North Carolina Bill Would Increase Scrutiny of Hospital Mergers

A bill was recently introduced in the North Carolina Senate (S.B. 16) that would greatly increase the scrutiny of any proposed hospital merger in the State. If enacted into law, the bill would require express North Carolina Attorney General approval for all such transactions, and require the merging parties to conduct (and pay for) public hearings at which they would be required to demonstrate that the transaction would be beneficial to the local community. If enacted into law in its current form, the procedures for gaining regulatory approval for hospital mergers in North Carolina would differ markedly from the federal Hart-Scott-Rodino Act (HSR Act) merger review procedures, potentially having a chilling effect on hospital transactions in the State.

S.B. 16 was introduced by State Senator Julie Mayfield, who represents Buncombe County, the home of Mission Hospital in Asheville, North Carolina. The bill follows the sale of Mission to HCA in 2019, which Senator Mayfield has asserted, occurred “without public hearings” and without asking the local government for their opinion of the transaction. S.B. 16 would change all of that, and more.

If enacted, the merging parties to any hospital transaction in the State in which control is transferred would be required to provide the Attorney General with written notice of the deal 90 days prior to close. The merging parties would then be required to schedule (and pay for) a public hearing to be held in the county in which the merging parties operate, providing the local community with an opportunity to express their views on the proposed transaction. At the hearing, the merging parties would be required to provide information regarding (1) the extent to which the transaction is expected to impact the cost, availability, access and quality of health care services; and (2) the “process involved in reaching a fair sales price for the hospital entity, including whether any director, officer, agent, or employee of the hospital entity will benefit directly or indirectly from the proposed transaction.” Under the proposed legislation, the Attorney General is also permitted to conduct its own public hearing (again, at the merging parties’ expense), at which time the merging parties are required to make a similar showing. 

Ultimately, the Attorney General is required to make a decision regarding whether the transaction will be permitted to proceed, and that decision can only be overturned by the courts if it is found to be “arbitrary and capricious.” In making its decision, the Attorney General is directed to consider factors including (1) whether the transaction is expected to impact the cost, availability, access and quality of health care services; (2) whether the transaction complies with all applicable federal and state antitrust laws; and (3) whether the proposed transaction is in the public interest, including the transaction’s ultimate anticipated effect on competition in any part of the State. To aid the Attorney General in making this determination, the Attorney General is authorized to hire experts to assist in the investigation, again at the merging parties’ expense. In addition, even after a transaction is approved, the merging parties would be required to submit to “post-closing monitoring” by an independent third party, who would file quarterly reports on whether the transaction remains compliant with the law. And, in circumstances where that is not the case, the Attorney General may file an action to unwind the deal. Finally, the bill would also impose a penalty of up to $1 million on “each member of the governing board and each chief financial officer of the parties” if the merging parties fail to comply with all aspects of the merger review law.

As noted above, S.B 16 varies considerably from current HSR Act procedures for the federal review of mergers. Among the many differences, while federal law requires pre-approval only for transactions above a certain minimum dollar threshold (currently set to increase to $111 million later this month), S.B. 16 contains no minimum threshold. In addition, notice to regulators must be provided 30 days prior to close, while S.B. 16 requires 90 days notice, and while the fees to be paid under the HSR Act are set based on the size of the transaction (beginning at $30,000 for transactions valued at less than $161 million), the fees incurred by the merging parties under S.B. 16 are uncapped, with the potential to greatly exceed the fees under the HSR Act if the Attorney General engages experts to aid in its analysis. In addition, the provision in S.B. 16 that would potentially expose individual board members and each CFO of the merging parties to penalties of up to $1 million for violating the law finds no comparable equivalent under the HSR Act, and the “post-transaction monitoring” period is also unprecedented. Finally, both the standard of review for the Attorney General’s decision under S.B. 16, and the standard for judicial review of that decision, are markedly different than under the HSR Act.

For all of these reasons – and a host of other differences between S.B. 16 and the HSR Act – the enactment of S.B. 16 into law in North Carolina, at least in its current form, clearly has the potential to have an enormous impact on hospital merger activity in the State going forward. 

Williams Mullen will continue to monitor this legislation and provide updates accordingly. In the meantime, please contact Jim Burns at 703.760.5223 or jmburns@williamsmullen.com if you have questions.