US State Law Developments Impacting Healthcare Investment Strategies: Part One

TL/DR –

U.S. states are increasingly introducing legislation to limit the influence of corporations, including private equity firms and real estate investment trusts (REITs), in medical practices. Examples of this trend include a bill introduced in North Carolina titled “An Act to Restore the Supremacy of Medical Providers’ Professional Judgment and to Prohibit the ‘Corporate Practice of Medicine’”. Other bills, such as Senate Bill 351 in California, go further by placing specific restrictions on private equity firms and hedge funds, potentially impacting their ability to invest in or contract with medical practices.

Investment Trends in the Healthcare Sector

This article serves as the first installment of a two-part series alerting investors in the healthcare sector, a sector that continues to attract significant interest from private equity firms, real estate investment trusts (“REITs”), and other investors. We examine active U.S. state law developments regarding the corporate practice of medicine doctrine. The second part will delve into the concept of mini-HSR laws.

Impact of NC SB570 on Healthcare Investment Strategies

The North Carolina Senate’s spring bill, “An Act to Restore the Supremacy of Medical Providers’ Professional Judgment and to Prohibit the ‘Corporate Practice of Medicine’”¹ (NC SB570) is part of a national legislative trend reshaping the corporate practice of medicine doctrine. If passed, NC SB570 could drastically change the way physicians outsource their non-clinical tasks and significantly shift private equity investors’ healthcare investment strategies, affecting their existing healthcare portfolio investments in the state.

Corporate Ownership in Healthcare

NC SB570 represents one of the latest state legislative measures to restrict corporate ownership or control of medical practices. This could stop practicing physicians from owning shares of the management services organizations (MSOs) that provide non-clinical services to their practices. This shift is particularly important for private equity firms and REITs looking to invest in healthcare through MSOs.

Overview of Corporate Practice Rules

Corporate Practice Rules are designed to stop corporations from practicing medicine or employing physicians to provide professional medical services.³ These rules stem from the principle that only licensed clinicians should influence patient care decisions, limiting non-physician investments in medical practices. MSOs and REITs usually circumvent these limitations by handling administrative tasks on behalf of medical practices and by acquiring real property or leasing from medical practices.

Proposed Expansion of Corporate Practice Rules

Legislation in some states seeks to expand or introduce new Corporate Practice Rules, looking at the involvement of MSOs, private equity firms, and REITs with medical practices. For instance, Senate Bill 351⁵ in California (CA SB351) places restrictions on private equity firms, hedge funds, and entities partially owned by them. These measures aim at preventing the interference with the professional judgment of physicians or dentists in healthcare decisions.⁶

Variations and Impact of Corporate Practice Rules

Despite similarities among proposed Corporate Practice Rules, there’s a variance in whether these laws would affect existing arrangements or only those formed post-enactment. A bill in Connecticut, Senate Bill 1507 (CT SB1507), would influence investments and management contracts with medical practices and even restrict REITs’ investments or contracts with medical practices.⁷ Upon enactment, state regulators could instantly impose fines or seek corrective actions for violations, potentially forcing private equity firms and REITs to divest or reform their contractual arrangements.

Changing Landscape of Healthcare Investments

The burgeoning efforts to curtail corporate influence in medical practices indicate a broader national trend that could overhaul healthcare investments. As the scope of Corporate Practice Rules widens, private investors’ ability to fund and support physicians might radically change. Hence, private equity firms and REITs should stay informed and be prepared to modify their investment strategies and manage compliance and commercial risks.

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