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New Proposed Legislation in California Increases Antitrust Scrutiny in M&A and Other Activities in the Healthcare Industry

May 19, 2020

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On May 13, 2020, California Attorney General Xavier Becerra and California Senator Bill Monning announced that Senate Bill 977 (“SB 977”), titled “Health care system consolidation: Attorney General approval and enforcement,” passed out of the California Senate’s Health Committee. SB 977, if passed by the state legislature and signed into law, will require the consent of the California Attorney General for all acquisitions and affiliations between a healthcare system and healthcare facility or provider.1 According to Attorney General Becerra, “[t]he coronavirus pandemic has shone a light on the crucial importance of our healthcare system and ensuring everyone has access to affordable, quality healthcare.”2 In support of SB 977 and its actions in the healthcare industry, the Attorney General’s Office cites to figures that demonstrate that “average prices for hospital care are 35 percent higher in Northern California, where healthcare systems are more consolidated, than in Southern California.”3

The bill would require the California Attorney General to deny an acquisition or affiliation request unless he or she determines that the acquisition or affiliation will “result in a substantial likelihood of clinical integration, a substantial likelihood of increasing the availability and access of services to an underserved population, or both.”4 In other words, the Attorney General’s determination to approve or deny a transaction under the bill will rely on two factors: (1) whether the transaction “would truly increase care coordination and/or increase access and affordability of care to an underserved population;” and (2) whether the transaction “is substantially likely to result in anticompetitive effects that outweigh any benefits.”5 This greatly expands the authority of the Attorney General under existing law, which only requires written notice and consent for transactions involving any non-profit corporation that operates or controls a health facility.6

The bill would also give the Attorney General new enforcement tools to monitor anticompetitive practices in the healthcare industry. In addition to the power to review proposed acquisitions and affiliations, the bill would prevent healthcare systems from exercising market power in a way that raises market prices, diminishes quality of care, reduces choices, increases total costs of care, and diminishes access or availability of hospital and non-hospital healthcare services. SB 977 also directs the Attorney General to establish a “Health Policy Advisory Board” to analyze healthcare markets in California and provide recommendations to the Attorney General’s Office. The Attorney General would be able to use existing law to bring civil actions and seek penalties calculated as either $1,000,000 or “twice the gross gain to the health care system or gross loss to any other party multiplied by 2, whichever is greater,” and require monetary relief for the state in the form of treble damages.

California is not alone in considering steps to increase merger scrutiny and enforcement during the COVID-19 pandemic. Colorado’s legislature repealed portions of the Colorado Antitrust Act in March 2020, which originally prevented the Colorado Attorney General from initiating state law antitrust challenges when federal antitrust agencies reviewed acquisitions without challenging them.7 And some federal legislators have called for bans on certain merger activity during the COVID-19 pandemic and its aftermath. Representative David Cicilline has advocated for a ban on merger deals not directly related to companies about to fail.8 Senator Elizabeth Warren and Representative Alexandria Ocasio-Cortez announced their intent to introduce legislation, titled the Pandemic Anti-Monopoly Act, to put a moratorium on mergers involving large companies.9 Senator Warren and Representative Cicilline also urged the Federal Reserve and Treasury Department to prohibit large corporations receiving CARES Act funds from engaging in “potentially harmful mergers and acquisitions.”10

Makan Delrahim, the Department of Justice’s Assistant Attorney General for Antitrust, has commented that mergers during the pandemic can be “procompetitive” or even “very necessary during this time to make sure that companies have the liquidity to continue on and keep workers employed.”11 He has invoked the flexibility of antitrust laws to deal with exigent circumstances, citing a settlement that allowed the Dairy Farmers of America to buy milk-related assets of Dean Foods out of bankruptcy, given the “current challenges for . . . demand of milk with the schools closing and restaurants closing,” while reiterating the strict standards that must be met to have a merger approved because the acquired firm is failing. Specifically, he explained, the purchasers must show that (1) “the company would have . . . to be unable to meet its financial obligations in the near future;” (2) “they can’t reorganize and shed off the debt through a bankruptcy proceeding;” and (3) “there actually has to be some kind of a good faith effort that’s been unsuccessful to sell the business or the division or the assets to a less anticompetitive or less competitively restrictive buyer.” At least one Commissioner of the Federal Trade Commission has also cautioned against shuttering merger activity, including transactions involving healthcare and hospitals, because it “prevents the market from working.”12

As healthcare systems and providers strive to cope with a new pattern of healthcare in the face of COVID-19 and consider collaborative actions and consolidations to provide better quality and more affordable healthcare in a financially viable manner, they should be aware of increased scrutiny and potential antitrust implications of their business proposals.

Given the pending legislative proposals and calls for increased antitrust enforcement activity, healthcare systems, facilities, and providers considering affiliations and acquisitions should stay informed of state and federal developments that may potentially impose restrictions on mergers and acquisitions in the healthcare industry. O’Melveny’s antitrust, healthcare, and state attorney general litigation & investigations practices are monitoring the evolving situation closely and are available to answer your questions.

1 See http://leginfo.legislature.ca.gov/faces/billCompareClient.xhtml?bill_id=201920200SB977&showamends=false; Although the term “acquisition” is defined to include “the direct or indict purchase . . . by a health care system, private equity group, or hedge fund,” the review and consent requirement apparently only applies to transactions between a “health care system and a health care facility or provider.”

2 https://oag.ca.gov/news/press-releases/attorney-general-becerra-and-senator-monning-announce-legislation-reduce

3 https://oag.ca.gov/news/press-releases/attorney-general-becerra-and-senator-monning-announce-legislation-reduce

4 http://leginfo.legislature.ca.gov/faces/billCompareClient.xhtml?bill_id=201920200SB977&showamends=false

5 https://oag.ca.gov/news/press-releases/attorney-general-becerra-and-senator-monning-announce-legislation-reduce

6 Cal. Corp. Code §§ 5914, 5920.

7 http://leg.colorado.gov/bills/sb20-064; https://www.law360.com/articles/1256517/colorado-lets-ag-bring-state-law-merger-challenges

8 https://cicilline.house.gov/sites/cicilline.house.gov/files/documents/05132020%20Federal%20Reserve.pdf

9 https://www.warren.senate.gov/imo/media/doc/Merger%20Moratorium%20One%20Pager.pdf

10 https://cicilline.house.gov/sites/cicilline.house.gov/files/documents/05132020%20Federal%20Reserve.pdf

11 https://www.cnbc.com/video/2020/05/13/doj-antitrust-chief-mergers-coronavirus-pandemic-squawk-box.html

12 https://www.cnbc.com/video/2020/04/28/ftc-commissioner-noah-phillips-on-proposed-ma-ban.html

This memorandum is a summary for general information and discussion only and may be considered an advertisement for certain purposes. It is not a full analysis of the matters presented, may not be relied upon as legal advice, and does not purport to represent the views of our clients or the Firm. Ben Bradshaw, an O'Melveny partner licensed to practice law in California and the District of Columbia, Riccardo Celli, an O'Melveny partner licensed to practice law in the Capital Region of Brussels, the Law Society England & Wales, and Roma, Courtney Dyer, an O'Melveny partner licensed to practice law in the District of Columbia and New York, Andrew Frackman, an O'Melveny partner licensed to practice law in New Jersey and New York, Philip Monaghan, an O'Melveny partner licensed to practice law in the Capital Region of Brussels, Hong Kong, the Law Society England & Wales, and the Law Society Ireland, Bo Pearl, an O'Melveny partner licensed to practice law in California, Anna Pletcher, an O'Melveny partner licensed to practice law in California, Katrina Robson, an O'Melveny partner licensed to practice law in California and the District of Columbia, Ian Simmons, an O'Melveny partner licensed to practice law in the District of Columbia and Pennsylvania, Michael Tubach, an O'Melveny partner licensed to practice law in California and the District of Columbia, Courtney C. Byrd, an O'Melveny counsel licensed to practice law in the District of Columbia and Maryland, Zhao Liu, an O'Melveny counsel licensed to practice law in California and the District of Columbia, Stephen McIntyre, an O'Melveny counsel licensed to practice law in California, Sergei Zaslavsky, an O'Melveny counsel licensed to practice law in the District of Columbia and Maryland, Kimberly Cullen, an O'Melveny associate licensed to practice law in the District of Columbia and Pennsylvania, and Trisha Parikh, an O'Melveny associate licensed to practice law in California, contributed to the content of this newsletter. The views expressed in this newsletter are the views of the authors except as otherwise noted.

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