State Lawmakers Slow Down Healthcare Mergers

Just last month, Illinois became one of the latest states to enact a law requiring parties involved in healthcare mergers to observe a waiting period before closing their transactions.

The bill, HB 2222, received very little attention when it was signed by Gov. J. B. Pritzker in mid-August. But it represents a little-known, but growing trend among state lawmakers who are increasingly concerned about consolidation in the healthcare sector and are monitoring mergers closely.

At least a dozen other states—California, Colorado, Connecticut, Hawaii, Massachusetts, Minnesota, Nevada, New Hampshire, New York, Oregon, Rhode Island and Washington—have enacted similar legislation.

These bills are known in legal circles as “mini-HSR Acts” or “Baby HSRs,” referring to the federal Hart-Scott Rodino Act, which requires companies under certain circumstances to file premerger notifications with the Federal Trade Commission and the Antitrust Division of the Justice Department.

The Baby HSRs tend to cover transactions valued below the threshold set by Hart-Scott Rodino, which is currently $111.4 million in most situations.

The multinational law firm Morgan Lewis recently issued a client alert warning: “These laws will increase the costs of healthcare deals and extend deal timelines—in some instances substantially. They may also create the risk that a transaction will not close absent divestitures or other conditions.”

Considerable Variation Among Healthcare Merger Laws

Generally, these bills require merging parties to notify state agencies of their intentions and to observe a waiting period before closing, anywhere from less than 30 days to as long as eight months.

For example, Illinois’ new law, which goes into effect on January 1, 2024, requires all merging parties to notify the Illinois attorney general and then wait 30 calendar days before closing their deal.

Illinois’ premerger notification law applies to healthcare transactions in which all parties are Illinois entities or in which out-of-state entities generate at least $10 million in annual revenue from patients in the Prairie State.

The global law firm Ropes & Gray recently lamented that these laws vary considerably, creating a “National Patchwork” of requirements.

As the firm noted in its analysis of the new laws coming out of Illinois and Minnesota, Minnesota's threshold for out-of-state entities is only $80 million in revenue from in-state residents.

“Health care providers, particularly those with operations in multiple states, and health care investors should be mindful of new laws and the increase in state oversight of health care acquisition activity and continue to monitor for updates on the success of proposed legislation focused on health care transaction activity,” Ropes & Gray warned in its own alert.

And it appears this may just be the beginning: law firms warn that other state legislatures are considering similar proposals.

For instance, in April a bipartisan trio of representatives in North Carolina introduced HB 737, which would establish a premerger program for healthcare transactions in the Tar Heel State.

What’s more, this trend could expand beyond just healthcare transactions. Days after the Illinois bill was signed into law, the international law firm Winston & Strawn warned: “(T)he implications of this growing trend of state notification requirements reach far beyond the healthcare space—states may adopt Baby HSR schemes that are applicable to other key sectors of their state’s economy. For example, in Maine, the Attorney General must be notified of proposed acquisition of retail gasoline or heating oil assets.”

States Subjecting Healthcare Mergers to Greater Scrutiny

At least 13 states have enacted laws requiring notification of state agencies and observance of waiting periods for healthcare-related mergers, according to law firms Morgan Lewis and Winston & Strawn. Aimed at promoting greater state scrutiny of mergers valued below the federal notification thresholds of the Hart-Scott Rodino Act—currently about $111 million for most transactions—the laws are often referred to as “mini-HSR Acts” or “baby-HSRs.”

Baby HSRs Could Kill Smaller Healthcare Mergers

How exactly could these new laws impact businesses? That remains unclear, because, as Morgan Lewis Antitrust & Competition partner Jonathan Rich pointed out, “I don't think we've seen them bring an enforcement action yet.”

A big question in the application of these laws is what standards states will use to enforce them. Rich said some states are clearly approaching Baby HSRs with competition and antitrust concerns in mind, while others are more focused on the impact mergers could have on the general public interest.

Those different approaches could impact how states apply these laws, to say nothing of the different thresholds and waiting periods each state is imposing.

“It could get complicated,” Rich said, particularly for multi-state transactions.

Indeed, Kevin Goldstein, a partner at Winston & Strawn, said the cost of these reviews alone could, in theory, kill some smaller proposed transactions.

Which may in fact be the point of these bills, he said, to make businesses second guess whether mergers are being proposed for the right reasons, such as lowering costs, increasing output, or improving the quality of patient care.

Goldstein said this legislative trend has emerged in part because the Biden Administration has encouraged states to get involved in antitrust enforcement and in part because both Republicans and Democrats are wary of healthcare mergers.

Republicans, he said, prefer competition in the health care sector rather than single-payer solutions, while Democrats are concerned about the impact of consolidation on quality and cost of care.

Goldstein also noted that the National Association of Attorneys General has been supportive of Baby HSR legislation and attorneys general have helped push for its passage in states.

Attorney Rodney Miller of the Practical Guidance and Analytical Team at LexisNexis® said the Baby HSR trend may have started because some studies have found that healthcare mergers have resulted in lower overall care.

Miller said legislators may be implementing these bills to protect the quality of care of their states.

Will they work? “That’s a good question,” he said. “It remains to be seen.”

—By SNCJ Correspondent BRIAN JOSEPH

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