Indiana aims to keep closer eye on mergers, acquisitions

Who is buying or selling hospitals, medical and dental offices, surgical centers, rehabilitative care clinics and other health care operations around Indiana?

Until now, many of the deals have been secret; but soon, Indiana officials will find out.

Starting July 1, any health care entity or private equity firm that is planning a merger or acquisition in Indiana—where the assets of at least one of the parties is $10 million or more—must notify the state attorney general at least 90 days in advance.

The Attorney General’s Office will review the deal and can issue an opinion about whether it has any antitrust concerns. It can also demand more information through the courts.

The move is part of a larger effort by some lawmakers and patient advocacy groups to drive down the cost of health care in Indiana. They say increasing consolidation over the last few decades has pushed the cost of medical care up, with hospital systems and private equity firms buying hundreds of medical practices and related health care services around the state, often increasing prices along the way.

The new law, Senate Enrolled Act 9, would allow the state to learn who is doing the buying and selling, said Sen. Chris Garten, a Republican from Charlestown, the bill’s primary author.

“As a conservative, I want to see a thriving, competitive market that drives down health care prices through consumer choices,” Garten told IBJ. “Today, Indiana is increasingly far from that goal because market consolidation in the state’s health care space has gone unchecked for years.”

Indiana’s hospital prices remain among the highest in the nation, according to the latest study conducted by research group Rand Corp., released last month. Indiana employers and employees are paying nearly three times, or 297%, what Medicare pays for the same services at the same hospital, the study concluded. Overall, Indiana’s total commercial hospital prices are eighth-highest in the nation.

The new law has plenty of supporters, including lawmakers from both parties, the Attorney General’s Office and consumer groups such as Employers’ Forum of Indiana and Hoosiers for Affordable Healthcare. They say patients and employers are shouldering the high cost of health care, which is also putting Indiana at a disadvantage to neighboring states, where prices are lower.

“Once a merger or acquisition occurs, you read about it in the newspaper, and you can’t undo it,” said Gloria Sachdev, president and CEO of Employers’ Forum of Indiana. “So you end up with all this consolidation, less competition and higher prices.”

The only organization to publicly raise concerns about the legislation is the Indiana Hospital Association, which said the law does not truly address affordability and only adds another round of government oversight that could wreck or delay potential deals.

Brian Heaton, a lawyer with Krieg DeVault LLP in Indianapolis who specializes in health care mergers and acquisitions, told lawmakers earlier this year that mergers and acquisitions, far from being a negative force, can potentially keep a failing hospital’s doors open—especially in small communities—if a stronger hospital buys it and invests more resources.

Heaton told the Indiana Senate Health and Provider Services in January that the federal government already has strict rules for reviewing mergers and acquisitions. In December, the U.S. Justice Department and the Federal Trade Commission strengthened the guidelines to trigger a federal review if the potential business combination would result in a market share of at least 30%, said Heaton, testifying on behalf of the Indiana Hospital Association.

“Adding another layer of state review is inconsistent with the federal process and injects a level of political scrutiny that is not present in the review process today and isn’t necessary when you have a recently strengthened federal review process,” Heaton said.

‘Behind the ball’

But others point out that the FTC typically concentrates on deals worth $100 million or more. They say the state needs to get a better handle on who is doing deals. Some say Indiana has already gone through several waves of health care consolidation and wonder if the state should have acted sooner.

“We are kind of behind the ball when it comes to consolidation,” Sen. Tyler Johnson, an emergency room physician and Republican from Leo, said during the bill’s committee hearing in January.

But the issue has picked up steam in the past few years, as business and government leaders have sounded the alarm on rising health care costs in Indiana. Last year, the Indiana General Assembly set up a Health Care Costs Oversight Task Force made up of four Republicans and two Democrats from the House and Senate.

Their task was to gather testimony from state and national experts and to forward recommendations to the Legislature.

Testimony showed that Indiana has a “serious lack of competition throughout its health care space, which may develop into a greater antitrust issue if not addressed,” said Garten, the task force’s chair.

He added that if similar legislation had been passed decades ago, the increased visibility on mergers and acquisitions would have had even greater impact. “Regardless, it is an appropriate protection moving forward,” he said.

The new law is the latest in a proliferation of statutes passed by states in recent years that require buyers and sellers of health care entities to report the deals for the purpose of monitoring them for health care access, quality, cost and potential antitrust concerns.

More than 20 states have similar laws, including California, Illinois, Minnesota and New York. But Indiana’s law has a much broader reach than other states’, because it also applies to stock purchases, transfer of assets and acquisition of direct or indirect control of health care entities, according to McGuireWoods LLP, a Chicago-based law firm.

“First, this $10 million asset threshold is much lower than many other similar laws, which often incorporate size-related thresholds as well, especially considering that the law requires an entity to include any of its combined entities and holdings in its calculation of total assets,” the firm said in a note to clients in March.

“Second, the statutory definition of ‘healthcare entity’ includes not only traditionally defined healthcare entities but also expressly extends to any private equity partnership that seeks to enter into a transaction with a traditionally defined healthcare entity.”

In addition, the 90-day notice period is longer than in many other states, the law firm noted.

Other law firms told clients that the law was a significant change and would likely result in delays and increased costs for health care transactions.

“The $10 million threshold is a relatively low bar and will likely capture a significant number of health care transactions throughout the state,” Indianapolis-based Hall Render Killian Heath & Lyman PC said in a note to clients in April.

The bill had support from Indiana Attorney General Todd Rokita’s office, which said its notification is an important step to address health care consolidation.

“Health care prices in Indiana are excessive, and they’re on the rise,” Scott Barnhart, the office’s chief counsel and director of the consumer protection division, told a Senate health panel in January.

He urged the Indiana General Assembly to take legislative action “to address this continuing crisis in health care affordability in Indiana. SB 9 is that action.”

The law covers a wide swath of players in health care, including hospitals, surgery centers and physicians’ offices. It excludes drug manufacturers and medical-device makers on the rationale that they are competing in a global market, unlike many hospital systems and medical practices.

In recent years, hospital systems around Indiana have been buying hundreds of physician practices in an effort to build consolidation to compete with other providers and to get better deals with health insurers.

Private equity

Lately, private equity firms, which pool money from wealthy individuals and institutional investors, typically offer struggling medical practices a combination of immediate cash and shares of their existing business to the owners. A private equity firm usually sells the health care practice in less than a decade, usually for a profit.

Within the past 18 months, three Indiana orthopedic physician groups—Indianapolis-based Midwest Center for Joint Replacement, Muncie-based Central Indiana Orthopedics and South Bend Orthopedics—have all been acquired by OrthoAlliance, a large practice based in Cincinnati and backed by Revelstoke Capital Partners of Denver.

Private equity has come under huge criticism from experts who say the investments might not lower costs or improve quality of care, and that the new owners often shrink the workforce sharply, jeopardizing patient care.

“Private equity in health care is terrible news for Hoosiers, as it is a short-term investment strategy to make quick money,” Sachdev told IBJ. “These firms may saddle a health care facility with tons of debt, pay themselves, and then file for bankruptcy, resulting in the facility shutting down. It’s unconscionable.”

The Healthcare Private Equity Association, a trade association based in Charlottesville, Virginia, counters that it removes the bureaucracy from health care, gives hospitals and other members more flexibility, and actually raises the quality of patient care.

“Healthcare investors play a vital role and our members bring innovation to the forefront to take on the biggest challenges in healthcare,” the company’s website says.

Indiana’s notification bill sailed through the Indiana Senate by a vote of 49-0. It picked up opposition in the House of Representatives but still passed by a wide margin, 60-35.

One vocal opponent in the House was Rep. Ryan Hatfield, D-Evansville, who criticized the legislation for forcing businesses to divulge confidential information to the state.

“Businesses operating in Indiana, providing care for Hoosiers all over the state, will be required to send their private information before they even make a decision about … whether it’s a prudent business opportunity,” he said during the floor debate in January.

First step

What the law does is give the Attorney General’s Office the power to receive and review notices of potential mergers and acquisitions, and to analyze deals in writing with antitrust concerns.

The Attorney General’s Office can issue a written analysis of antitrust concerns within 45 days or issue a civil investigative demand for further information.

Yet it’s unclear how much transparency the law will provide to the public about merger activity. The law calls for the attorney general to keep all “nonpublic information” confidential and to provide any written analysis on antitrust concerns only to the person that submitted the notice.

Whether the Attorney General’s Office will release a summary of the state’s merger and acquisition activity remains to be seen. The law is silent on that point, and the Attorney General’s Office did not return a phone call and email to IBJ to discuss the point.

But some patient advocates say the Indiana General Assembly could revisit and require more transparency.

“In my opinion, this is a first step,” Matt Bell of Hoosiers for Affordable Healthcare told IBJ. “I think that when you look around the landscape, there are more than 20 states today that have put in more robust merger and acquisition review and approval statutes. In Indiana, I think our legislators said, ‘Look, we want to be incremental in the way we approach this. So we’re going to begin with notification.’”

He added: “My belief is that, as we continue to see mergers and acquisitions, particularly as private equity is more active, there’s going to be a desire potentially to go further.”•