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In response to the number of COVID-19 related deaths in New Jersey long-term care facilities, the State engaged a consulting firm to conduct a review and recommend changes. The consultant’s report1 noted that, “[n]ationally and in New Jersey, the ownership of facilities has become heavily for-profit and is frequently changing hands. A facility may change ownership multiple times in a single week.” The report specifically provided: “For-profit facilities have opaque financials and can use complex ownership and management structures to obscure the entities responsible for delivering care, curtailing the ability of the state and residents to hold them accountable. Rigorous change of ownership (CHOW) requirements are critical for ensuring accountability and promoting quality and stability of the workforce.”
The consultant found that current New Jersey Department of Health (DOH) processes fall short because: (1) DOH currently collects information from anyone with a 10% direct or indirect ownership interest, while many states require the disclosure of anyone with a 5% (or less) interest, (2) CHOWs are not public, and DOH has not historically disapproved a CHOW, and (3) facilities that change ownership are not subject to any additional oversight or reporting following the change.
In response to the report’s findings, the New Jersey legislature introduced Senate Bill No. 2789/Assembly Bill 4477, as amended, requiring, in part, more transparency with sales of nursing homes. The Bill significantly increases the disclosure requirements for those seeking to operate nursing homes. It also gives the State greater power to screen potential buyers, audit and review operations, and monitor spending. In addition, DOH would be required to provide pre-change approval of any delegation of management to a third- party management company and any sale or transfer of ownership of the land or other real property on which a nursing home is located. Changes of both management company and real estate ownership would require extensive application submissions and require disclosure of upper-tier ownership. The Bill passed through the State Senate and needs to be signed by Governor Phil Murphy to become law.
Among other provisions in the Bill, in the case of an application to transfer controlling interest in a nursing home to an individual or entity that has never previously owned or operated a licensed health care facility in New Jersey, or for any application to transfer controlling interest in a nursing home that is submitted within six months after a prior application for transfer of controlling interest in the nursing home was approved, the applicant must:
- submit a projection of profits and losses for the next three years and a capital budget projection for the next three years;
- disclose any licensed health care facilities owned, operated, or managed by the proposed owners and principals in the United States in the preceding three years, along with owner-certified financial statements for each such facility for the last three years and disclosures by the applicant as to any enforcement actions;
- hold a public hearing on the application no earlier than 30 days after the date the application is received by DOH. The nursing home shall invite the Attorney General and the Commissioner of Health, or their designated representatives, to attend the hearing; and
- submit to a criminal history record background check of each proposed owner and principal.
Applicants who have owned or operated a licensed health care facility in New Jersey are not required to hold a public hearing or submit to a background check. A copy of each transfer of ownership application, or a summary of the application prepared by the applicant that includes the names of the proposed owners, principals, and interested parties, will be published on DOH’s website and subject to public comment. DOH will complete the review of applications within 120 days.
In summary, New Jersey nursing facilities should expect greater scrutiny from the State, at least in the short term, even if the Bill is not signed into law. Additionally, if the Bill is signed into law, parties to a nursing facility CHOW expecting to use a “bridge” or “interim” arrangement whereby the real estate owner and management company change, while the CHOW is processed, will need to go through a much more rigorous regulatory process to utilize the structure. Depending on the processing time of the State, it could take close to or the same amount of time for DOH to process and approve an interim structure as it would to process the actual CHOW, making interim structures a less attractive option.
The Arnall Golden Gregory Change of Ownership (CHOW) team leads all regulatory aspects of healthcare transactions for investors, operators, managers, capital partners, and developers of every size in all 50 states. The team streamlines the regulatory process so that clients close their transactions on or ahead of schedule. Whether obtaining licensure and Medicare/Medicaid approvals, structuring transactions to expedite closings, anticipating issues to minimize cash flow disruption, negotiating regulatory terms in deal documents, creatively resolving diligence issues, or advising on CHOW guidelines and compliance, the team provides extensive experience and practical solutions. To date, the CHOW team has served as primary regulatory counsel in transactions valued at more than $25 billion.
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