California, Illinois, and Minnesota are the latest states to enact laws requiring merging parties in healthcare-related transactions to notify state agencies and observe waiting periods (anywhere from less than 30 days to upwards of eight months) prior to closing. While the filing requirements, notification thresholds, waiting periods, and review standards vary, all of the statutes share the common objective of providing state agencies with the tools to review, block, and modify healthcare deals.

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.

Several other states, including Colorado, [1] Connecticut, [2] Massachusetts, [3] Nevada, [4] New York, [5] Oregon, [6] and Washington, [7] have already enacted similar “mini-HSR Acts” for healthcare transactions.

CALIFORNIA

California’s Office of Health Care Affordability (OHCA) will soon be adopting rules that establish the filing criteria under the state’s new healthcare premerger notification law, the Health Care Quality and Affordability Act (HCQAA). On July 27, 2023, OHCA released the first draft of its proposed rules. [8] OHCA will finalize its rules before the HCQAA begins to apply to any healthcare deal that requires filing on or after January 1, 2024.

OHCA’s proposed rules would apply to a wide variety of healthcare transactions with relatively low size-of-transaction or size-of-person thresholds. [9] Some key takeaways from the proposed rules include the following:

• Deals involving a change in ownership of a healthcare entity from nonprofit to for-profit, or physician-owned to private-equity–owned, may require a pre-closing notification. [10]
• A “healthcare entity” includes “affiliates,” which is defined as all entities that are under common control. [11]
• Filings will need to disclose a significant amount of information, including information and documents about geographic markets, competitive conditions, patients, employees, prior transactions, and the pending transaction. [12]
• The proposed waiting periods in California are very long. The basic waiting period is 90 days, but if OHCA issues a Cost and Market Impact Review, or CMIR, the minimum post-filing waiting period in California is over eight months. [13] Because the proposed rules empower OHCA to toll the California waiting periods while other state or federal review of the deal is ongoing, [14] waiting periods in California could easily exceed one year.
• Parties are obligated to compensate OHCA for its expert, consultant, and administrative costs incurred during its review of the proposed transaction.[15]

While OHCA may bring lawsuits to enforce the notification requirements of the HCQAA, it does not have the authority to bring lawsuits to enjoin proposed transactions; [16] instead, it may refer its findings and investigative record to the California Attorney General, which can initiate investigations into the antitrust merits under existing law and challenge a transaction under both California law and the federal antitrust laws. [17]

ILLINOIS

Illinois’s healthcare premerger notification law, enacted on August 15, 2023, will become effective on January 1, 2024. [18] The law will apply to transactions where all parties are Illinois entities or where an out-of-state entity generates at least $10 million in annual revenue from patients in Illinois. [19]

Parties may satisfy the filing requirement by (1) sharing a copy of their Hart–Scott–Rodino Act (HSR Act) filings with the Illinois Attorney General, (2) submitting an application for a change in ownership to the Illinois Health Facilities and Services Review Board, or (3) producing transaction- and facility-related information to the Illinois Attorney General. [20]

The premerger filing is due no later than 30 calendar days prior to closing a deal. [21] During this 30-day period, the Illinois Attorney General may request additional materials to assist in its investigation. [22] Any such request extends the waiting period until 30 calendar days following the parties’ substantial compliance with the request. [23] All information submitted to the Illinois Attorney General should receive confidential treatment. [24]

If a party fails to comply with the law, the Illinois Attorney General may bring an action in court to seek a civil fine of $500 per day of noncompliance, as well as injunctive relief to demand compliance. [25] While the law does not provide an independent right of action for the Illinois Attorney General to enjoin or unwind transactions on the merits, it does not affect the Illinois Attorney General’s existing power to challenge a transaction under existing laws, such as Section 7 of the Clayton Act. [26]

MINNESOTA

Minnesota’s healthcare premerger notification law, Chapter 145D, applies not only to individual healthcare transactions, but also to any series of healthcare transactions that occur within a five-year period. [27] Chapter 145D imposes different filing requirements depending on the size of the deal.

The filing requirement for smaller healthcare transactions, Chapter 145D.02, applies to all deals that close on or after January 1, 2024 where a party has (or will have post-closing) average annual revenues between $10 and $80 million. [28] Parties will submit information on a confidential basis regarding their facilities, providers, geographic markets, competitors, strategic plans, corporate governance, and employees, among other topics. [29] The filing typically must occur at least 30 calendar days prior to closing, but can be submitted on an accelerated time frame if needed. [30]

The filing requirement for larger healthcare transactions, Chapter 145D.01, is currently in effect and requires a filing where a party has (or will have post-closing) average annual revenues of at least $80 million. [31]

In addition to submitting all information required by Chapter 145D.02, parties must also submit on a confidential basis information regarding synergies, financial models, valuations, financial data, impact analysis reports, tax filings, copies of HSR Act filings (if applicable), and, for any deals involving nonprofit entities, sworn affidavits from certain directors and executives. [32] A Chapter 145D.01 filing must occur at least 60 calendar days prior to closing. [33] The Minnesota Attorney General can extend this initial period an additional 90 calendar days. [34]

Unlike Chapter 145D.02, Chapter 145D.01 expressly authorizes the Minnesota Attorney General to bring an action in court to enjoin or unwind a larger healthcare transaction on procedural or substantive grounds (including, for example, if the parties fail to comply with the notification requirements). [35]

KEY TAKEAWAYS

The new premerger notification laws enacted in California, Illinois, and Minnesota continue the trend of state legislatures empowering their agencies and attorneys general to investigate proposed transactions in healthcare industries prior to closing. This trend is likely to continue: more state legislatures are considering adopting similar laws. [36]

The US Department of Justice (DOJ) and Federal Trade Commission (FTC), in parallel, are considering adding HSR Act filing requirements that would significantly increase burdens for transactions subject to HSR Act filings, [37] as well as amending the Merger Guidelines to subject a greater variety of transactions to potential investigation and challenge under the HSR Act. [38]

It remains to be seen how state agencies will interpret and use these new healthcare premerger notification laws in future merger reviews. There is also a possibility that states will notify and then collaborate with the DOJ or FTC on healthcare deals reportable under state laws but not under the HSR Act; the DOJ and FTC can—and do—sue to stop or reverse transactions that are not reportable under the HSR Act.

Companies or individuals that are involved in healthcare industries should closely monitor developments in state premerger notification laws for their application to healthcare-related transactions, especially with respect to these laws’ impacts on costs, closing times, and antitrust risk in connection with transactions that are not reportable under the HSR Act.

[1] See Colo. Rev. Stat. §§ 6-19-101 et seq.

[2] See Conn. Gen. Stat. §§ 19a-486i et seq.

[3] See Mass. Gen. Laws ch. 6D, § 13.

[4] See Nev. Rev. Stat. §§ 598A.290 et seq.

[5] Morgan Lewis, LawFlash, New York State: Healthcare Entities Must Disclose Certain Material Transactions (May 9, 2023).

[6] See Or. Rev. Stat. §§ 415.500 et seq.

[7] See Wash. Rev. Code §§ 19.390.010 et seq.

[8] See Cal. Office of Health Care Affordability, CMIR Regulations for Workshop (July 27, 2023) (OHCA Proposed Rules).

[9] Id. § 97435(b).

[10] Id. § 97435(c)(8).

[11] Id. § 97431(a).

[12] Id. § 97439(b)-(c).

[13] Within 60 calendar days of filing, OHCA must decide whether to issue a CMIR. Id. § 97441(b). Once a CMIR issues, OHCA has a minimum of 90 calendar days to investigate and issue a preliminary report. Id. § 97441(d). Following publication of a preliminary report, OHCA must provide 10 business days (i.e., 14 calendar days) for public comment. Id. § 97441(f). OHCA then has a minimum of 30 calendar days to publish a final report. Id. § 97441(g). Finally, parties may not close their transaction until 60 calendar days following OHCA’s publication of its final report. Cal. Health & Safety Code § 127507.2(a)(3).

[14] See, e.g., OHCA Proposed Rules § 97441(d)(3) (“The Office may choose to toll . . . the time periods . . . during any time period in which other state or federal regulatory agencies or courts are reviewing the subject transaction.”).

[15] Cal. Health & Safety Code § 127507.4(b)(2).

[16] While the HCQAA provides OHCA with authority to seek “specific performance” or “injunctive relief,” along with attorney fees and costs, these remedies apply in connection with the enforcement of the provisions of the HCQAA (e.g., enforcing filing requirements), rather than allowing OHCA to bring actions to enjoin transactions on the merits. See id. § 127507.6.

[17] Id. § 127507.2(d).

[18] Ill. Pub. Act 103-0526, § 99 (to be codified at 740 Ill. Comp. Stat. 10/7.2a).

[19] Id. § 7.2a(b).

[20] Id. § 7.2a(c).

[21] Id. § 7.2a(b).

[22] Id. § 7.2(d).

[23] Id

[24] Cf. 740 Ill. Comp. Stat. 10/7.2(2) (“[N]o documentary material, transcripts of oral testimony, or answers to interrogatories, or copies thereof, in the possession of the Attorney General shall be available for examination by any individual other than an authorized employee of the Attorney General or other law enforcement officials, federal, State, or local, without the consent of the person who produced such material, transcripts, or interrogatory answers.”).

[25] Ill. Pub. Act 103-0526, § 7.2a(e) (to be codified at 740 Ill. Comp. Stat. 10/7.2a).

[26] Id. § 7.2a(d) (“Nothing in this Section precludes the Attorney General from conducting an investigation or enforcing State or federal antitrust laws at a later date.”).

[27] Minn. Stat. Ann. § 145D.01 subdiv. 1(j).

[28] Id. § 145D.02(a).

[29] Id. § 145D.02(b), (d).

[30] Id. § 145D.02(b).

[31] Id. § 145D.01 subdiv. 2(a).

[32] Id. § 145D.01 subdiv. 2(c)-(d), 7.

[33] Id. § 145D.01 subdiv. 2(b).

[34] Id. § 145D.01 subdiv. 2(e).

[35] Id. § 145D.01 subdiv. 5.

[36] For example, North Carolina’s HB 737, introduced in April 2023, would establish a premerger notification program for healthcare transactions in that state. See House Bill 737, N.C. Gen. Assembly.

[37] See Morgan Lewis, LawFlash, New HSR Form Will Transform the US Merger Review Process (June 30, 2023).

[38] Press Release, Fed. Trade Comm’n, FTC and DOJ Seek Comment on Draft Merger Guidelines (July 19, 2023).

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