States' fight to clamp down on private equity deals in healthcare isn't over, despite recent setbacks.
Proposed legislation in states including California, Connecticut and Minnesota fell flat last year, raising questions about future oversight efforts affecting private equity transactions. However, the new year brought renewed support for state legislation ranging from stricter reporting requirements to stipulations on certain operational models.
Related: How state laws, regulations could shape hospital deals in 2025
The support for this type of legislation isn’t likely to go away and may even gain momentum in 2025, said Jordan Grushkin, a partner at law firm Sheppard Mullin. Concerns about rising healthcare costs are more prominent than ever, and legislators across the aisle are joining efforts that scrutinize how private equity investment can contribute to those costs.
But private equity investors and their representatives argue the new legislation could negatively impact deal-making in some states, as well as add financial burden and administrative costs. Some physicians say the broad-based changes could do more harm than good by limiting their options for navigating a high-cost environment with low reimbursement rates.
States renew oversight efforts
Several states have already passed or proposed legislation this year that would limit private equity investment in healthcare.
For example, New Mexico legislators on Jan. 21 introduced Senate Bill 14, which would establish notice and approval requirements for transactions involving hospitals and other healthcare entities, depending on a revenue threshold.
Earlier in January, Massachusetts Gov. Maura Healey (D) signed a bill into law that sets up new reporting requirements for private equity investors, real estate investment trusts and other entities, in addition to broadening the definition of a material change and expanding oversight by the state’s Health Policy Commission.
Massachusetts is towing a strict line on private equity after Steward Health Care’s spiral into bankruptcy left several of the Bay State’s hospitals in turmoil.
"There are just greater risks with the private equity model that relies on more debt than you see with the usual problems that show up in for-profit healthcare," said Mary Bugbee, healthcare director at advocacy group Private Equity Stakeholder Project. "Having greater transparency can help regulators and state agencies prepare to address issues that might come up."
Some states are also looking to regulate investors’ operating models, including professional corporations and management services organizations, which are non-medical entities that handle administrative tasks for practices.
State legislators in Washington on Jan. 21 introduced Senate Bill 5387, which would prohibit unlicensed entities from practicing medicine, owning practices and employing healthcare providers. Licensed providers would also have to be the majority stakeholders if a professional corporation is used to establish a medical practice.
Legislators in Oregon introduced Senate Bill 951 on Jan. 28. The bill, similar to House Bill 4130 in 2024, would generally prohibit an MSO from owning, serving as a director or otherwise directing management of a practice.
Oregon Sen. Deb Patterson (D) said the legislation does not prohibit MSOs but rather ensures the organizations don’t hold a controlling interest in medical practices. She said there have been multiple instances in Oregon when for-profit entities were allowed to make care decisions and ultimately limited access.
“It would just require that healthcare decisions would be made by the healthcare providers, not corporate headquarters,” Patterson said. “Healthcare dollars should be spent on caring for patients, not on boosting investor profits.”
Lawmakers in states such as Connecticut, Indiana, New York and Vermont are also proposing new or expanded oversight this year.
The increased activity could add momentum to oversight efforts.
“States look to other states for examples of how to regulate, whether it’s directly targeting private equity or having a broad-based review process for certain types of stakeholders or provider types,” Sheppard Mullin's Grushkin said.
Sen. Ed Markey (D-Mass.) doesn't think states' efforts go far enough. He and Rep. Pramila Jayapal (D-Wash.) sponsored a bill in 2024 that would require more transparency from private equity firms and for-profit companies that own healthcare operations.
“We need a national law. We have to make sure that private equity has rules built around it,” Markey said. “Otherwise, we're going to see a repetition of what we saw with Steward, which is a looting of emergency rooms and ICUs to get the revenues to enrich already-rich CEOs and investors.”
States' interest worries private equity investors
Industry observers say private equity investors aren’t happy about the legislation, though many companies are staying mum.
More than a dozen private equity companies did not respond to requests for comment or declined to comment.
Still, attorneys say their private equity clients have expressed concerns about the administrative burdens associated with stricter reporting requirements across various states, including time, money and other resources needed to be in compliance.
“It’s something that was much less of an issue five years ago,” Grushkin said. “You need to do a little bit of a cost-benefit analysis. Minimally, a private equity company should know, ‘OK, if I’m going to attempt this deal, what are the risks?’”
Proposed reporting requirements could involve sensitive details that aren’t typically disclosed by private operations, said Angela Humphreys, chair of the healthcare practice group at law firm Bass, Berry & Sims.
She estimated complying with the reporting requirements in some states could add tens of thousands of dollars to a transaction cost — and potentially balloon to hundreds of thousands of dollars if multiple states are involved. The additional costs could make companies less willing to invest in certain states, though Humphreys said she has yet to see a company walk away from a deal for that reason.
Reporting requirements also create burdens on the seller side, said Robert Aprill, a partner at advisory firm Physician Growth Partners. He said implementing guardrails may make sense for large healthcare companies or systems, but for lower- to middle-market physician-owned practices, they create unnecessary hurdles.
“Anything [from the government] that controls a physician’s ability to make decisions for what’s best for their practice and their patients, … I think, presents challenges,” Aprill said.
Even relatively basic regulatory actions, such as creating an oversight board, can negatively affect physician practices because it sets up the infrastructure for more restrictions to come, he said.
Restricting management service organizations could have a devastating impact on the private physician practices that rely on the model and assistance from private equity investors to stay independent, said Dr. Paul Berggreen, board chair and president of the American Independent Medical Practice Association, which represents physicians, including those working with private equity investors. An MSO agreement with a physician practice is different from a large private equity firm buying up hospital operations. MSOs aren’t typically involved in clinical decisions at a practice, he said.
“We look at private equity as one of any number of vehicles that private practices have available to them to remain independent,” Berggreen said. “I look at the movement around certain states saying, ‘Private equity equals bad,’ and I [think], ‘Are you guys not understanding what’s happening to the profession?’”
PESP's Bugbee disagrees. She said arguments that additional oversight could hurt dealmaking is fear-mongering and an attempt to keep legislators from taking action.
"Healthcare is one of the most highly regulated industries in the United States, and investors who invest in healthcare recognize that," Bugbee said. "It's important for states to know about what's going on in the finances of these companies, especially if there are issues that are building for years that are going to impact the greater health system."
Reporter Michael McAuliff contributed to this report.
