Hospital mergers and acquisitions are again on the rise. According to a Health Care M&A News report1, twenty-four (24) hospital deals were announced in the third quarter of 2013, an increase of twenty percent (20%) over the number of deals in the second quarter of 2013, and an increase of thirty-three percent (33%) over deals in the third quarter of 2012. This jump in merger and acquisition activity, which includes affiliation and other consolidation transactions, has been driven by integration and bundling initiatives under the Affordable Care Act2, as well as by market and financial factors. To respond to these challenges, many hospitals are seeking partners in order to achieve synergies in operations, improve access to capital for physical improvements and expansions, and utilize the information technology and other infrastructure capabilities of multi- hospital health systems.
Both federal and state regulatory requirements, ranging from Medicare successor liability and enrollment issues to compliance with state licensure and certificate of need rules, must be taken into account in structuring hospital mergers and acquisitions. In addition to these “change of ownership” and other regulatory requirements, a number of states require the state’s Attorney General to review non-profit hospital transactions for oversight of the disposition of the non-profit hospital’s charitable assets. In Georgia, non-profit hospital acquisitions are subject to review by the Attorney General under the Georgia Hospital Acquisition Act (O.C.G.A. § 31 7 400 et seq.) (the Act).
The Act covers both non-profit to non-profit transactions and non-profit to for-profit transactions.3 The sale or lease of assets of a hospital owned or operated by a hospital authority to any non-profit or for-profit is also subject to the provisions of the Act.4 Both parties to the non-profit transaction must provide the Attorney General with “at least ninety (90) days notice of the proposed transaction prior to its consummation.”5 Within this ninety (90) day period, the Attorney General is required to conduct a public hearing in the county where the hospital is located.6
In Georgia, even where there has been no outright sale or lease of a hospital, certain non-profit hospital affiliation and change of control transactions have been found to be within the scope of the Act’s review provisions. In 2011, the Georgia Attorney General considered an affiliation transaction whereby a non-profit hospital corporation (“Hospital Corporation A”) proposed to amend its bylaws and articles of incorporation to provide that another non-profit hospital corporation (“Hospital Corporation B”) would become the sole member of Hospital Corporation A with the right to appoint a majority of the board of directors of Hospital Corporation A. In his determination letter7, the Attorney General concluded that the Act not only covered non-profit hospital sale and lease transactions, but also was applicable “[w]here a transaction will involve the transfer of control of a non-profit hospital and the restructuring exception is not satisfied.”8 In a subsequent determination letter which did not involve the Act’s “restructuring exception,”9 the Attorney General confirmed that “consideration of whether the Act applies to a particular transaction has to extend beyond the question of whether the transaction involves consideration or is specifically styled as a sale or lease,” but concluded that the Act did not apply to the substitution of a new member of a non-profit hospital corporation where the substituted, new member will be controlled by the same parent corporation that controlled the previous member of the non-profit hospital corporation. A similar determination of non-reviewability was made in a December 2013 determination letter10 where a member substitution did not result in the transfer of control of the non-profit hospital outside of a controlling parent corporate entity.
In light of the Act’s broad remedial purpose as determined by the Attorney General, any transaction which involves the “change of control” of a non-profit hospital corporation, irrespective of whether a sale or lease is involved, may be subject to the Act. Where a reorganization of the non-profit corporate entity that owns the hospital involves a change of control
of the corporate entity from one corporate body to a different corporate body, whether through member addition, member substitution or otherwise, it is likely that the review procedures of the Act are implicated. Early review of the affiliation or change of control transaction by legal counsel experienced with the provisions of the Act and with the Attorney General’s review procedures will aid in moving the transaction toward a timely and successful conclusion.