In the next several years, South Carolina’s health care industry could see increased activity from private equity investors. That projection follows a momentous change in state law that Gov. Henry McMaster signed in May, as well as the continuation of economic trends that are making it easier – relatively speaking – for private equity firms to close deals. The state is also working to increase availability of services that have been underfunded in the past, including behavioral health.

Those are just a few of the biggest developments currently shaping the health care industry in South Carolina. Every corner of the industry may ultimately be touched by the State Health Facility Licensure Act (Act No. 20), which sunsets the state’s Certificate of Need (CON) program by January 2027. Critics claim the CON program has made opening a variety of health care facilities expensive, adversarial, and slow. But the reform could have its own complications, and market forces could impact many physicians’ ability to offer new services. 

Certificate of Need reform

Organizations representing physician groups were the primary drivers of CON reform. They argued that more competition, shorter wait times for care, and lower costs could result from repealing the program. Proponents of CON countered that the program keeps costs down by preventing the opening of unnecessary facilities, and that it protects providers serving vulnerable populations.

The majority of states have some form of CON, although many states have sought to modify their programs in recent years, according to the National Conference of State Legislatures. North Carolina lawmakers, for example, passed a bill this year that will remove CON requirements for urban ambulatory (outpatient) surgical centers, psychiatric beds, and certain other services.

South Carolina’s new law goes beyond that. It immediately eliminated CON for ambulatory surgical centers, cardiovascular care services, opioid treatment programs, and all other facilities and services except for hospitals, nursing homes, and home health agencies. It also set CON to expire for hospital projects on Jan. 1, 2027. That sunset provision may have the practical effect of eliminating CON for hospitals much sooner, as they may decide it’s not worth the time, money, and effort to challenge projects that will move forward in less than four years.

The result will likely be a proliferation of health care services in South Carolina. The changes will spur investment from private equity groups in particular, as they can move quickly and have increasingly focused on health care in recent years.

Joint ventures or other business arrangements with private equity firms come with their own considerations for physicians. We have seen cases where the investors impose strict requirements on operations to cut costs and increase prices. There is potential for some of those practices to be challenged under a concept of state law prohibiting the corporate practice of medicine. Physicians should also be aware that private equity firms may require them to sign broad noncompetition agreements. We have seen one example where the physician was barred from working for a competitor anywhere in the state for five years.

Of course, physicians are no strangers to noncompete agreements: many of them already have one with their employer. Considering the vast majority of South Carolina physician contracts include noncompete agreements, the agreements will likely impact how much the health care ecosystem changes after CON reform. For that reason, there was a provision addressing non-competes in an earlier version of the CON reform bill. It was stripped from the final bill, as some viewed it as detrimental to hospitals.

Non-competes in health care will be a key area to watch in the next legislative session, as a bill is expected to be pre-filed to make them impermissible for certain providers. Combined with CON reform, that would likely result in serious changes to the health care landscape. It would also fit into a broader national trend against non-competes, as the Federal Trade Commission has proposed banning them across industries.

That said, non-competes can play an important role for hospitals given the significant, long-term investments they make in training their medical staff and providing cutting-edge equipment. Banning non-competes would be very disruptive to the health care industry. 

How CON reform may affect health care M&A

CON reform may provide at least a short-term shot in the arm for deal-making in South Carolina’s health care industry, which has been impacted by high interest rates. That has made it harder to fund mergers and acquisitions, especially in post-acute care and behavioral health. Those areas tend to operate with thinner margins than, say, outpatient surgical services, so higher interest rates have meant less wiggle room when banks or other lenders look at financing a deal. A deal that would have been made two years ago is now much more questionable.

CON reform will initially add further questions related to financing. Prior to the new law, banks could generally count on a stable revenue stream from the limited number of new facilities that made it through the CON process. The risk analysis now changes, as there is no longer an economic moat around the facility. Increased competition and high interest rates will add to uncertainty for lenders in the near term.

That combination is yet another reason private equity is likely to drive the initial investments in new services. Many private equity firms have deep enough pockets to pay cash and bypass bank financing.

Potential relief for patients needing behavioral health services

Lastly, South Carolina is taking steps to increase the availability of certain services that have been overlooked for reimbursement increases, the biggest example of which is behavioral health. Several South Carolina agencies have been innovative in working with industry partners to enhance reimbursement rates while also focusing on improving quality. Those steps – which may spur more investment – could result in relief for South Carolinians who have struggled to find behavioral health treatment.

Walt Cartin and Will Thomas are partners in Parker Poe’s Health Care Industry Team in Columbia. Walt leads the team, and Will is its former leader. They can be reached at [email protected] and [email protected].