State governments are becoming increasingly critical of health care dealmaking, and this trend is poised to have a significant impact on the behavioral health industry. As regulators scrutinize healthcare mergers and acquisitions (M&A), it’s becoming more difficult for operators in the behavioral health sector to close deals efficiently. A key driver behind this shift is the growing number of states that are implementing stringent State Healthcare Laws that require disclosure and review of health care transactions.
The Growing Influence of State Healthcare Laws
The effect of these laws will not be uniform across the United States. While some state legislatures actively pursue these regulatory frameworks, others may resist or delay the implementation of such measures. Currently, around a dozen states have introduced some form of State Healthcare Laws, and these regulations are quickly becoming a significant factor in the way healthcare transactions are conducted.
For the behavioral health industry, the introduction of these laws means more complexity, greater expense, and longer timelines for completing deals. With the increased regulatory burden, behavioral health operators must brace for longer due diligence periods and greater uncertainty as they navigate the maze of state-level healthcare regulations. State Healthcare Laws essentially add another layer of oversight, which can slow down the process and increase costs.
The Impact on Deal Timelines and Complexity
On the surface, the introduction of State Healthcare Laws seems like an obstacle that only adds more time to an already intricate process. In many cases, it opens up the deal to additional scrutiny, which could lead to chaos and delays. As Tommy Spiegel, Vice President at Provident Healthcare Partners, pointed out in an interview with Behavioral Health Business, “There are a lot of people involved. No one has a crystal ball [showing] what’s coming in the future. Anything could happen. So, it’s best to close as efficiently and correctly as possible.”
The focus on antitrust concerns and the increasing political discourse surrounding anticompetitive practices in healthcare have brought more attention to for-profit health care organizations, particularly those backed by private equity firms. These State Healthcare Laws are a direct response to growing concerns about the affordability and availability of healthcare services. By demanding greater transparency in dealmaking, state regulators are hoping to curb perceived abuses and ensure that mergers do not reduce competition or limit patient choice.
Recent Examples and Growing Scrutiny
A recent case that exemplifies the growing scrutiny of health care deals is Steward Health Care, once owned by Cerberus Capital Management. The organization, which is now working through bankruptcy, has faced numerous accusations of poor care and noncompliance with regulatory standards. Steward Health Care’s troubles highlight the risks involved when private equity-backed healthcare entities fail to meet expected standards.
Similarly, there is growing concern about the potential for nonprofit hospital systems to merge in ways that could limit patient choice and inflate prices. Research has shown that private equity-backed hospitals are associated with a 25% increase in hospital-acquired conditions, further fueling criticism of the influence of private capital in healthcare.
As policymakers aim to curb these issues, State Healthcare Laws are being increasingly used to monitor and regulate healthcare mergers, particularly when private equity is involved. In some cases, these laws are specifically targeting private equity firms and hedge funds, requiring them to disclose deals and submit them for review before proceeding.
The Rise of Legal and Compliance Costs
As State Healthcare Laws expand across the country, the cost of compliance is increasing. With new legal requirements, dealmakers now face higher expenses due to the involvement of attorneys, bankers, and other professionals who charge based on the time spent navigating these complex processes.
A key issue with these laws is the need for specialized legal expertise to manage compliance. According to Robert Aprill, Managing Director at Physician Growth Partners, local attorneys are often critical to ensuring that all the nuances of state-specific regulations are addressed. “Local attorneys can utilize their knowledge and local relationships to help the process along,” he explained. This can be especially helpful as many of these State Healthcare Laws differ significantly from state to state.
In states like Indiana, a new law requires healthcare deals with assets worth $10 million or more to be disclosed to the state attorney general’s office 90 days before closing. The law also mandates a review process that could extend the timeline for deal completion. Similarly, California is considering a law that would require approval from the state attorney general for healthcare deals, giving regulators the power to impose conditions if they believe the deal would reduce competition or harm access to healthcare services.
Navigating the Future of Healthcare Mergers and Acquisitions
Despite the added complexity of State Healthcare Laws, many experts believe that these regulations should not be viewed as deal blockers but as hurdles that can be planned for. “They are just another hoop,” said Aprill, “We’ve not experienced in those states where those laws exist for them to be deterrents or barriers to deals. They are not shutting deals down. They are just an unfortunate step that can delay the process.”
However, the growing number of State Healthcare Laws does have the potential to shift decision-making in the behavioral health space. Investors may opt to focus their efforts on states where these regulations are less stringent, thus reducing the potential risks and delays associated with lengthy reviews and compliance processes. While this may not be a deciding factor in every deal, it’s certainly something that investors and operators will take into consideration when evaluating the attractiveness of a particular transaction.
The Role of Private Equity and Its Influence on Behavioral Health
Private equity firms have been instrumental in driving growth and expansion in the behavioral health sector, particularly in areas like autism services. Private equity investments have led to the creation of new sites of service and increased access to care, helping to address gaps in the behavioral health landscape.
However, with the rise of State Healthcare Laws, private equity’s role in the industry is under greater scrutiny. These regulations are pushing companies to focus more on data collection, compliance, and transparency in an effort to demonstrate that their investments are leading to measurable improvements in care quality.
The flood of private equity into the behavioral health space is not likely to subside anytime soon. As Spiegel noted, “No other group has helped expand access to care more than private equity in autism services.” Nevertheless, the increased regulatory scrutiny will likely lead to a more cautious approach by investors, particularly in states with stricter State Healthcare Laws.
Looking Ahead: Federal and State-Level Reactions
The future of healthcare dealmaking, especially in the behavioral health sector, remains uncertain as State Healthcare Laws continue to evolve. At the federal level, the Biden administration has launched an investigation into private equity’s role in healthcare, and state governments are likely to continue pushing for stricter oversight of the sector.
Despite these challenges, the demand for behavioral health services remains high, and operators and investors are likely to find ways to work within these new regulatory frameworks. Whether through strategic lobbying efforts or by adjusting their business models, the behavioral health industry will need to adapt to the changing landscape of healthcare dealmaking.
Conclusion
As State Healthcare Laws continue to shape the landscape of healthcare dealmaking, the behavioral health industry must stay agile and informed. While these laws may lengthen the timeline and add complexity to deals, they also present an opportunity for the industry to demonstrate transparency, improve care standards, and ensure that investments are being made in ways that benefit patients and communities. For investors, operators, and attorneys, understanding and preparing for these evolving regulations will be crucial to navigating the future of healthcare mergers and acquisitions.
