Polsinelli Shareholders Bobby Guy and Arindam Kar are no strangers to public and regulatory concerns surrounding private equity investment in healthcare. HCB News asked the two attorneys to tap into their dealmaking and antitrust perspectives to outline the state of healthcare investments today. We also get into how the election will impact current regulatory scrutiny, and the history of how the demise of the public markets have led to a reliance on private funding.

Bobby Guy believes that the uncertainty surrounding the US healthcare market presents the greatest investment opportunity in healthcare for the last half-century. He is a healthcare deal lawyer, and he spends his time focused on growing, buying and selling healthcare companies. In 2016 and 2017, he led the two largest skilled nursing spinoffs in the country each year, involving more than 30 buyers in 25 states in those deals. In the post-acute and behavioral space, his team has bought and sold more than 500 healthcare facilities in the last several years.

Arindam Kar is a thought leader who partners with clients to provide effective antitrust compliance solutions, pragmatic counseling, and results-driven resolutions to government investigations. Arindam also serves as outside general counsel to several emerging, innovative entities that are delivering solutions that impact industry and national security. Arindam’s legal service is provided alongside his passionate dedication to diversity, equity, inclusion, and belonging in addition to servant leadership and community service.

HCB News: What’s the current environment for healthcare investment look like?
Bobby Guy: Right now, we’re going through what we refer to as the “Transparency Tempest” in healthcare. Government agencies are applying significant scrutiny to healthcare transactions, especially investments by private equity into healthcare. Much of the scrutiny is coming from the Federal Trade Commission, the Centers for Medicare and Medicaid Services, and state legislatures passing new laws that require pre-notification of healthcare transactions. At the same time, the Corporate Transparency Act, which affects US companies across all industries and is enforced by the Financial Crimes Enforcement Network of the IRS (FinCen), became effective this year, so trends around transparency are coalescing. Here’s what each of these levels of government are doing, with Arindam addressing the FTC’s antitrust scrutiny to kick us off.

Arindam Kar: The FTC – Antitrust Scrutiny: PE firms are facing an unprecedented level of antitrust scrutiny. This scrutiny reflects a “whole-of-government” approach by the Biden Administration to have federal agencies actively collaborate and use the traditional antitrust laws, other regulations that impact competition, and use them as a tool to address systemic concerns in our economy. So, for example, earlier this year it was announced that the Antitrust Division of the U.S. Department of Justice, the Federal Trade Commission, and the Department of Health and Human Services were working together to tackle “Corporate Greed in Healthcare” by issuing a public request for information to identify instances where private equity in healthcare has led to anticompetitive conduct, effects, and/or harm to patients. This information would help the agencies conduct investigations in the industry.

BG: In addition, the FTC has indicated that when a proposed private equity transaction in healthcare requires a filing under the Hart-Scott-Rodino Act (HSR – typically when a transaction is larger than approximately $119.5 million), the FTC can look back at all prior transactions in the last 10 years by the parties to see if there has been an anticompetitive effect, essentially putting those prior transactions at risk of challenge. Further, following the Change Healthcare data breach, the FTC has indicated that it will look at whether a healthcare transaction is likely to make healthcare data more or less secure.

Two: CMS – Medicare Change of Ownership – CMS has new rules regarding Medicare participation that require disclosure of “additional disclosable parties” – which includes landlords, lessors, and anyone providing management or financial or clinical services. The rules require disclosure of individuals holding (directly or indirectly) at least 5% of the ownership of those additional disclosable parties, and the data will eventually be published. The rules are primarily for nursing homes, but they also reach a number of other healthcare providers. They can be problematic for private equity, as they could require private equity funds to reveal any actual investors holding more than 5% of a fund.

Three: State legislatures passing transaction pre-notification laws – There are now 13 states with laws that require pre-notification of healthcare transactions. The timing for the notices typically runs from 1-4 months, with Oregon’s statute requiring six months pre-notification. The state laws vary as to how they define healthcare transactions, but the result is a simple one – healthcare transactions will take more time and be subject to more scrutiny before parties can consummate deals.

Four: The Corporate Transparency Act - The CTA is a law aimed at preventing money laundering, and it applies to companies regardless of industry, so it includes healthcare companies. Many businesses now are registered as limited liability companies, and many more large businesses are privately owned now compared to past decades when public companies were more popular (a point that will become important as discussed below), so the Treasury is looking for ownership transparency.

HCB News: Is private equity good for healthcare?
BG: We think the “War on Private Equity in Healthcare” is based on a fundamental misunderstanding of investment and innovation in healthcare. Here’s why: There are four types of equity available to grow companies – public market equity from stock exchanges like the NYSE or Nasdaq, private market equity like private equity funds or venture funds, non-profit equity (i.e., charitable fundraising by non-profit healthcare companies), and government equity (i.e., taxpayer dollars used by the government to support healthcare providers).

What’s important is to realize that in 2001, Congress passed a law called Sarbanes-Oxley (SOX), which made it much more difficult for companies to go public and much more expensive for companies to remain public. SOX was a reaction to the shocking scandals of Enron and Worldcom, but SOX had an unintended effect – while the government was trying to protect the public from bad investments, instead the government protected the public from almost all investments. The result of SOX was that the number of companies on the public stock exchanges plummeted. Between 1982 and 2002, the US created approximately 7000 new public companies; since then, the US has created only about 2,500-3000 new public companies. The Wilshire 5000 stock index now only has about 4,300 stocks listed on it – because that’s about all the sizable public companies there are.

What does this mean? The only equity money readily available to grow companies for the last 20+ years has been private equity, and without those private equity dollars, the healthcare industry would have serious difficulty adapting and innovating. So, the government is blaming private equity for a problem that the government created – a lack of public market investment in healthcare (and every other industry). Public companies have much more transparency than private companies, and the “Transparency Tempest” is the result of living in an environment where many more companies are private instead of public – the government now wants back the transparency that it had with public companies.

Instead of blaming private equity, the better solution is re-open the public markets, making it easier for companies to go public again, so that there are more public companies investing in healthcare (and the government will automatically have the transparency it so much desires). This would create more competition for healthcare investment dollars, and the best dollars would win – private equity in some cases, and public companies in others.

HCB News: How will Private Equity adapt investment strategies in healthcare given recent regulatory scrutiny?
BG: There are a lot of private equity funds that are focused entirely on healthcare, and we expect they will remain committed to investing in the healthcare sector.

AK: PE firms need to realize that there is a paradigm shift on how the antitrust and other laws are being used to impact social and economic change. Accordingly, PE firms cannot set their acquisition strategies using the traditional financial/investment lens; rather, they must be much more thoughtful in conducting an antitrust risk assessment of their portfolio holdings, which will help modulate those strategies to account for this new legal risk. Moreover, firms investing the healthcare space must be able to answer the fundamental question of how a proposed acquisition will benefit the customer/patient (i.e., will it help with access to services? Will it lead to new innovation?) If this question cannot be answered or otherwise substantiated in the affirmative (i.e., the deal will help patients), PE investments in healthcare will continue to face an uphill battle.

HCB News: Will the 2024 presidential election have an impact on the antitrust environment for PE investment in healthcare?
AK: I do not believe that a change in the White House will substantially impact the current antitrust scrutiny PE firms face in healthcare for a few reasons. First, while the Biden Administration implemented the new enforcement regime that PE firms are currently encountering, the concern about PE investments in healthcare has been developing for some time across multiple presidential administrations. Second, key enforcement agencies, such as the Federal Trade Commission, have been structured to have a certain amount of sustainability and stability irrespective of who is in the White House. For example, when President Biden entered office, the Commission had a majority Republican set of commissioners that would have been in office, based solely on their respective staggered terms, for a few years into President Biden’s term. Similarly, the Democrats could control the FTC for a few years even if Mr. Trump wins. Finally, the concern about private equity in healthcare is a bipartisan issue in Congress and particularly in the Senate, which I do not see subsiding anytime soon.