On May 26, 2023, Minnesota Gov. Tim Walz signed legislation requiring pre-close notification for qualifying healthcare transactions, making Minnesota the latest in a rapidly growing number of states with such requirements. Also in May, the Illinois state legislature enacted a statute that, if signed by Gov. J.B. Pritzker as expected, would require pre-close review of qualifying healthcare transactions by the Office of the Illinois Attorney General.
States increasingly are requiring notice and review of smaller-scale physician practice acquisitions and other deals not typically subject to pre-close scrutiny. The effective date of both the Minnesota and Illinois laws is Jan. 1, 2024.
On May 26, Gov. Tim Walz of Minnesota signed legislation requiring pre-close notice to the Office of the Minnesota Attorney General and Commissioner of Health for any transaction — whether a “single action or a series of actions within a five-year period” — that occurs “in part” in the state, or involves a healthcare entity formed or licensed in the state, where at least one healthcare entity involved has average annual revenues of $80 million or where the transaction is expected to result in an entity projected to have average annual revenues of $80 million or more once it is operating at full capacity.
Healthcare entities are defined as follows:
- Hospital systems.
- Captive professional entities (that is, entities owned by a provider employed by, controlled by or subject to the direction of a hospital or hospital system).
- Medical foundations.
- Provider groups.
- Entities organized or controlled by any entity above.
- Entities that own or control any entity above.
The notice must be filed at least 60 days prior to the proposed completion date of the transaction; however, the review period may be extended by the attorney general for up to an additional 90 days. Covered transactions include:
- A merger with, or acquisition of control over, a healthcare entity.
- A transaction involving at least 40% of a healthcare entity’s assets or that results in the transfer of at least 40% of a healthcare entity’s ownership.
- An agreement that results in the sharing of at least 40% of a healthcare entity’s revenues with another entity.
- Any modification of a healthcare entity’s governing body that transfers control or, for a nonprofit healthcare entity, that changes its membership by at least 40%.
- The creation of a new healthcare entity.
Certain clinical affiliations, offers of employment, certain services contracts and other specified transactions are exempt from the notice requirement.
The statute, which will go into effect Jan. 1, 2024, is unique in several respects.
First, the depth and breadth of information that must be submitted with the notice is substantial, including:
- Service-area information for each location affected by the transaction.
- Post-merger synergies information.
- Detailed leadership information.
- Financial statements and tax returns going back five years.
- Workforce-related information.
- All expert and consultant reports evaluating the transaction that were created within three years of the transaction, including valuation reports.
- Utilization models.
- Normal course transaction-related documents and information such as agreements, disclosure of all third-party consultants and experts, and information relating to any plans to close locations or expand post-close.
For certain transactions, the statute also requires the submission of an “independent expert or consultant” economic analysis, a report on the “effects of the transaction” and a separate report on the effects “on the community and workforce.” Compared to other states’ notice requirements, this likely will involve significantly more preparation and expense for the parties and may affect deal timelines. Parties also may need to develop their sense of the “case” related to areas such as services and workforce going into the transaction much more than in previous deals.
Second, the attorney general may extend the initial 60-day waiting period by an additional 90 days without having to articulate any reason for doing so, making the potential timeline of a review much longer than in other states. At the same time, the statute provides that the attorney general may shorten the waiting periods and waive certain provisions of the notice requirements as well.
Third, the statute expressly prohibits healthcare entities from entering into transactions that “substantially lessen competition” or “tend to create a monopoly or monopsony.” Although these are generally consistent with prohibitions in existing antitrust laws, they will require parties to affirmatively think through antitrust issues prior to entering into a transaction and be prepared to address them in interactions with the attorney general and commissioner in the course of the review.
Fourth, unlike other state statutes, the Minnesota law does not provide for daily fines for noncompliance, but it does specifically provide that noncompliance or inadequate compliance (if not cured) is grounds for a court to enjoin or unwind a transaction.
Finally, the legislation imposes a separate pre-close reporting requirement for smaller transactions — those involving healthcare entities with between $10 million and $80 million average annual revenues. Parties to these smaller transactions must submit a notice to the commissioner (but not to the attorney general) within 30 days of the expected effective date of the transaction. The data required to be submitted under this provision is significantly slimmed down and the commissioner’s purpose in collecting the data is tracking and reporting rather than to conduct a review of the transaction.
On May 18, 2023, the Illinois General Assembly enacted legislation that would require pre-close review of certain healthcare transactions. The legislation requires parties to notify the Illinois attorney general of certain healthcare transactions that are not subject to existing federal Hart-Scott-Rodino Act (HSR) filing requirements or Illinois Health Facilities Planning Act notice requirements. For HSR- and Illinois Health Facilities Planning Act-reportable transactions, parties will need to submit copies of the HSR filings to the attorney general for review and should expect that Illinois Health Facilities Planning Act filings will be reviewed by the attorney general. If Gov. J.B. Pritzker signs it into law, the legislation would take effect Jan. 1, 2024.
Because the legislation requires observation of a 30-day pre-close waiting period and disclosure of substantial information, not to mention steep penalties for noncompliance, it is critical that providers and other healthcare companies become familiar with these obligations as long before a transaction as possible.
The legislation would apply only to certain healthcare transactions. Covered transactions include “any merger, acquisition, or contracting affiliation between 2 or more health care facilities or provider organizations not previously under common ownership or contracting affiliation.” A “provider organization” means any entity in the business of healthcare delivery or management that represents at least 20 providers in contracting with payors. A “healthcare facility” covers six types of entities, subject to limited exceptions:
- Licensed ambulatory surgical centers.
- Facilities licensed under the Illinois Hospital Licensing Act.
- State-maintained hospitals, ambulatory surgical centers or kidney disease treatment centers.
- Kidney disease treatment centers.
- Outpatient surgical facilities leased, owned or operated by or on behalf of an out-of-state entity.
- Facilities used for the provision of a healthcare category of service, as defined under the Illinois Health Facilities Planning Act (such as cardiac catheterization and open-heart surgery).
The legislation layers on a materiality threshold for covered transactions involving an out-of-state healthcare entity. These transactions would be subject to the notice requirement only if the out-of-state entity generates at least $10 million in annual revenue from patients residing in Illinois.
Parties to a covered transaction would need to notify the Illinois attorney general of the transaction at least 30 days before closing. The legislation provides three routes to satisfy the notice requirement:
- For covered transactions also subject to the HSR Act, the parties satisfy the notice requirement by submitting a copy of the HSR filing to the attorney general.
- For covered transactions also subject to the Illinois Health Facilities Planning Act, the parties satisfy the notice requirement by filing an application for change of ownership with the Illinois Health Facilities and Services Review Board, which will forward the application to the attorney general.
- For all other covered transactions, the parties must submit written notice to the attorney general that includes the parties’ names and addresses, the locations where they provide healthcare services, a description of the proposed transaction and the closing date.
The legislation allows the attorney general to request additional information during the 30-day waiting period. After complying with such requests, the parties would need to wait another 30 days before closing. Although the attorney general may issue several requests for information, only the first one extends the waiting period by 30 days.
Once the waiting period expires, the parties are free to close the transaction. The legislation cautions, however, that the attorney general may challenge covered transactions at any time, meaning the expiration of the waiting period does not amount to presumptive approval of the deal.
The legislation imposes steep penalties. Parties could receive fines of up to $500 for each day of noncompliance. The attorney general also may sue to block the deal. That said, the legislation requires the attorney general to notify the parties 10 days before taking any action, effectively creating a period to cure noncompliance.
Opaque Review Process
The legislation does not include features common in other states’ notification regimes such as details about how the review will be conducted and the criteria that will guide the attorney general’s analysis of covered transactions. Without further regulation to provide more detail and clarity, it may be challenging to assess how the new law will affect future transactions.
McGuireWoods Can Advise Clients on This Evolving Regulatory Landscape
As McGuireWoods discussed previously, the current list of states with notice laws includes Washington, Oregon, Massachusetts, Nevada, Connecticut, New York (effective Aug. 1, 2023) and California (effective April 1, 2024). Two other states are considering similar legislation this legislative term — Maine (special session ending June 21) and North Carolina (session ending Aug. 31). McGuireWoods continues to monitor this evolving regulatory landscape and has significant experience navigating state healthcare filings. If you have any questions, please reach out to the authors or your McGuireWoods contact.