Proposed Legislation Focuses on Private Equity and REITs in Healthcare

Efforts to draw attention to and, in some instances, dissuade private equity investment in healthcare have been on the rise. For example, in late 2023, the Centers for Medicare & Medicaid Services finalized a rule increasing private equity and REIT disclosures in Medicare enrollment. These efforts could shift gears from transparency to “accountability” in the Corporate Crimes Against Health Care Act of 2024 (the “Bill”), which was introduced on June 11, 2024, by Sens. Elizabeth Warren (D-Mass.) and Ed Markey (D-Mass.). A summary of the Bill provides the following as background:

Over the last decade, private equity fund assets have more than doubled, totaling $8.2 trillion in 2023. While private equity funds have purchased companies in nearly every sector of the economy, their aggressive deal-making in the health care sector poses grave risks to patient health and raises questions about the potential abuse of taxpayer dollars, as private equity companies routinely load up portfolio companies with usurious debt, sell off valuable assets, and extract exorbitant dividends and fees—regardless of how their investments perform. Unfortunately, lax corporate accountability and transparency laws have provided cover for private equity’s parasitic practices, allowing executives to plunder hospitals, nursing homes, provider practices, and other health care entities with impunity . . . . It is past time we hold private equity firms and corporate executives accountable for driving companies . . . into bankruptcy—and empower regulators to prevent similar crises from happening in the future.

The Bill would:

• Add sections to Chapter 31 (Embezzlement and Theft) of Title 18 (Crimes and Criminal Procedure) of the U.S. Code that would penalize any “covered party” whose actions contributed to a “triggering event” that results in the death or injury of a patient or patients under the care of a “target firm” by imprisoning the individual for one to six years and imposing a civil penalty “in an amount of not more than 5 times the amount of any clawback authorized under [new] section 674.” The Bill would permit state attorneys general and the U.S. Department of Justice to claw back all compensation, including salaries, issued to private equity and portfolio company executives within a 10-year period before or after an acquired healthcare firm experiences serious, avoidable financial difficulties due to “looting.”
  • A covered party is defined within the Bill to mean:

(A) “any current or former director, officer, or control person of, or agent for, a private equity firm or target firm”; or

(B)  “any current or former shareholder or joint venture partner that participates in the conduct of the affairs of a target firm”; or

(C) “any private fund.”

• • A target firm is defined to mean “a health care corporation that is acquired in a change in control transaction.”
  • A triggering event is defined to mean:

(A) “any time at which a target firm is behind on salary payments greater than 25 percent of the total workforce of the target firm for a period of more than 90 days”;

(B) “closure of the target firm”;

(C) “if the target firm is behind on rent payments for a period of more than 90 days”;

(D) “if the target firm defaults on a loan for a period of more than 90 days”; or

(E) “the entry of an order for relief under title 11 on behalf of the target firm or the commencement of any other insolvency proceeding.”

• Amend the Social Security Act to prohibit payments from federal healthcare programs, such as Medicare and Medicaid, to entities that sell assets or use assets for a loan collateral made to a REIT, with an exemption for current arrangements. The Bill would also repeal the rule in the Tax Code that allows taxable REIT subsidiaries to exert influence on the operations of healthcare entities and remove the 20% pass through deduction for all REIT investors.
• Amend Title XI of the Social Security Act to require certain entities (including hospitals, certain physician practices, ambulatory surgical centers, independent freestanding emergency departments, behavioral health treatment facilities, hospices, home health agencies, renal dialysis facilities, and assisted living facilities) receiving federal funding to issue, among other items, reports containing information on mergers, acquisitions, changes in ownership or control, transactions to form new affiliations, changes in partnerships, joint ventures, and/or management services agreements to which such entity is a party. The entity must report the primary reason it completed the acquisition and a description of how the acquirer obtained control of the acquiree, as well as the percentage of ownership acquired. Failure to report will subject the entity to a civil penalty of “not more than $5,000,000 for each such report not provided or containing false information.”
• Require that the Health and Human Services Office of Inspector General issue a report to Congress regarding the “harms of corporatization in health care,” including an evaluation of profit-driven and revenue-maximization practices, such as overbilling or up-coding and reductions in staff.

For more information, please contact AGG Healthcare partners Hedy Rubinger or Alex Foster.

The Arnall Golden Gregory CHOW team leads all regulatory aspects of healthcare transactions for investors, operators, managers, capital partners, and developers of every size in all 50 states. The team streamlines the regulatory process so that clients close their transactions on or ahead of schedule. Whether obtaining licensure and Medicare/Medicaid approvals, structuring transactions to expedite closings, anticipating issues to minimize cash flow disruption, negotiating regulatory terms in deal documents, creatively resolving diligence issues, or advising on CHOW guidelines and compliance, the team provides extensive experience and practical solutions. To date, the CHOW team has served as primary regulatory counsel in transactions valued at more than $35 billion.