(Bloomberg) -- Private equity investors in the health-care industry will face additional oversight in Massachusetts under a new law that Governor Maura Healey signed into law Wednesday.
The legislation will subject private equity investors, real estate investment trusts and management service organizations to financial reporting requirements under the state’s Center for Health Information and Analysis and increases the fines for non-compliance. It will also broaden the authority of the Massachusetts Health Policy Commission and allow the regulator to seek testimony from financial sponsors at its annual cost trends hearing.
“We’ve seen bad actors exploit vulnerable hospitals and communities,” Healey said Wednesday as she signed the new law. “We need to prevent that from happening again.”
The bill’s passage is a rare success story in a nationwide effort to crack down on private equity firms after a string of high-profile health-care bankruptcies.
In California, Governor Gavin Newsom vetoed legislation that would have enabled the state to block private equity deals for most health-care facilities. Efforts to bolster oversight of financial firms or outright prohibit certain health-care investments also faltered in Pennsylvania, Connecticut, Oregon, Washington and Minnesota.
Lawmakers in Massachusetts faced pressure to follow through on proposals for stricter curbs for investors amid public outrage over last year’s bankruptcy filing by Steward Health Care, which was one of the state’s largest hospital operators and had history of financial dealmaking.
While new owners were found for most of Steward’s hospitals in the state, two facilities closed. Former Steward nurses testified to horrors such as having to put dead newborns in cardboard boxes because the company had failed to pay the vendor supplying proper bereavement boxes.
After failing to reach a compromise before the end of the regular legislative session in July, Massachusetts lawmakers clinched a last-minute deal to salvage the bill on Dec. 30, leaving a short window for Healey to sign or veto the proposal.
The primary effect of the Massachusetts law will be greater transparency that could at least give lawmakers more warning when health-care facilities are facing financial challenges, said Mary Bugbee, health-care director at the Private Equity Stakeholder Project, an advocacy group.
“Companies would have to provide more information than they already do about their financials. And I think that’s a good thing,” she said.
While other states have laws that entitle regulators to review financial information ahead of a private equity transaction involving local health-care operators, the Massachusetts legislation is unique in that it expands reporting and disclosure requirements beyond a deal setting to include normal operations, said John Saran, a partner at law firm Holland & Knight.
The law stops short of granting the state the power to outright block a private equity transaction. Healey had previously expressed concern about the potential chilling effect of regulations that seek to more radically sideline investors in the health-care industry. But the legislation does effectively ban acute-care hospitals from signing new deals with real estate investment trusts to sell and lease back their primary campuses.
In 2016, Steward — then owned by private equity firm Cerberus Capital Management — announced a $1.25 billion deal with Medical Properties Trust Inc. to sell and lease back its hospital real estate, including Massachusetts facilities. Lawmakers have said that transaction saddled Steward with exorbitant rents and compounded its financial challenges.
Healey is also set to sign a separate bill aimed at lowering prescription drug prices and increasing oversight of pharmacy benefit managers, health industry middlemen who negotiate with insurers and manufacturers.
(Updates with Healey comments in third paragraph.)
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