At both the federal and state levels, scrutiny of private equity investments in the healthcare sector is intensifying, likely leading to more scrutiny from insurers during renewal discussions. Private equity firms should be prepared to answer underwriters’ questions and should work with their insurance brokers to understand how coverage could apply to organizations and individuals.
More onerous rules for private equity
In October 2024, The Federal Trade Commission (FTC) approved new premerger notification rules (opens a new window) under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, which amended the Clayton Antitrust Act of 1914. The approved rule, the FTC said, “requires additional information that is necessary to determine which deals require an in-depth antitrust investigation” by the FTC and Department of Justice (DOJ). Among other things, the new rules require prospective acquiring firms to provide:
Their rationale for any acquisition.
Details about their competitive overlaps, supply relationships, and ownership structures.
Information about minority shareholders, partners, and other related parties.
Meanwhile, on January 8, Massachusetts Governor Maura Healey signed into law H.5159 (opens a new window), which the state legislature passed in late December. The new bill, which will take effect in early April, gives the state’s Health Policy Commission additional authority over significant investors in Massachusetts healthcare entities, including private equity companies and real estate investment trusts. The law also empowers Massachusetts’ Center for Health Information and Analysis (CHIA) to request more detailed information about these investors’ operations, including audited financial statements of out-of-state operations, significant equity investors, and major investments.
Legislation passed in California that would have required approval by the state attorney general for any private equity transactions in healthcare was vetoed by Governor Gavin Newsom (opens a new window) in September 2024, but a similar bill was reintroduced in the Senate in February. Other proposals restricting private equity investment in healthcare and/or requiring private equity firms to provide more information ahead of prospective mergers are under consideration in Connecticut, Indiana, and New Mexico.
A new environment
Healthcare organizations are tasked with ensuring patient safety and providing access to care, and the vast majority of healthcare providers in the U.S. are nonprofit or government-operated. For example, of the 6,093 hospitals across the U.S., just 1,214 (19.9%) are for-profit (opens a new window), according to the American Hospital Association.
Private equity’s growing interest in healthcare highlights a fundamental challenge and concern for some — that their business models and objectives, which prioritize profitability and returns for investors, are fundamentally different from those of many traditional healthcare organizations. These competing objectives and the potential for antitrust risks arising out of consolidation are two reasons why private equity firms now face greater scrutiny from regulators.
President Trump and his administration intend to reduce regulatory restrictions for businesses, including facilitating a more deal-friendly environment for private equity firms and others than existed under President Biden. However, the FTC’s new Hart-Scott-Rodino M&A guidelines introduced under the Biden administration were approved in a unanimous, bipartisan vote, and thus may survive the transition to the Trump administration.
Greater scrutiny by the FTC, DOJ, and regulators in states that enact similar legislation or rules will put significant pressure on both private equity firms and healthcare organizations. Smaller deals will now be subject to prereview by regulators. (Notably, however, the FTC announced in January that the size-of-transaction threshold for reporting proposed merger acquisitions under section 7A of the Clayton Act will rise in 2025 from $119.5 million to $126.4 million (opens a new window)).
Among the tools at regulators’ disposal is litigation to challenge deals they believe are not in the public interest.
Managing risk
Intensifying regulatory scrutiny will likely have some implications for insurance and risk management in the healthcare sector. This includes a similar increase in scrutiny by underwriters during upcoming renewals for directors and officers liability (D&O) and other forms of coverage. Underwriters are likely to ask healthcare organizations more questions if private equity firms have invested in or are seeking to invest in them, including about:
Their compliance procedures.
Their ownership structure and board structure.
Any plans to improve their financials — for example, through layoffs or the closure of specific units or facilities.
Their debt levels.
Any growth plans they have and how they would be funded.
Whether any private equity firms seeking to purchase them have prior healthcare industry experience.
The new regulatory environment is likely to have its most significant impacts on smaller healthcare organizations — those with under $100 million in annual revenues and/or fewer than 500 employees — which are often being targeted by private equity for acquisitions. These organizations generally have fewer legal and compliance resources with which to push back against greater regulatory scrutiny.
Although regulatory coverage is an important component in standard D&O policies purchased by healthcare entities, insurers may seek to introduce blanket exclusions for private equity-related risks for smaller buyers. This could force these organizations to seek such coverage through London and elsewhere.
To mitigate potential risk in this new environment, healthcare risk professionals should first determine whether their organizations are up for sale or potential takeover targets. This is crucial to understanding the potential implications of new rules and regulations.
Risk professionals should also work with their brokers to review existing D&O policies, with special attention to coverage provisions around regulation and antitrust matters. Risk professionals and key stakeholders, including board members and C-suite executives, should be familiar with how coverage works for both the organization and for them as individuals.
Advice and guidance from insurance brokers is crucial during this process. Organizations should look for brokers that specialize in healthcare coverage and claims and can help risk professionals engage boards and C-suite executives about potential coverage concerns.
For more on this topic, visit our healthcare landing page here (opens a new window)or contact a member of your Lockton team.
