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If Enacted, North Carolina House Bill 737 Will Transform the Legal Landscape for Hospital Transactions
Thursday, April 27, 2023

On April 18, 2023, Representative Caleb Rudow (D-Buncombe) introduced House Bill (HB) 737, entitled An Act Preserving Competition in Health Care by Regulating the Consolidation and Conveyance of Hospitals. If enacted, HB 737 will impose significant new requirements on mergers, acquisitions, joint operating agreements, and other transactions involving North Carolina hospitals. The legislation is proposed to be codified as new Article 11C of Chapter 131E of the General Statutes, §§ 131E-214.20 through 214.42.


North Carolina is hardly unique with respect to hospital consolidation trends. As is true nationwide, North Carolina has few remaining hospitals that are truly “independent,” i.e., not affiliated with larger hospital systems. The reasons for consolidation are multi-faceted, but shrinking margins, high fixed costs, and access to capital are often cited as reasons driving the consolidation trend. While North Carolina already has a statute (G.S. § 55A-12-02(g)) that requires prior written notice to the Attorney General in transactions involving not-for-profit hospitals, HB 737 would sweep more broadly. It would apply to any hospital transaction where a “material amount” or “substantial portion” of a hospital’s assets are sold, transferred, leased, exchanged, optioned, conveyed, or otherwise disposed of to any person or entity. HB 737 would give the Attorney General broad authority to investigate and challenge such transactions, and monitoring authority for consummated transactions. The Attorney General could also seek to unwind transactions consummated after the effective date of the law. In some ways, HB 737 is reminiscent of North Carolina’s former Certificate of Public Advantage (COPA) law, which sunset in 2015. But unlike the COPA statute, HB 737 offers no immunity from antitrust scrutiny. To the contrary, HB 737 encourages the use of antitrust principles to limit hospital mergers.

If enacted, HB 737 would take effect on December 1, 2023, and apply to activities on or after that day.

Below, we examine HB 737’s key features.

Applicability of HB 737:

First, HB 737 would apply to all hospitals, regardless of their for profit or not-for-profit status, and regardless of their ownership (privately owned or governmental ownership).

Second, HB 737 would apply whenever a hospital: (1) sells, transfers, leases, exchanges, options, or otherwise disposes of a material amount of its assets or operations; (2) undergoes a change in control; (3) enters into a binding legal obligation resulting in a change of control, responsibility, or governance of a substantial portion of a hospital’s assets; (4) enters into any other type of transaction, regardless of its exact form, that would require review under this Article; (5) enters into any transaction that the Attorney General determines merits review because the transaction, if consummated, would have a meaningful effect on competition; (6) any transaction described in items (1)-(5) above that it is entered into by a hospital entity or by any person or entity that controls, is controlled by, or is under common control with such hospital entity; and (7) all sales, transfers, conveyances, or other dispositions of a substantial portion of a hospital entity’s assets made in the course of a bankruptcy proceeding. Notably, the terms “material amount,” “meaningful effect” and “substantial portion” are not defined in the proposed law.

Third, HB 737 applies to licensed hospitals, their holding companies, and subsidiaries. An ambulatory surgical facility or imaging center owned by a group of physicians, for example, would not be subject to HB 737.

Fourth, HB 737 contains one narrow exception. HB 737 would not apply (i) if the transaction is in the usual and regular course of the hospital’s activities; and (ii) the Attorney General has granted the hospital a written waiver with respect to the transaction. But, if when requested to grant a waiver, the Attorney General instead determines that the transaction merits review under HB 737, then that decision is final and can only be overturned by a court if the decision is found to be arbitrary and capricious. This is an extremely high standard of review which favors the Attorney General.

Fifth, unlike the federal Hart-Scott-Rodino (HSR) Act, which requires premerger notification to the federal antitrust regulators only for certain large mergers, acquisitions, and joint ventures, HB 737 would apply to all hospital transactions that are subject to its purview, regardless of their size.

How to Comply with HB 737:

The law requires written notice to the Attorney General before entering into any transaction subject to review. The hospital must also certify that each member of the hospital’s board of trustees has received a copy of Article 11C in its entirety. The proposed law contemplates that the Attorney General will enact rules providing more details about the contents of the notice, and provides that the Attorney General may, in its discretion require additional information, even if not expressly required by the rules. Buyer and seller may provide a single written notice to the Attorney General.

Although to-be-enacted rules will shed further light on this subject, parties will presumably be in communication with the Attorney General’s Office long before they submit their written notice to explain the transaction and determine what information the Attorney General’s Office would like to review. This is another timing issue the parties must consider as they plan their transaction timelines.

Timing and Process:

Once the Attorney General determines that the parties have provided a complete notice of a proposed transaction, a 90-day review period begins. Various provisions of the proposed statute allow the Attorney General to extend the 90-day review period by an additional 90 days, for a total review period of 180 days. By comparison, the typical HSR review period is 30 days. At the end of the review period, the Attorney General must state in writing whether it objects to the transaction or will take no action regarding the transaction. During this review period, parties are prohibited from consummating their transaction. Thus, even if the HSR Act applies and its waiting period has expired, parties must wait a significantly longer time under HB 737 before they can close their deal. It is also possible that different outcomes could be reached on the federal and state levels. For example, the waiting period under the HSR Act could expire without any issue, but the Attorney General’s Office might decide to challenge the transaction.

What happens during the Review Period?

The Review Period will be devoted to public involvement. The parties must provide notices in newspapers of general circulation and conduct public hearings. Interestingly, unlike the CON process in which statutory public hearings for certain projects are organized by the Division of Health Service Regulation, the parties to an HB 737 transaction must conduct (and pay for) the required public hearings themselves. The proposed statute specifically contemplates “one or more public hearings.” The public hearings must occur within 30 days after the parties provide the Attorney General with notice of their transaction, regardless of whether the Attorney General has acknowledged receipt of a complete notice. This public hearing process could prove to be a significant expense depending upon the nature and extent of the public hearings involved. Further, nonprofit and public hospitals must provide a website link with their transaction documents, unless the documents are exempt from disclosure as competitive healthcare information under G.S. § 131E-97.3.

The Attorney General may also conduct its own public hearing and may recover the costs from the parties. HB 737 also allows the Attorney General to grant waivers from public hearings, though we would anticipate that waivers would be sparingly granted, since the HB 737 framework is designed to encourage transparency and public participation. Bankruptcy proceedings are specifically excluded from HB 737’s public hearing requirements but are otherwise subject to HB 737. Again, this creates an opportunity for different outcomes. A bankruptcy court might approve the sale of a bankrupt hospital to a buyer, but the Attorney General’s Office might seek to block the sale.

What information must the Attorney General consider?

HB 737 contains a lengthy list of required considerations ranging from indigent care, whether the consideration for the transaction is fair market value, whether the transaction complies with the antitrust laws, and whether the transaction is “otherwise in the public interest.” Further, the Attorney General must determine whether the hospital’s governing body exercised due diligence; whether there has been any breach of fiduciary duty; and how the proceeds from the transaction will be used. The proposed law also contains specific considerations for transactions involving non-profit or publicly owned hospitals.

The proposed law also gives the Attorney General broad authority to request any other information it reasonably deems necessary to complete its review.

Who pays?

The proposed law contemplates that the buyer will pay a filing fee of up to $50,000, plus the costs of the public hearings, plus the costs the Attorney General incurs in contracting with experts or other agencies to obtain necessary information, plus the costs of a report that the Attorney General may commission from the Department of Health and Human Services on access to or pricing of health care services. All in, the fees under HB 737 could be significantly more than the smallest HSR filing fee (the HSR minimum fee is currently $30,000). This is in addition to the parties’ fees for lawyers, consultants, and other experts whose services may be needed. HB 737 does allow the acquiring party to object to any fees, but also states that the failure to pay any fee authorized by this section constitutes sufficient grounds for the Attorney General to object to the transaction.

What happens if the Attorney General objects?

If the Attorney General objects, it has 30 days to go to superior court to seek an injunction to stop the transaction. Interestingly, and even though the Attorney General is the plaintiff with the burden of proof, the conduct of the litigation appears to be driven by whether the hospital being acquired is non-profit or for-profit. In the case of non-profit or publicly owned hospitals, the statute would impose burdens on the merging parties to establish, by clear and convincing evidence:

  • There has been no breach of fiduciary duty;

  • Any assets that were used for charitable purposes before the transaction will continue to be used for charitable purposes after the transaction is consummated; and

  • The benefits of the transaction outweigh any disadvantages attributable to a reduction in competition.

By contrast, in the case of for-profit hospitals, the burden remains with the Attorney General to establish by clear and convincing evidence that the consummation of the transaction would have “significant and deleterious” effects on cost, availability, accessibility, and quality of health care in North Carolina, and that the negative consequences outweigh any potential benefits. The statute specifically states that the court may draw upon the determinations of federal and North Carolina cases concerning unreasonable restraints of trade and upon antitrust principles, but then also directs the court to consider a series of “findings” of the General Assembly that conclude, among other things, that hospital consolidation has increased prices and reduced quality. Thus, the proposed law appears to assume that hospital mergers, at least in the for-profit arena, invariably produce negative outcomes.

It is unclear why the burden of proof and the analysis under the statute would be different, depending on the nature of the hospital being acquired. In practical terms, there are many more nonprofit hospitals in North Carolina than for-profit hospitals.

Regardless of the nature of acquired hospital, the statute would allow the court to approve the transaction, approve the transaction with modifications, or to disapprove the transaction. The statute allows for further appeals but provides no time period by which the appeal must be filed.

What happens if the Attorney General does not object?

If the Attorney General does not object to a transaction, the acquiring entity shall be subject to post-transaction monitoring by an independent health care access monitor for a period of not less than three years but not more than 10 years. The purpose of this monitoring is “to determine the measurable effect of the transaction on the accessibility, price, and quality of health care in the State.” The acquiring party must pay 100% of the post-transaction monitoring costs for the first three years; if the monitoring extends beyond year three, the acquiring entity shall pay 50% of the costs, and the Department of Justice and the Department of Health and Human Services shall split the remaining 50% of the monitoring costs.

Could there be more litigation?

The short answer is yes, there could be more litigation, even if the transaction was approved without objection by the Attorney General. If the Attorney General “deems it reasonable and necessary to do so based upon the deleterious anticompetitive effects of the transaction on access to, and the price and quality of, health care in any part of the State,” the Attorney General may institute litigation to unwind the transaction. If unwinding the transaction is “not practicable,” the statute allows the court to “otherwise alter the control or governance of assets involved in the transaction.” The proposed statute imposes a maximum time limit of ten years after the consummation of the transaction for the Attorney General to bring such an action.

Are there penalties for violating the law?

HB 737 imposes severe consequences on individuals and entities for violations. First, a transaction entered into in violation of the statute “shall be null and void.” Second, each member of the governing boards and each chief financial officer of the parties to the transaction are subject to a civil penalty of $1 million per violation. The Attorney General must institute proceedings to impose a civil penalty, and a court will decide the amount of any penalty. Third, HB 737 provides that the Department of Health and Human Services “shall not issue a new or renewal license to operate a hospital . . .on behalf of any hospital that is party to a transaction entered into in violation of the notice, public hearing, and review requirements of this Article.” Thus, both acquiring and acquired hospitals would eventually be required to close, as a license is required in order to operate a hospital in North Carolina. This part of the proposed statute is written in mandatory terms, leaving the Department with no discretion. Hospital closures pursuant to this proposed law would clearly have a devastating impact on local communities.


HB 737 represents a major shift in North Carolina health policy. The time, costs, and potential penalties are significant and are plainly intended to discourage hospital merger activity. The Nelson Mullins team will keep a close watch on HB 737 as it makes its way through the General Assembly

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