Overview
On February 22, 2024, the Minnesota state legislature introduced House Bill (HF) 4206, aiming to curb the acquisition of and control over certain healthcare providers by private equity companies and real estate investment trusts (REITs). The bill, if enacted, would prohibit private equity companies and REITs from acquiring or increasing any direct or indirect ownership in, or operational or financial control over, certain healthcare providers. Such restrictions would become effective August 1, 2024. The bill has been referred to the Committee on Commerce Finance and Policy but has not yet been listed on the committee agenda.
In Depth
BACKGROUND
On May 21, 2023, the Minnesota legislature passed HF 402, granting the Minnesota attorney general greater oversight of healthcare mergers and other transactions involving entities with annual revenue of more than $80 million. HF 402 imposed significant pre-closing notice requirements and provided a pathway for the Minnesota attorney general to petition the Minnesota state courts to block certain transactions. HF 402 largely focuses on hospital transactions. HF 4206 continues the trend of increased regulation and oversight with respect to healthcare transactions but shifts the focus to private equity companies and REITs.
HF 4206 PROVISIONS
Prohibitions on Certain Arrangements
HF 4206 contains only two operative provisions. The first would prohibit ownership of “providers” (defined as “an individual or entity that provides health or medical care services within Minnesota for a fee”) by private equity companies and REITs. The second would prohibit the exercise of operational or financial control over “providers” by private equity companies and REITs.
Ownership Prohibition
If HF 4206 is passed, effective August 1, 2024, private equity companies and REITs would be prohibited from acquiring or increasing any direct or indirect ownership interest in a provider. Ownership interest refers to “the possession of equity in capital, stock, profits, or ownership of real estate on which a provider operates.” Such an interest is indirect if an entity has ownership interests (1) in an entity that has an ownership interest in the provider or (2) in an indirect owner of a provider.
Control Prohibition
Similarly, upon the passage of HF 4206, private equity companies and REITs would be prohibited from acquiring or increasing any operational or financial control in a provider effective August 1, 2024. Operational control is defined in HF 4206 as the ability to “influence or direct the actions or policies of any part of a provider” or “choose, appoint, or terminate a member of the board, manager, managing member, senior employee, consultant, or other individual or entity that participates in the operational oversight of a provider.” This provision would not prohibit a private equity company or REIT from replacing directors and employees of a provider in the ordinary course of business.
Key Definitions
- “Private equity company” means a “publicly traded or nonpublicly traded entity that collects capital investments from individuals or entities.”
- “Provider” includes nursing homes, clinics, hospitals, ambulatory surgical centers, dental organizations, physician organizations, and integrated provider and plan systems.
- “For a fee” includes traditional fee-for-services arrangements, capitation arrangements, and any other arrangements wherein the provider receives compensation for health services or directly bills a group purchaser, health plan company or individual for those services.
- “Real estate investment trust” means a corporation, trust or association:
- That is managed by one or more trustees or directors;
- The beneficial ownership of which is evidenced by transferable shares or by transferable certificates of beneficial interest;
- That would be taxable as a domestic corporation but for the provisions of 26 U.S.C. § 856;
- That is neither a financial institution referred to in 26 U.S.C. § 582(c)(2) nor an insurance company to which 26 U.S.C. Subchapter L applies;
- The beneficial ownership of which is held by 100 or more persons;
- That is subject to the provisions of 26 U.S.C. § 856(k), and not closely held as in 26 U.S.C. § 856(h); and
- That meets the requirements of 26 U.S.C. § 856(c).
ANALYSIS
HF 4206 continues the nationwide trend toward increased regulation over healthcare transactions. For example, a bill was recently introduced in the California state legislature proposing restrictions on healthcare transactions involving private equity groups and hedge funds. (For a more detailed review of the California bill, read our On the Subject “California AB 3129 Targets the Health Facility Transactions Approval Process.”)
If passed, HF 4206 would significantly impair current and future transaction structures used by private equity companies and REITs for investing in healthcare businesses in Minnesota.
The bill is currently referred to the Committee on Commerce Finance and Policy. McDermott will continue to monitor the bill’s progression through the state legislature and provide updates.
KEY TAKEAWAYS
If HF 4206 is passed:
- Private equity companies and REITs would be prohibited from acquiring or increasing ownership interest in individuals or entities that provide healthcare services in Minnesota beginning on August 1, 2024.
- Private equity companies and REITs would be prohibited from acquiring or increasing operational or financial control over individuals or entities that provide healthcare services in Minnesota, also effective August 1, 2024.
- Private equity companies and REITs would be permitted to replace the directors or employees of a provider in the normal course of business.
Jae Hyun Lee, a law clerk in the New York office, also contributed to this article.
