Health Care Investing: Washington’s Continued Assault Reflected in “Corporate Crimes Against Healthcare Act of 2024”

On June 11, Senators Elizabeth Warren (D-Mass) and Edward Markey (D-Mass) introduced a bill titled “The Corporate Crimes Against Healthcare Act of 2024.” The proposed Act would criminalize acts of senior executives who operate health care entities that, according to a release prepared by Senator Markey’s office, are being “looted,” and that looting can be traced back to the death of a patient. In addition, the proposed Act gives the U.S. and State governments the right to claw back compensation paid to certain executives over a 10-year period prior to any event deemed to be looting. The proposed Act also focuses on real estate investment trusts (REITs) and has certain additional reporting requirements for entities undergoing change of control transactions.

The proposed Act appears to be adjunct to the Health Over Wealth Act proposed by Senator Markey in May 2024, which is the subject of our blog “Private Equity: Proposed Health Over Wealth Act – What This Means for You.”

In brief the proposed Act would:

• Make it a criminal act and apply a penalty of not less than one and not more than six years in prison, for executives to cause a so-called “triggering event” with respect to health care entities like nursing homes and hospitals, and such event results in a patient’s death.

• Claw back from any current or former director, officer, or control person of, or agent for, a private equity firm or target firm; any current or former shareholder or joint venture partner that participates in the conduct of the affairs of a target firm; or any private fund (i.e., a private equity firm) the compensation earned by and paid to the above persons and entities during the ten-year period prior to the triggering event.

• Authorize the United States Attorney General, and states attorneys general, to levy a civil penalty of up to five times (5x) the amount of compensation clawed back above;

• Prohibit payments from federal health programs (such as Medicare and Medicaid) to entities that sell assets or use assets as collateral for loans made to the entities by a REIT, with an exemption for REIT arrangements currently in place;

• Repeal (i) certain provisions in the Internal Revenue Code that allow taxable REIT subsidiaries to exert influence on the operations of health care entities; and (ii) the 20% pass-through deduction, passed in the 2017 Trump tax cuts, for all REIT investors;

• Require health care providers receiving federal funding to publicly report mergers, acquisitions, changes in ownership and control, and financial data, including debt and debt-earnings ratios; and

• Require the Office of Inspector General of the Department of Health and Human Services (HHS) to provide a report to Congress on the “harms of corporatization in health care.”

The proposed Act defines a “triggering event” (i.e., an event that triggers the criminal and civil penalties and disgorgement described above) to include:

• A “target firm” being behind on salaries and wages for 25% of its total workforce for more than 90 days;
• A closure of a target firm;
• A target firm being behind on rent payments for more than 90 days;
• A target firm being in default on a loan for more than 90 days;
• A target firm filing for bankruptcy or other insolvency proceeding.

The above events appear quite broad and there would seem to be a risk that certain types of business practices that are not necessarily abusive or troublesome, could be swept into the ambit of the Act. In addition, the Act overly simply defines a “target firm” as a “health care corporation that is acquired in a change of control transaction.” Arguably this could pick up virtually any corporation or similar entity engaged in health care.

The proposed Act would apply to:

• Any current or former director, officer, or control person of, or agent for, a private equity firm or target firm;
• Any current or former shareholder or joint venture partner that participates in the conduct of the affairs of a target firm; or
• Any private fund (i.e., a private equity firm).

The compensation that can be clawed back would include:

• Salaries;
• Bonuses;
• Equity based compensation (e.g., options, profits interests, stock grants);
• Advisory, management and monitoring fees;
• Profits from sales of assets and real estate;
• Severance pay; and
• Golden parachute payments.

As noted above, the penalties are draconian and will apply to the above broad categories of persons or firms. The penalties range from criminal penalties to, potentially, incredibly large disgorgements and civil penalties.

The proposed Act appears designed to put an end to the health care REIT industry as it would preclude from participation in Federal health care programs any individuals or entities that sell assets to or pledge assets, as collateral, to REITs. That is, if a provider engages in a transaction with a REIT, such as a sale leaseback deal, that provider will be prohibited from participating in Federal health care programs, such as Medicare and Medicaid.[1] The proposed Act also would eliminate the various income tax benefits attributable to REITs and available to their investors, such as the 20% pass through deduction.

Finally, the proposed Act would mandate that providers, such as hospitals and health systems, physician practices, including those who are controlled by private equity funds, ambulatory surgery centers, behavioral health providers, home health agencies and the like, provide certain information to the Federal government on an annual basis such as:

• Information on transactions in which the provider engaged in the prior year, such as change of control transactions;
• Names information, including provider numbers, of individual providers within the reporting provider;
• Financial information, such as debt-to-earnings ratios, the amount of debt incurred by the provider (including a breakdown of debt by hospital within a health system), fees charged and dividends paid to investors, information on capital gains income received by nonprofit hospital systems, etc.

The above information will be posted by HHS on a website to be made publicly available. Failure to report or reporting misleading information may result in civil monetary penalties of up to $5,000,000.

This proposed Act is a further attempt by Congressional advocates to get their arms around health care investing in the United States. Given the voting rules in the United States Senate and the fact that Republicans control the United States House of Representatives, the fate of this proposed Act is dubious, but it shows that proposals for government intervention in health care show little signs of slowing.

Foley is here to help you address the short- and long-term impacts in the wake of regulatory changes. We have the resources to help you navigate these and other important legal considerations related to business operations and industry-specific issues. Please reach out to the authors, your Foley relationship partner, our Health Care & Life Science Sector, or to our Health Care Practice Group with any questions.

[1] There is an exemption for providers and arrangements with REITs in place as of the effective date of any enactment of the proposed Act.