expanding protections for physician alignment and patient engagement. While the changes generally reflect a move toward narrower interpretation of the prohibitions and broader interpretation of the exceptions, hospitals and health systems should ensure that any arrangements remain compliant with the regulations as well as applicable state laws.
   
   
5. COVID-19-specific regulations and considerations continue to impact transactions and operations, but hospitals and health systems should also prepare for a transition to a post-public health emergency era. Of note, the Centers for Medicare & Medicaid Services issued an interim final rule on Nov. 4, 2021, requiring specific Medicare- and Medicaid-certified providers and suppliers — including hospitals, health systems and others — to ensure all staff members are vaccinated for COVID-19 by Jan. 4, 2021. The requirement has a limited religious exemption and does not permit testing in lieu of vaccination. Separately, on Nov. 4, the Occupational Safety and Health Administration released an Emergency Temporary Standard (ETS) requiring employees of large employers either to get vaccinated or to test negative on a weekly basis. Lawsuits over the testing requirements for private employers may impact implementation, as the 5th U.S. Circuit Court of Appeals issued a temporary stay for the ETS requirement on Nov. 6 after several states challenged the requirements. Several other states, trade groups, companies and schools filed a separate challenge in the 11th U.S. Circuit Court of Appeals on Nov. 5. Aside from vaccination and testing policies and procedures, hospitals and health systems should also begin planning for operations after federal, state and local governments rescind public health emergency-era policies and waivers. As government authorities transition back from COVID-19 policies, healthcare entities will need to reconsider any changes made in light of temporary rules and ensure compliance with the appropriate regulatory requirements.

McGuireWoods has published additional thought leadership related to how companies across various industries can address crucial coronavirus-related business and legal issues, and the firm’s COVID-19 response team stands ready to help clients navigate urgent and evolving legal and business issues arising from the COVID-19 pandemic.