Health care leaders intent on growing their businesses in the Pacific Northwest through mergers and acquisitions have difficult timing decisions to make. On the one hand, many larger health systems and hospitals have just now started to rebound from the financial and emotional wreckage of the COVID-19 pandemic.[1] The temptation might therefore be to maintain the status quo for a while, enjoying a rare opportunity to rest and take full breaths after years of treading water. On the other hand, legislative efforts to clamp down on private-equity backed transactions and, more generally, consolidation in the health care industry, raise the specter of choppy seas ahead. The resulting conclusion might be that, when it comes to health care mergers and acquisitions, it is now or never. This article explores some of the reasons why leaders might decide to take advantage of this brief period of calm before the impending storm.

The Regulatory Environment May Be As Good As It Is Going to Get

One of the most compelling reasons to initiate mergers and other health care transactions now is that regulatory hurdles are likely to become higher and more prevalent in the very near future. The Washington Senate recently approved a bill that, if signed into law, would give the state’s attorney general broad discretion to reject or place conditions upon mergers that are deemed potentially harmful to consumers. The bill, known as the “Keep Our Care Act,” is Washington’s response to Oregon’s Health Care Market Oversight (“HCMO”) program, which is considered one of the most aggressive merger-oversight initiatives in the country. Indeed, the HCMO just survived a challenge to its constitutionality brought by hospitals claiming it gives the Oregon Health Authority too much discretion to meddle in health care transactions.

The HCMO program and the Keep Our Care Act are not the only legislative efforts to put health care transactions under the microscope. Oregon representatives introduced HB 4130 during the 2024 legislative session to place even stricter limits on private equity investment in health care. The bill died when it failed to gain passage before the end of the session on March 7, 2024. But proponents have vowed to resurrect the fight in 2025. In the meantime, California legislators are considering AB 3129, a bill that proposes giving the state’s attorney general power to scrutinize health care acquisitions involving private equity groups and hedge funds.

Federal agencies are also jumping into the fray. On March 5, 2024, the Federal Trade Commission (“FTC”), the Antitrust Division of the U.S. Department of Justice (“DOJ”), and the U.S. Department of Health and Human Services (“HHS”) announced their intent jointly to investigate, “Corporate Greed in Healthcare.”[2] It will take the agencies some time to comb through the public comments submitted in response to their request for information. But the agencies’ findings would seem to be a foregone conclusion—especially when their stated goal is to “understand how certain health care market transactions may increase consolidation and generate profits for firms while threatening patients’ health, workers’ safety, quality of care, and affordable health care for patients and taxpayers.”[3]

The Financial Environment May be Improving

In May of 2024, the American Hospital Association published a report with the ominous title, “America’s Hospitals and Health Systems Continue to Face Escalating Operational Costs and Economic Pressures as They Care for Patients and Communities.”[4] While obviously intended to sway public and legislative opinion in favor of policies and laws supportive of hospitals, the report cites some sobering statistics, including the finding that days cash on hand for the average American health system or hospital has plummeted 28.3% since the beginning of 2022.[5] But not all financial news is so bleak.

In particular, recent reports reveal a leveling off of interest and inflation rates that peaked in late 2023.[6] They also reveal a return to profitability for health systems and hospitals having annual revenues in excess of $500 million, even as smaller providers continue to struggle.[7] The upshot may be that larger health systems and hospitals, buoyed by significant investment portfolio gains in 2023, are increasingly capable of buying at a time when smaller and more-rural hospitals are increasingly interested in selling.[8] Potential gains might be especially enticing when the acquiring entities’ targets have robust outpatient and ambulatory surgery offerings. Studies show in this regard that gains in outpatient revenues continue to outpace gains in inpatient revenues.

Antitrust Enforcement Authorities May be Reeling

The recent decision in the case of FTC v. U.S. Anesthesia Partners might provide an additional reason for health care leaders to consider their acquisition options now.[9] This case was brought by the FTC to challenge the defendants’ alleged attempts to consolidate the hospital anesthesia market in Texas. The FTC pointed out that U.S. Anesthesia Partners (“USAP”), which was created by a private equity firm called Welsh, Carson, Anderson & Crowe (the “PE Company”), has managed through targeted acquisitions to gain control of “nearly 70% of the commercially insured, hospital-only anesthesia market in Houston, a similar share in Dallas, and over 52% in Austin.”[10]

Despite this dominance, the court found that the PE Company was not necessarily guilty of antitrust violations. In particular, the court noted that the antitrust laws do not prohibit the PE Company from receiving profits from or holding stock in USAP. It also pointed out that having the ability to facilitate consolidation in the health care market is not equivalent to engaging in anticompetitive activity. On these grounds, the court granted the PE Company’s motion to dismiss the lawsuit against it.

It is unclear whether a federal court located in the Pacific Northwest would come to the same conclusions as the Texas-based federal court that decided the U.S. Anesthesia Partners case. Suffice it to say, the decision represents a win in private equity investors’ battle to remain relevant in the health care marketplace. It may also represent a turning point in the war because it undermines the FTC’s efforts to challenge so called “roll-up” strategies, which involve the consummation of multiple small acquisitions in lieu of one larger acquisition that would trigger reporting and scrutiny under the Hart-Scott-Rodino Act.[11] This law requires parties to report to the FTC before proceeding with a transaction having a value of $119.5 million or more.

Conclusion

There is no magic, crystal ball that predicts the best times to engage in health care merger activity. However, the improvements in the economic picture, combined with the possibility of more onerous regulatory requirements just around the corner, may make these next few months as good a time as any to pull the trigger. And the arguments for acting soon may even grow stronger when one considers another source of uncertainty—the upcoming U.S. presidential election.

[1] See, e.g., Christian Wihtol, “Oregon hospital revenues rebound, but costs also surge,” OPB (Mar. 23, 2023), accessed on June 5, 2024, at https://www.opb.org/article/2024/03/23/oregon-hospital-revenuesrebound-costs-surge/#:~:text=Collectively%2C%20the%2061%20hospitals%20as,Report%20by%20the%20hospital%20association.

[2]  FTC, “Federal Trade Commission, the Department of Justice and the Department of Health and Human Services Launch Cross-Government Inquiry on Impact of Corporate Greed in Health Care,” FTC Website, accessed on June 5, 2024, at https://www.ftc.gov/news-events/news/press-releases/2024/03/federal-trade-commission-department-justice-department-health-human-services-launch-cross-government.

[3]  Id.

[4]  American Hospital Association, “America’s Hospitals and Health Systems Continue to Face Escalating Operational Costs and Economic Pressures as They Care for Patients and Communities,” AHA, accessed on June 5, 2024, at https://www.aha.org/costsofcaring.

[5]  Id.

[6]  See, e.g., Federal Reserve Bank of St. Louis, “30-Year Fixed Rate Mortgage Average in the United States,” accessed on June 5, 2024, at https://fred.stlouisfed.org/series/MORTGAGE30US.

[7]  Alan Condon, “Hospitals With Revenues Under $500M Likely to Struggle This Year,” Becker’s Hospital Review (Jan. 8, 2024), accessed on June 5, 2024, at https://www.beckershospitalreview.com/finance/hospitals-with-revenues-under-500m-likely-to-struggle-this-year.html.

[8]  See OPB, supra n. 1.

[9]  Federal Trade Commission v. U.S. Anesthesia Partners, Inc., et al., 4:23-CV003560, Doc. 146 (S.D. Tex. 2024), accessed on June 5, 2024, at https://www.hklaw.com/-/media/files/insights/publications/2024/05/20240513usapmemorandumandorder.pdf?rev=0f26fda79a8b4a20a267a4c5567e2b44&hash=BF5C1A2B030FD75AFC82C6417C7A4850.

[10]  Id. at 4.

[11]  See DOJ and FTC, “Merger Guidelines,” (Dec. 18, 2023), accessed on June 5, 2024, at https://www.ftc.gov/system/files/ftc_gov/pdf/2023_merger_guidelines_final_12.18.2023.pdf. See also Henry Liu, “Slow the Roll-Up: Help Shine a Light on Serial Acquisitions,” FTC (May 23, 2024), accessed on June 5, 2024, at https://www.ftc.gov/enforcement/competition-matters/2024/05/slow-roll-help-shine-light-serial-acquisitions.