Introduction

In North Carolina, consolidation has been an ongoing trend throughout the past year, even though the overall M&A activity has continued to decline since 2021. Unsurprisingly, this has garnered attention from the Federal Trade Commission (FTC), similar to the antitrust scrutiny of M&A activity occurring in other areas of the USA. Given the ongoing financial challenges and labour shortages for healthcare providers in the post-pandemic environment, as well as the ongoing shift towards value-based care reimbursement, it seems likely that consolidation will continue to be an attractive and potentially necessary option for healthcare providers. Parties considering M&A arrangements, however, should expect to receive critical examination both from federal and state agencies.

Increase in Large-Scale North Carolina Healthcare Consolidations

North Carolina has seen a recent uptick in healthcare M&A activity across the state, including several large-scale transactions involving in- and out-of-state entities. A number of factors are driving this activity, including provider shortages and rising costs, as well as the need for health systems to expand and diversify their patient populations as healthcare reimbursement programmes continue their shift towards value-based care.

The following are some of the more significant transactions evidencing this trend since late 2022.

• Atrium Health (based in Charlotte, North Carolina) and Advocate Aurora (an Illinois-based system) completed a merger in December 2022, forming a new system known as Advocate Health. The combined system provides care to nearly six million patients and operates facilities across six states, including 40 hospitals located in North Carolina. Advocate Health is now one of the largest non-profit health systems in the USA.
• Novant Health, a health system headquartered in Winston-Salem, North Carolina, completed an acquisition of three hospitals, 27 physician clinics and a freestanding emergency department located in South Carolina from Tenet Healthcare Corp for an aggregate purchase price of USD2.4 billion.
• In January 2024, Blue Cross Blue Shield of North Carolina (“Blue Cross NC”) announced the acquisition of all 55 in-state locations of FastMed, an urgent care provider focusing on improving access to healthcare in rural areas of the state.
• In July 2023, Eastern Carolina Emergency Physicians ‒ a North Carolina-based provider of outsourced emergency room (ER)-management services ‒ completed its merger with Emergency Care Partners (a national provider of similar services). The companies’ combined platform aims to provide ER-management services to 49 locations across eight states, treating upward of 1.2 million patients annually.

Much of the consolidation across the state in the past few years appears to be driven, in part, by the need to find solutions to increasing provider shortages. In recent years, North Carolina has experienced a decline in licensed providers and direct-care workers (certified nursing assistants, home health aides, and personal care aides), with the latter group experiencing a decline of approximately 9% between 2016 and 2021. Certain M&A activity in North Carolina has therefore been aimed at restoring and revitalising the state’s healthcare system in the face of this challenge, as follows.

• Blue Cross NC’s acquisition of FastMed is aimed at addressing provider shortages in rural areas of the state. Blue Cross NC has indicated that its short-term plans for the FastMed acquisition include getting operations back to pre-pandemic service levels.
• According to PNC Financial Services Group, Inc’s analysis, published in a Business North Carolina magazine article titled “The Continued Transformation of North Carolina’s Health Systems and Hospitals” on 1 March 2024, the pace of M&A transactions in North Carolina can be expected to continue ‒ particularly in the acute care space ‒ as providers may seek relationships with other entities in order to drive economies of scale outside acute care lines of business.

While certain transactions have been subject to scrutiny in North Carolina (as further discussed later in this article), other types of consolidation have received governmental support. By way of example, the North Carolina Department of Health and Human Services (NC DHHS) oversaw the consolidation of state-funded mental health agencies aimed at streamlining public mental health services. Currently, private entities known as Local Management Entity/Managed Care Organisations (LME-MCOs) are responsible for the management of mental health services provided to North Carolinians covered by Medicaid, as well as those without insurance. In late 2023, the NC DHHS ordered the consolidation of LME-MCOs from six to four in total. The largest impacts were seen in eastern North Carolina, where areas previously served by three LME-MCOs are now managed by only one. The NC DHHS hopes that this move will aid in streamlining mental healthcare in the state and allow for a roll-out of individually tailored plans.

Continued Expansion of Private Equity into North Carolina Healthcare

The pandemic-accelerated consumerisation of healthcare, an ageing population, and high fragmentation within many specialties of healthcare ushered in an era of record-breaking M&A deal volumes in 2020 and 2021. The first half of 2022 saw similar record-breaking numbers; however, when the US Federal Reserve Bank raised interest rates, the deal market slowed. In 2023, the M&A community continued to feel the headwinds of macroeconomic factors such as inflation, labour shortages, and rising interest rates across all industries. The result was consecutive years of declining deal volumes, and healthcare M&A was no exception. Healthcare M&A nationwide experienced a 16.2% year-on-year decline in 2023, even with some of the above-mentioned large-scale consolidation occurring in North Carolina.

Despite these headwinds, many private equity firms continue to invest heavily in the healthcare industry, closing deals at a rate that continues to outpace pre-pandemic levels. Limited data points make it challenging to provide granular detail on the number of healthcare private equity platforms, add-on sales, and tuck-in deals executed in North Carolina. One indicator of private equity activity in North Carolina, though, is the number of gastroenterology practices in the state backed by private equity firms. Nationwide, private equity firms are reported to only have a role in approximately 14% of gastroenterology practices. According to research by the Nicholas C Petris Center, however, private equity firms have investments in approximately three-quarters of the gastroenterology practices located within at least five metropolitan areas across the state of North Carolina.

In the past decade, private equity firms have become increasingly more comfortable with the regulatory overlay associated with investing in healthcare services adjacent to the core of healthcare (eg, dermatology, ophthalmology, contact research organisations, and other ancillary healthcare services). As hospitals and health systems grapple with rising costs and lower bottom-line performance, VMG Health reports that private equity firms are now investing in core healthcare business areas (eg, diagnostic imaging, ambulatory surgery, cancer treatment, and physician practices in specialties such as orthopedics, cardiology, and urgent care). A 2023 report from the Private Equity Stakeholder Project revealed that North Carolina tied with Kentucky for having the second-most private equity-owned hospital and health system facilities in the country. Texas had the most private equity-owned hospitals, with 17 facilities ‒ followed by North Carolina and Kentucky, with 12 private equity-owned facilities.

In addition to gastroenterology and hospitals, private equity activity in North Carolina has also included other sectors of healthcare. What follows is a sample listing of private equity-backed transactions that closed in 2023.

• On 10 May 2023, an investment consortium of Elliot Investment Management, Patient Square Capital, and Veritas Capital agreed to take Syneos Health private in a deal valued at USD4.46 billion (or USD7.1 billion, including debt).
• On 9 August 2023, Penuma Behavioral Health announced its strategic acquisition of Bright Parth Behavioral Health, a CARF-accredited, in-network partial hospitalisation and intensive outpatient treatment centre specifically for adolescents aged 13‒18.
• On 18 October 2023, Dallas-based Havencrest Capital Management announced the acquisition of Well Care Home Care, the home care division of North Carolina-based Well Care Health.

Although the number of private equity-backed healthcare deals dipped in 2023 for the second year in a row, according to a report by Pitchbook, private equity sponsors still reached the third-highest deal volume by deal count at 788 deals. If the US Federal Reserve Bank decreases interest rates or labour constraints ease, there could be a boost in deal-making in 2024.

Healthcare M&A and the North Carolina Legislature

During North Carolina’s 2023 legislative session, the North Carolina Senate passed a bill (SB 743) that included provisions that would give the University of North Carolina healthcare system an exemption from any state or federal antitrust scrutiny, owing to its state-owned status. The bill has not been passed in the North Carolina House of Representatives (“the House”).

The House introduced a bill in April 2023 (HB 737) that its supporters argue would preserve competition in the healthcare market by creating what has been described as a “mini-HSR” process. This bill closely aligns with the federal Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the “HSR Act”) and would provide the North Carolina Attorney General with extensive authority to review hospital transactions in the state (specifically hospitals, as well as their holding companies and subsidiaries) that involve an acquisition, merger, or change of control. Under the proposed bill, the only way for a hospital to avoid the Attorney General’s review of a transaction would be if the transaction is in the usual and regular course and the Attorney General provides a written waiver.

Unlike the federal HSR filing, this bill would require hospital entities to provide the Attorney General with a written notice of any proposed acquisition, merger, or change of control – not just those that meet a certain dollar threshold. Once the Attorney General deemed the pre-transaction notice complete, then the Attorney General would have 90 days to review the provided information and determine whether they would object to the proposed transaction or take no action. The Attorney General would have discretion to increase the review period to include an additional 60 days if necessary.

The bill would also require hospital entities involved in the transaction to provide written notice by publication in every county in which the transacting parties are located or where the transacting parties have a substantial number of patients residing. The transacting parties would also have to hold a public hearing within 30 days of providing notice to the Attorney General.

In the event that the Attorney General did not object to a proposed transaction, the acquiring entity would be subject to post-transaction monitoring by an independent healthcare access monitor for a period of no less than three years but no more than ten years. The bill’s proponents argue that this would allow the Attorney General to monitor the effect of the transaction on the accessibility, price, and quality of healthcare throughout the state of North Carolina. If, as a result of such post-transaction monitoring, the Attorney General were to determine that the transaction had anti-competitive effects on the access to, price, and quality of healthcare, then the Attorney General could seek to unwind the transaction. This bill has not been passed in the House or the Senate.

North Carolina Healthcare M&A Under Scrutiny

Hospital consolidation in North Carolina has been met with some scepticism and scrutiny, particularly by the North Carolina Attorney General, who filed a suit against HCA Healthcare in December 2023 related to HCA Healthcare’s 2019 acquisition of Mission Health (based in Asheville, North Carolina). The Attorney General’s complaint alleged that HCA Healthcare did not comply with certain requirements imposed on it in the purchase agreement covering that transaction.

The Attorney General had the authority to review the transaction in 2018 prior to its closing. Since HCA Healthcare was an out-of-state, for-profit entity, the Attorney General was concerned that HCA Healthcare’s model would lead to a reduction in critical medical services needed by patients in North Carolina. Therefore, the Attorney General required that HCA Healthcare agree in the purchase agreement to maintain a certain range of services at the acquired facilities for a period of at least ten years.

Since the transaction was consummated, the Attorney General indicates that it has received more than 500 complaints about services being provided at the acquired facilities in Asheville. The Attorney General has now sued HCA Healthcare for breaching its covenants in the purchase agreement and has asked the court for permanent injunctive relief. As of the time of this article, the court has not issued a formal ruling in the case.

Conclusion

North Carolina healthcare M&A trends are consistent with other trends occurring around the country – specifically, that healthcare providers are consolidating at a faster rate than they are fragmenting, and governments are wary of how consolidation will ultimately impact the patient. Given that there is no common ground on how to best address the concerns yet, the authors anticipate a continued trend of consolidation among healthcare providers in North Carolina during the upcoming year.