How CMS Proposal Would Change PE Deal Transparency
In this article for Law360, partner Anthony Del Rio and associates Olivia Seraphim and Jamie Feyko discuss the Centers for Medicare and Medicaid Services’ proposed new rule that would require the disclosure of additional ownership, managerial and other information regarding Medicare skilled nursing facilities and Medicaid nursing facilities and the potential impact on private equity health care transactions. The article also discusses the increasing trend among both state and federal agencies towards increased transparency with respect to transactions involving health care entities, and particularly with respect to the involvement of private equity in such transactions.
On Feb. 15, the Centers for Medicare and Medicaid Services proposed a new rule that would require the disclosure of additional ownership, managerial and other information regarding Medicare skilled nursing facilities and Medicaid nursing facilities. Similar requirements were previously proposed by CMS in 2011 but were never finalized.[1]
Now, armed with what CMS has characterized as new data regarding the standard of care that private equity-sponsored nursing facility residents receive, increased ownership and disclosure requirements are back on the table.
Private equity ownership information disclosed to CMS and state Medicaid agencies would become public as part of all new provider enrollments, reported changes of ownership and enrollment revalidations.
The proposed rule reflects the Biden administration's desire to more closely scrutinize private equity and real estate investment trust investments in nursing facilities, with the agency broadly defining "private equity company" as a publicly traded or nonpublicly traded company that collects capital investments from individuals or entities — i.e., investors — and purchases an ownership share of a provider — e.g., nursing facilities and home health agencies.
CMS is soliciting comments on this definition, specifically on whether the proposed definition should include publicly traded private equity companies.
With respect to Medicare, the proposed rule includes adding data elements to the provider enrollment form — Form CMS-855 — utilized by CMS for not only initial provider enrollment but also for changes of ownership and changes of information.
Specifically, the proposed rule calls for a confirmation of whether the provider is owned by private equity or a REIT.
The enrollment form is utilized by CMS to determine whether the provider satisfies applicable Medicare requirements and is central to the agency's efforts for preventing fraud, waste and abuse.
With respect to Medicaid, CMS intends to defer to the applicable state agency to determine how each state will collect the ownership and disclosure information required under the proposed rule, and it is accepting comments to the proposed rule until April 14.
Private Equity Under Increased Scrutiny
The proposed rule is consistent with the Biden administration's increased attention on private equity deals, especially within the health care industry.
Over the past decade, private equity firms have been investing significantly in various types of health care entities, leading to a call for increased transparency to monitor any resulting changes to the cost or quality of care.
With respect to nursing homes specifically, the proposed rule comes on the heels of the COVID-19 pandemic, during which nursing facility quality of care issues took center stage.
Indeed, in February 2022, the White House released a fact sheet titled "Protecting Seniors by Improving Safety and Quality of Care in the Nation's Nursing Homes," in which the Biden administration announced next steps and new CMS initiatives for improving the quality and safety of nursing home care.[2]
The fact sheet's proposed initiatives included improving the transparency of facility ownership and finances, as well as examining the role of private equity in nursing home care.
The proposed rule is just one of several initiatives that the administration has set in motion in furtherance of increased transparency.[3]
States are also continuing to consider legislation that increases scrutiny on private equity investments in health care, reflecting a larger, nationwide trend of targeting private equity investment in health care entities, especially nursing facilities.
For example, the Pennsylvania Department of Health recently released updated regulations regarding nursing facility ownership transparency, requiring, in part, ongoing disclosure of financial information for owners and proposed owners of facilities, and notice to facility residents of any proposed changes in ownership similar to those of the proposed rule.
At the licensure level, more and more state and regulatory agencies are necessitating the disclosure of increased ownership information in connection with any required changes of ownership. For example, the California Board of Pharmacy's change of ownership process has become increasingly burdensome with the board's increased focus on fund-level information and materials during the last year.
Additionally, an increasing number of states are either passing or considering legislation that would increase the state's authority to assess health care transactions generally.
In March, the Illinois House passed H.B. 2222, which would require a 60-day preclosing notice to the Illinois attorney general of certain proposed health care transactions and provide the state attorney general with broad powers to request information from the parties to such transactions.
In February, the governor of New York set forth a proposal that would have given the state Department of Health authority to review and approve certain private equity transactions involving health care entities, including organizations that only provide administrative services, such as management service organizations. While the proposal was not adopted within the current budget, it is likely that the New York Legislature will continue to consider the proposal for adoption later this legislative session.
The California Legislature has likewise made several recent attempts to pass legislation that would require state attorney general approval of certain health care transactions, including private equity investments, although to date such legislation has not made it out of the state Senate. California did, however, pass S.B. 184, creating the Office of Health Care Affordability, which will exercise broad authority to review health care transactions in the state.
Impact on Private Equity Health Care Transactions
Should this proposed rule be finalized in its current form, private equity funds acquiring or investing in Medicare and Medicaid-participating nursing facilities may need to explicitly disclose their investment interest to CMS and applicable state Medicaid agencies moving forward.
The proposed rule could also serve as a precursor for similar changes to the scope of the information collected by CMS and state Medicaid agencies upon enrollment and changes of ownership for other provider types.
As noted above, many states and state agencies have already started to take this approach of requiring private equity to disclose their investment interests as part of health care transactions. Accordingly, private equity funds should consider transaction structures and other solutions to mitigate the scope of filings that would require such disclosures.
Moreover, because private equity ownership and investment information will be publicly available and on file with CMS, private equity firms could face an increased risk of liability relating to compliance violations by portfolio companies as enforcement agencies seek to "pierce the corporate veil" and hold those with ultimate beneficial ownership accountable.
As a result, private equity funds should consider their preferred level of engagement with portfolio companies.
Anthony Del Rio is a partner, and Olivia Seraphim and Jamie Feyko are associates, at Kirkland & Ellis LLP.
The opinions expressed are those of the author(s) and do not necessarily reflect the views of their employer, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.
[1] "Prospective Payment System and Consolidated Billing for Skilled Nursing Facilities; Disclosures of Ownership and Additional Disclosable Parties Information" (76 FR 26364).
[2] See White House, "Fact Sheet: Protecting Seniors by Improving Safety and Quality of Care in the Nation's Nursing Homes" (February 28, 2022), https://www.whitehouse.gov/briefing-room/statements-releases/2022/02/28/fact-sheet-protecting-seniors-and-people-with-disabilities-by-improving-safety-and-quality-of-care-in-the-nations-nursing-homes/.
[3] For example, the Federal Trade Commission and Department of Justice are anticipated to release revised federal merger guidelines to regulate acquisitions by private equity firms within the coming weeks.
