Personal Fairness Investments in Oncology: Prime 5 Issues to Know

Though non-public fairness (PE) sponsors have been lively traders within the well being care providers business for the final decade, PE-backed well being care suppliers in the present day represent solely 4% of the US well being market by income. Furthermore, development in PE funding in well being care has slowed over the previous six years. The year-over-year development price within the variety of PE-backed well being care firms has slowed from almost 25% in 2018 to lower than 1% within the first quarter of 2024.[i]

Regardless of the relative lack of depth of PE funding within the well being care sector, authorities and media consideration has grown dramatically focusing on PE sponsors and highlighting considerations over the care of sufferers, the upkeep of amenities, and the remedy of workers. Among the considerations might have benefit in some instances, whereas many are misplaced or utilized with too broad a swath. Nonetheless, non-public fairness funding shouldn’t be going away briefly time period, and up to date developments present an uptick in non-public fairness in oncology, a key subject mentioned on the September 2024 Most cancers Care Enterprise Alternate. Overshadowing the deal exercise are quite a lot of rapidly evolving authorized and regulatory developments, that traders and suppliers alike ought to take note of.

Authorities Scrutiny of PE-Backed Well being Care Suppliers Seems More likely to Proceed to Improve

The Federal Authorities and numerous state governments have set their sights on well being care non-public fairness traders. This focus has included, amongst different issues, proposed Federal laws (mentioned in our earlier weblog) requiring “transparency” into non-public fairness investments by mandating annual reporting to the Division of Well being and Human Companies, proposals to repeal conventional Federal revenue tax benefits from well being care actual property funding trusts, hearings on and demonization of personal fairness sponsors, proposals for legal penalties to be utilized to well being care executives within the occasion of deaths to sufferers and important claw backs of compensation paid to well being care non-public fairness executives below sure circumstances.

Furthermore, the Federal Commerce Fee (FTC) and United States Division of Justice (DOJ) have proven a eager curiosity in pursuing antitrust claims in opposition to suppliers whose market share has grown slowly, by way of so-called “creeping” acquisitions (i.e., transactions at sizes beneath Federal antitrust company reporting thresholds).

Lastly, sure states, together with California, Connecticut, Illinois, Indiana, Massachusetts, Minnesota, Nevada, New York, Oregon, Washington, and Pennsylvania, have thought-about, handed, or are within the technique of passing, statutes that may require traders occupied with buying or recapitalizing well being care suppliers, corresponding to hospitals, well being methods, expert nursing amenities, hospices, ambulatory surgical procedure facilities, and doctor practices, to report transactions of a sure dimension or character to state regulators to permit these regulators to find out whether or not or not such offers might be allowed to maneuver ahead. In short, this scrutiny seems widespread and is more likely to intensify, at the least within the brief time period.

The FTC’s Rule Prohibiting Covenants To not Compete was Lately Enjoined. What’s Subsequent?

On August 20, 2024, the U.S. District Courtroom for the Northern District of Texas issued a ruling enjoining the FTC’s enforcement of its rule (issued earlier in 2024, and described in our earlier weblog) banning most employment covenants to not compete.[ii] The rule, had it not been briefly restrained, would have taken impact on September 4, 2024, and would have prohibited for-profit employers from imposing non-competes it at the moment has with most of its workers, together with physicians and clinicians who present a lot of the providers to sufferers. Whereas there are particular exceptions — for instance, for sure “senior executives” — these exceptions are narrowly tailor-made and wouldn’t have utilized to rank-and-file physicians and different medical workers. The injunction has supplied momentary aid for many employers, lots of whom doubtless are respiration a sigh of aid. The Texas district court docket took the place that the rule is overly broad and that the FTC exceeded its authority below the FTC Act in writing that rule. Of notice, the injunction doesn’t imply that the rule has been deemed to violate the Structure, and the FTC has acknowledged that it doubtless will enchantment the court docket’s ruling. If it does, the struggle might be removed from over. Within the interim, covenants to not compete stay in impact, and as long as they don’t violate relevant state regulation (with some states, notably Massachusetts and Connecticut, expressly prohibiting enforcement of non-competition agreements with physicians), ought to stay enforceable.

Antitrust Issues on the Rise

The FTC and the DOJ have gotten more and more occupied with antitrust points associated to competitors and aggressive conduct amongst well being care suppliers, together with these managed and managed by non-public fairness sponsors. A number of years in the past, the FTC introduced an motion in opposition to U.S. Anesthesia Companions (USAP), a Welsh Carson and Stowe-backed firm.[iii] The FTC alleged that USAP, and Welsh Carson, had engaged in anticompetitive conduct within the Texas market. USAP is an anesthesia medical apply that grew dramatically throughout the US, and most particularly in Texas. Lately, a Federal court docket dismissed Welsh Carson from the motion, however didn’t dismiss USAP. This ruling was on the heels of a current Request for Data issued by the FTC and the DOJ relative to function of, amongst others, non-public fairness sponsors in well being care markets. The FTC and the DOJ have proven a eager curiosity in “roll up” methods that keep away from reporting below the Hart Scott Rodino Antitrust Enhancements Act however, in the end, lead to platform companies with important market energy and the power to have interaction in — what these regulators consider is — anticompetitive conduct corresponding to predatory pricing.

Enforcement of Stark Legislation Penalties on the Rise

As of April 2024, the DOJ has been exhibiting elevated deal with imposing the Doctor Self-Referral Legislation, often known as the “Stark Legislation,” by way of the False Claims Act (FCA). This contains submitting complaints and asserting settlements associated to Stark Legislation violations. In a single excessive profile and ongoing instance, in December 2023, Steward Well being Care and Steward Medical Group had been accused of violating the Stark Legislation by paying a heart specialist nearly $4.9 million in incentive compensation.[iv]

Many non-public equity-backed supplier platforms are wealthy with ancillary providers, corresponding to imaging, lab, bodily remedy, orthotics and prosthetics, and — notably in oncology — outpatient pharmaceuticals. These ancillaries are, usually, the idea of excessive margin providers, however referrals to them can implicate the Stark Legislation and the FCA. Given the brand new deal with Stark Legislation violations, non-public fairness sponsors and their supplier companies are effectively recommended to pay cautious consideration to the assorted exceptions that permit physicians to refer to those ancillaries with out violating the Stark Legislation or implicating the FCA. For instance, we consider that the Authorities is more likely to look fastidiously at valuations of compensation or different remuneration paid to physicians, the industrial reasonableness of preparations and the evaluation of doctor compensation, together with the association of ancillary providers bonus swimming pools.

Improve in PE-Backed Bankruptcies

2023 and 2024 have seen a rise in bankruptcies amongst non-public fairness backed suppliers, essentially the most notable of which has been Steward Well being Care System, which filed for chapter in early 2024 amid allegations of facility and affected person neglect, hospital closures, layoffs, confiscatory compensation of upper-level executives and administration malfeasance. Steward owns and operates 31 hospitals and employs greater than 1500 physicians throughout the US. Nearly all of Steward’s amenities are topic to leases with Medical Properties Belief (MPT), all of which had been bought by MPT over the previous a number of many years. The proceeds of the actual property gross sales had been distributed to Steward’s traders and Steward was left with costly leases which resulted in a considerable drain to Steward’s funds.

Steward has grow to be a lightning rod for Federal and state governments intent on defending the general public from sure varieties of for-profit well being care and can doubtless trigger the regulatory scrutiny mentioned above to proceed escalating. In 2023 alone there have been 79 well being care bankruptcies involving firms with greater than $10 million of indebtedness.[v] File excessive rates of interest (at the least over the past a number of many years) are cited as one of many causes of those failures. Different causes are, doubtless, the cessation of CARES Act funds, price and pricing strain from payors together with Medicare and Medicaid, nationwide and native labor shortages (coupled with rising wages) and excessive provide prices. These components have created a “good storm” that has pushed firms with weak stability sheets to hunt chapter safety from collectors. Word that the speed of filings is down over 2023, however nonetheless quantity nearly 60.[vi] Overly leveraged suppliers, these with weak money positions, in addition to these closely dependent upon reimbursement from Federal well being care packages will stay prone to monetary failure.

Takeaways

Regardless of the rising authorized and regulatory headwinds, it’s affordable to count on rising non-public equity-backed exercise in oncology, and well being care extra typically. 

Foley is monitoring this evolving authorized and enterprise panorama and has the sources that can assist you navigate these and different necessary authorized issues associated to well being care transactions, with a crew of Foley attorneys poised to help. Please attain out to the authors, your Foley relationship companion, or to our Well being Care Follow Group and Well being Care & Life Sciences Sector with any questions.

[i] See “Quantifying PE Funding in Healthcare Supplier” by Rebecca Springer, Ph.D., Pitchbook, July 8, 2024, accessible at: https://information.pitchbook.com/web site/information/pdf/Q3_2024_PitchBook_Analyst_Note_Quantifying_PE_Investment_in_Healthcare_Providers.pdf

[ii] FTC v. United States Anesthesia Companions, Inc., 2024 U.S. Dist. LEXIS 85714, 2024 WL 2137649.

[iii] Fed. Commerce Comm’n v. U.S. Anesthesia Companions, Inc., No. 4:23-CV-03560, 2024 U.S. Dist. LEXIS 85714 (S.D. Tex. Might 13, 2024).

[iv] https://oig.hhs.gov/fraud/enforcement/united-states-files-complaint-against-st-elizabeths-medical-center-steward-medical-group-and-steward-health-care-system/

[v] https://www.fiercehealthcare.com/finance/chapter-11-bankruptcies-spiked-across-healthcare-2023-particularly-hospitals

[vi] https://www.fiercehealthcare.com/finance/healthcare-bankruptcy-filings-slow-2024-gibbins-advisors-analysis-finds