Healthcare Founders Face New Exit Considerations

Exiting a business, whether you are a serial entrepreneur looking to move on to the next project or a healthcare provider like a physician or therapist who has nurtured your practice for decades, can be difficult. After all, corporate transactions are complex affairs that often hang on small details. That’s to say nothing of the emotions that business owners sometimes experience when stepping away from an enterprise into which they have poured their sweat and passion.

For those in the healthcare industry, the complexities only get tougher to tackle. As one of the most heavily regulated industries, healthcare embodies a level of regulatory risk—from merely annoying to existential—that most businesses don’t have to contemplate, making succession and exit plans hard to develop and harder still to execute.

For much of the 21st century, some of the challenges associated with healthcare exit transactions were blunted by an incredibly robust market. Investment capital poured into healthcare, particularly from private equity sponsors, whose investment in healthcare increased fortyfold during the first two decades of the new century, providing ample liquidity for owners looking to exit their businesses. Similarly, whether driven by private equity platform companies or strategic buyers, industry consolidation lent momentum to dealmaking.

Much of this backdrop has changed in the post-pandemic era. The interest-rate environment shifted into a tightening cycle, and rates have remained elevated far above the pre-pandemic period, frustrating dealmakers who have relied on ultracheap leveraged loans to finance transactions. Additionally, regulatory risk in healthcare remains a concern, especially in the context of mergers and acquisitions. The U.S. government recently revised its regulatory framework for mergers , making the process more complex and likely leading to longer transaction timelines and greater time and expense in getting deals across the finish line. The cumulative impact of increased regulatory scrutiny and deteriorating financial conditions took its toll in 2023. According to Becker’s Hospital Review, no fewer than two dozen hospital and health system deals fell apart over the past 24 months, many due to threatened or actual regulatory intervention.

Smaller transactions are also attracting the attention of regulators. In March 2024, the Department of Justice, Federal Trade Commission, and the Department of Health and Human Services jointly launched “a cross-government public inquiry into private-equity and other corporations’ increasing control over health care.” The agencies have specifically called for public comment and information concerning “transactions that would not be reported to the Justice Department or FTC for antitrust review under the Hart-Scott-Rodino Antitrust Improvements Act,” presumably because the values of companies are too small. This puts smaller deals—the current HSR size-of-transaction threshold is $119.5 million—squarely in the crosshairs of this new regulatory emphasis.

State governments have joined the FTC, DOJ, and HHS in ramping up scrutiny of healthcare-industry transactions, demanding greater transparency. Notably, California’s newly created Office of Health Care Affordability (OHCA) has implemented extensive reporting requirements for qualifying material change transactions. While the reporting threshold is already quite small—$25 million—the reporting requirements are triggered for even smaller deals in certain circumstances, targeting in particular acquirers that have been active in M&A in the past (a not-so-subtle shot across the bow of private equity sponsors). In some cases, reportable deals in California go beyond change-of-control transactions and could potentially impact even conventional lending and lease transactions.

Read the rest of the article at: https://www.healthcarelawinsights.com/2024/07/healthcare-founders-face-new-exit-considerations/