New Pre-Transaction Notification Requirements for Health Care Entities

Change of Law: Hospital Action Required

To: Rural CEOs, CFOs, Legal Counsel, and Government Affairs staff

From: Zosia Stanley, JD, MHA, Associate General Counsel | ZosiaS@wsha.org | (206) 216-2511

Subject: New Pre-Transaction Notification Requirements for Health Care Entities

Purpose

The purpose of this bulletin is to inform hospitals of new legislation requiring hospitals and providers to notify the state Attorney General’s Office (AGO) of anticipated mergers, acquisitions, and contracting affiliations that meet state law definitions.

Applicability/Scope

The requirement to submit pre-transaction notice to the AGO applies to hospitals licensed under RCW 70.41 or RCW 71.12 that engage in a merger, acquisition, or contracting affiliation with another hospital, hospital system, or provider organization. Hospitals should be aware that the new law may apply to and require reporting on some relatively small scale or routine transactions.

Recommendation

Hospitals should review this bulletin and Substitute House Bill 1607 with legal counsel to determine whether any anticipated changes involving affiliations, ownership, or control may be subject to the legislation’s pre-transaction notification requirements.

The legislation includes two notification requirements:

A requirement to provide written notice 60 days in advance of certain mergers, acquisitions, or affiliations. This requirement applies to transactions with an effective date on or after January 1, 2020, that result in a material change. This includes mergers, acquisitions, and contracting affiliations involving two or more provider organizations, hospitals licensed under chapter 70.41 or 71.12 RCW, or hospital systems.
A requirement to provide a copy of a premerger notification submitted to the federal government. This requirement was effective July 28, 2019 and applies to all providers and provider organizations, including physician-hospital organizations, provider networks, and accountable care organizations.

WSHA heavily negotiated this bill to narrow the scope and burden imposed by the reporting obligations. As enacted, the legislation remains complex and requires significant analysis to determine which transactions require pre-transaction notice. Hospitals are strongly encouraged to consult with legal counsel regarding any anticipated transactions to determine whether they may trigger a pre-transaction notice requirement.

Overview

What triggers an obligation to provide pre-transaction notice?

SHB 1607 requires the parties to certain transactions to provide written notice to the AGO sixty days prior to the transaction’s effective date. The transactions triggering the notice requirement are those that result in a “material change” with an anticipated effective date on or after January 1, 2020.

A “material change” is a merger, acquisition, or contracting affiliation between two or more hospitals, hospital systems, or provider organizations if the entities did not previously have common ownership or a contracting affiliation. (See definitions below.) There is no minimum dollar threshold that triggers the reporting requirement.

A material change also includes a proposed change between a Washington entity and an out-of-state entity if the out-of-state entity generates $10 million or more in health care services revenue from Washington patients.

The legislation defines the following key terms:

“Acquisition” means an agreement, arrangement, or activity, the consummation of which results in a person acquiring directly or indirectly the control of another person.
“Contracting affiliation” means a relationship that permits the entities to negotiate jointly or on behalf of each other with carriers or third-party administrators over rates for professional medical services. (“Professional medical services” is undefined.)
“Hospital” means a facility licensed under chapter 70.41 or 71.12 RCW.
“Hospital system” means a parent corporation of one or more hospitals and any entity affiliated with the parent through ownership or control, or a hospital and any entity affiliated with the hospital through ownership.
“Merger” means a consolidation of two or more organizations and includes joining through a common parent organization or forming a new organization.
“Provider organization” means a business entity or group of persons in the business of health care delivery or management and that represents seven or more health care providers in contracting with carriers or third-party administrators for the payment of health care services. It includes physician organizations, physician-hospital organizations, independent practice associations, provider networks, and accountable care organizations.

Who must provide notice?

Any party to the transaction that is licensed or operating in the state must submit the written notice to the AGO.

What is required to be included in a pre-transaction notice?

The pre-transaction notice must include the parties’ names and current business addresses, the locations where the parties provide health care services, a brief description of the nature and purpose of the proposed change, and the anticipated effective date. The AGO has developed an online form, available here.

Does submitting a premerger notification to the federal government trigger state reporting requirements?

Yes. Any provider or provider organization doing business in Washington that files a premerger notification with the federal government under the Hart-Scott-Rodino Act must provide a copy of the filing to the AGO. A party that provides the AGO with a copy of a Hart-Scott-Rodino filing satisfies the pre-transaction notice requirement.

What is the penalty for noncompliance?

A person who fails to comply with these requirements is subject to a civil penalty of $200 per day.

The legislation is based on the Attorney General’s existing antitrust authority under the Consumer Protection Act (CPA) and does not expand or limit that authority. There is no private right of action to enforce the provisions of the legislation. The Attorney General may request additional information from the parties under the statute governing civil investigative demands (RCW 19.86.110) but must do so within 30 days of receiving the written notice.

Is the information submitted in a pre-transaction notice publicly available?

Information may not be produced for inspection or copying and the contents may not be disclosed without the consent of the person who produced the information, with some exceptions. Information submitted to the AGO must be maintained and used in the same manner and under the same protections as information submitted under the CPA, and it is not subject to disclosure under the Public Records Act by the entity that produced the information (e.g., a public hospital district), unless ordered by a court for good cause.

What are examples of transactions that may trigger an obligation to provide pre-transaction notice?

The law requires reporting of mergers, acquisitions, and contracting affiliations. Significant ambiguity remains the types of transactions that may trigger the notice requirement, particularly those that are encompassed by the term “contracting affiliation.” For example, the legislation does not define “professional medical services,” which is key to understanding what types of contracting affiliations and provider organizations are covered by the law. Legal counsel will play a critical role in analyzing anticipated transactions to determine whether they qualify as “material changes” under the law.

What analysis can be used for what counts as a “contracting affiliation”?

The following “decision tree” may be a helpful conceptual tool to analyze potential transactions. Please note, this is only a conceptual structure and additional analysis will be needed to assess specific transactions. [Note: green=term defined in statute; red=undefined term]

Washington Entities? Are at least two of the parties either: (a) a Washington legal entity, or (b) an out-of-state legal entity that is generating $10 million or more in health care services from patients residing in Washington state? If yes, go to #2. If no, STOP, this is likely not a contracting affiliation.
Two or More Parties of Certain Type? Are the parties two or more of the following: hospital, hospital system, and/or provider organization? If yes, go to #3. If no, STOP, this is likely not a contracting affiliation.
Unrelated Parties? Are the parties unrelated (i.e., not under common ownership?) If yes, go to #4. If no (i.e., the parties are under common ownership), STOP, this is likely not a contracting affiliation.
New Arrangement? Is this a new relationship between the parties (i.e., the parties did not previously have a contracting affiliation)? If yes, go to #5. If no, STOP, this is likely not a contracting affiliation.
Negotiation of Rates? Will the relationship involve the parties jointly, or will one party on behalf of the other, negotiating rates with carriers or third-party administrators? If yes, go to #6. If no, STOP, this is likely not a contracting affiliation.
Professional Medical Services? Is the arrangement related to professional medical services? If yes, go to #7. If no, STOP, this is likely not a contracting affiliation.
Effective after 12/31/2019? Is the arrangement effective after 12/31/2019? If yes, this is likely a reportable contracting affiliation.

Background

The Legislature has shown increasing interest over the last several years in proposals related to health system transparency and disclosure of information that impacts the cost of care, in particular. Legislators have, for example, recently introduced bills to require disclosure of prescription drug costs, hospitals’ and ambulatory surgical facilities’ financial information, and the salaries of health carrier employees. The AGO has also shown a heighted interest in antitrust enforcement, including recently settling an antitrust lawsuit involving health care providers.

Legislation to require advance notice of hospital mergers and affiliations is part of this trend and was first proposed in the 2017 legislative session. WSHA strongly opposed HB 1811 during both the 2017 and 2018 sessions. The bill would have imposed onerous requirements on a wide array of hospital and provider transactions by requiring submission of a significant amount of information for a large swath of business arrangements.

This session, WSHA opposed HB 1607 as it was originally introduced. In its initial form, the bill would have required hospitals and providers to submit a significant amount of information without adequate protection from public disclosure. After negotiating with the bill’s sponsor and proponents to limit the scope of the bill, WSHA took a neutral position. Through its advocacy, WSHA was able to secure the following changes:

Removal of the requirement to provide the Attorney General with a copy of all current agreements governing and related to the proposed change;
Protection of information from public disclosure; and
Clarification that nothing in the bill expands the Attorney General’s authority or creates a private right of action.

The AGO does not anticipate proposing rules to implement SHB 1607. WSHA plans to reach out to the AGO with questions regarding implementation.

References

SHB 1607

Chapter 19.390 RCW, Health Care Market Participants

Consumer Protection Act, chapter 19.86 RCW

Washington State Attorney General Guide to Antitrust Laws