On May 26, 2023, Minnesota's Governor Walz approved a bill (HF 402) that requires advance notice to the attorney general and commissioner of health of certain health care transactions and prohibits anticompetitive transactions. The bill was drafted and passed in response to the proposed Sanford-Fairview hospital merger, but it affects more than just hospitals.
HF 402 Key Takeaway
The new law is complex, but the most important takeaway is probably that if a “health care entity” is considering a business arrangement that could constitute a “transaction” (as those terms are defined under the new law), then the arrangement should be carefully evaluated to see if the new law applies. If it does, the arrangement could be prohibited if it is determined to be anticompetitive and, depending on the size of the entities involved, it could require advance notice to the attorney general and/or commissioner of health. Contacting legal counsel early in the process will be important to confirm whether the state could argue the transaction is prohibited or notice is required and, if notice is required, to ensure the notice is timely provided and any delay is minimized.
Below are important definitions and a summary of the new law followed by questions and answers that Minnesota health care entities will face going forward.
Health Care Entity
“Health care entity” means a hospital or hospital system; a captive professional entity; a medical foundation; a health care provider group practice; or an entity organized or controlled by, or an entity that owns or exercises control over, any of the foregoing. Many of the terms used in defining “health care entity” are themselves separately defined, so it will be important to examine each definition to determine if a particular entity would be subject to the new law. However, unless an entity meets the definition of a health care entity or is entering into a transaction with a health care entity (including the creation of a new health care entity), it would not be subject to the law.
“Transaction” means a single action, or a series of actions within a five-year period, which occurs in part within the state of Minnesota or involves a health care entity formed or licensed in Minnesota, that constitutes:
- a merger or exchange of a health care entity with another entity;
- the sale, lease or transfer of 40 percent or more of the assets of a health care entity to another entity;
- the granting of a security interest of 40 percent or more of the property and assets of a health care entity to another entity;
- the transfer of 40 percent or more of the equity of a health care entity to another entity;
- a change in the governing body that transfers control, responsibility for or governance of the health care entity to another entity;
- the creation of a new health care entity;
- an agreement or series of agreements that results in the sharing of 40 percent or more of the health care entity’s revenues with another entity;
- a change of the members of a nonprofit entity that results in a change of 40 percent or more of the membership of the health care entity; or
- any other transfer of control of a health care entity to, or acquisition of control of a health care entity by, another entity.
Prohibited Anticompetitive Transactions
Under the new law, a health care entity is prohibited from entering into any transaction that will “substantially lessen competition” or “tend to create a monopoly or monopsony”. These phrases are not further defined. The attorney general has the power to bring an action in district court to enjoin or unwind a transaction or seek other equitable relief necessary to protect the public interest if the transaction is prohibited (i.e. it would substantially lessen competition or tend to create a monopoly/monopsony), is contrary to the public interest, or both. The law contains a non-exhaustive list of factors that will be considered in determining whether a transaction is contrary to the public interest.
Small and Large Transaction Notice Requirements
Even if a transaction is not prohibited, it will be subject to an advance notice requirement if the health care entity involved has average revenue of more than $10 million per year or the transaction will result in an entity projected to have average revenue of more than $10 million per year once the entity is operating at full capacity.
Small Transaction Notice Requirement
For transactions where the average revenue is between $10 million and $80 million, certain data must be provided to the commissioner of health including the following: the entities involved in the transaction and the terms of the transaction agreement or agreements; the leadership, ownership structures and business relationship of the entities involved in the transaction including all board members, managing partners, member managers and officers; the primary and proposed service area for each location; plans to close facilities, reduce workforce or reduce or eliminate services; and the number of full-time equivalent positions at each location before and after the transaction by job category, including administrative and contract positions. This is referred to as the “Small Transaction Notice Requirement” throughout this article.
Large Transaction Notice Requirement
For transactions where the health care entity has average revenue of at least $80 million per year, or the transaction will result in an entity projected to have average revenue of at least $80 million per year once the entity is operating at full capacity, a different notice requirement applies. This is referred to as the “Large Transaction Notice Requirement” throughout this article. Under the Large Transaction Notice Requirement, the health care entity must affirmatively disclose essentially all of the same items required under the Small Transaction Notice Requirement plus additional information, including all consideration related to the transaction, markets in which the entities expect post-merger synergies to produce a competitive advantage and the experts and consultants used to facilitate and evaluate the transactions. On top of that, the health care entity must affirmatively submit, among other things, the transaction agreement(s) and all related documents, all expert or consultant reports or valuations conducted in evaluating the transaction, copies of all filings submitted to federal regulators, and audited and unaudited financial statements as well as tax filings for the preceding five fiscal years from all entities involved in the transaction. Disclosures and submissions under the Large Transaction Notice Requirement must be made to the attorney general and commissioner of health.
Frequently Asked Questions
When do I need to provide the required notice?
If the transaction is subject to the Small Transaction Notice Requirement, the required data must be provided at least 30 days before the proposed completion date of the transaction (or within 10 business days of the date the parties first reasonably anticipate entering into the transaction if the expected completion is within less than 30 days).
If the transaction is subject to the Large Transaction Notice Requirement, all required disclosures and submissions must be made at least 60 days before the proposed completion date of the transaction. The attorney general may extend the notice period for an additional 90 days or waive all or any part of the notice period. For any transaction subject to the Large Transaction Notice Requirement, failure to provide the required notice may be an independent and sufficient ground for a court to enjoin or unwind the transaction or provide equitable relief.
Just because the attorney general does not try to enjoin or delay a transaction prior to closing does not mean the transaction has been approved. Silence is not approval, and it may be possible for the attorney general to later attempt to unwind a transaction determined to be anticompetitive.
I want to sell my dental practice. Would the sale be subject to the new law?
Probably not. Unless the dental practice is owned by or employs two or more licensed physicians, physician assistants or advance practice registered nurses, the practice would likely not meet the definition of a “health care entity” under the new law. If the dental practice is not a health care entity, the proposed sale would not be subject to the new law, unless the sale involves another health care entity or the creation of a new health care entity.
Two physician groups want to merge. Does the new law apply?
Yes, if at least one group meets the definition of a “health care entity,” however, the new law is unclear whether a physician group would always be considered a health care entity. For example, a physician practice with a single owner but multiple physician employees may not meet the definition of a “health care entity.” But, assuming at least one physician group is a health care entity, the new law would apply.
Our two-owner physician group is entering a PSA with a hospital system. This law doesn’t apply to PSAs, does it?
It will depend on the particular PSA. The primary question will likely be whether the PSA transfers “control” of the group to the hospital system. The term “control” has a nuanced definition, but the crux of the issue is whether, as a result of the PSA, the hospital system has the power to direct the management and policies of the group. If the system has that power, the transaction would likely be subject to the new law.
My medical practice is obtaining a line of credit and the bank is requiring a recorded lien against the assets of the practice. Do I need to give notice?
Probably not. The law contains a carveout for a mortgage or other secured loan for business improvement purposes provided it does not directly affect delivery of health care or governance of the health care entity. There are also carveouts for certain restructuring transactions; entities formed solely for the purpose of collaborating on clinical trials or providing graduate medical education; offers of employment contracts between a health care entity and a health care provider primarily for clinical services; and transactions involving only certain licensed entities, such as nursing homes and assisted living facilities.
Are there additional requirements for nonprofit health care entities?
Yes. Additional requirements include ensuring that the transaction does not involve or constitute a breach of charitable trust; the nonprofit will receive full value for its public benefit assets (unless an exception applies); the proceeds of the transaction will be used in a manner consistent with the public benefit for which the assets are held by the nonprofit health care entity; the value of the public benefit assets to be transferred has not been manipulated in a manner that causes or has caused the value of the assets to decrease; and there are procedures and policies in place to prohibit any officer, director or executive of the nonprofit from benefitting from the transaction. The new law gives the attorney general authority to enjoin or unwind any transaction that does not comply with the requirements applicable to nonprofits.
What is the effective date for the new law?
HF 402 states that the prohibition on anticompetitive transactions and Large Transaction Notice Requirement are effective the day following final enactment and applies to transactions completed on or after that date, while the Small Transaction Notice Requirement is effective January 1, 2024, and applies to transactions completed on or after that date. It will be important to analyze the final statutory language to confirm the effective date for each provision in the new law.
Fredrikson is closely monitoring the implementation and interpretation of these changes. Contact a member of our Health Law Group with questions on this article.