Developments in spring 2024

At the request of the Ministry of Health, Welfare and Sport (VWS), EY conducted research into the impact of private equity on healthcare. The research report found no significant differences in the quality, accessibility or affordability of care between healthcare institutions funded by private equity and those that were not. You can read our blog on the EY research here.

Following the EY report, a Thirty League debate on private equity in healthcare was held in April with then-Minister Helder. In the Cabinet’s written response in early June, Minister Helder was clear: prohibiting healthcare providers from working with private equity was not legally feasible, necessary or desirable. However, the Minister agreed with Parliament on the need for stricter regulation to balance the financial interests of healthcare providers with public healthcare interests.

As a result, the Minister announced several tougher measures, including:

  • the introduction of an open standard for business integrity;
  • basic conditions for profit distribution;
  • additional grounds for the revocation or refusal of a Wtza licence.

These are the core elements of Legislative proposal on Sound Business Conduct for Care and Youth Aid Providers (Wetsvoorstel integere bedrijfsvoering zorg- en jeugdhulpaanbieders, Wibz). Other measures include:

  • the NZa's care-specific merger test (requiring amendment of the Wmg); and
  • increased transparency of care providers in terms of quality and financial management.

Developments summer 2024

On 1 July, the Advisory Division of the Council of State (the Advisory Division) published its critical response to the Wibz. The Advisory Division recommended VWS either to adjust and further substantiate various parts of the bill or abandon the proposed regulations on profit distribution and integer business operations. 

The Advisory Division highlights a lack of clear problem analysis for the legislative proposal. It remains unclear which forms of unethical behaviour are occurring, in which categories of healthcare providers, and to what extent. The explanatory memorandum does not sufficiently explain why existing regulations (Wkkgz, Wtza and the Youth Act) and self-regulation (governance codes) are inadequate to monitor and enforce unethical business practices by care and youth assistance providers.

Citing a 2022 report by the Court of Audit on the effectiveness of anti-fraud measures in public healthcare funding, the Advisory Division notes a primary issue: supervisors are not fully utilising existing instruments, neglect to investigate integrity and fraud concerns and lack  necessary enforcement measures. This problem cannot be solved by new legal standards for sound business conduct.

It therefore, in our view, raises doubts as to whether the Wibz effectively responds to the Chamber’s concerns about safeguarding funds earmarked for quality care and youth support from misuse by care providers lacking integrity.

An understanding of the positive and negative effects of profit-sharing is also necessary to assess the necessity and proportionality of the proposed regulation. Such insight is needed to determine whether broad measures affecting all care and youth services providers are warranted, or if targeted actions should apply to specific categories of care providers, and, if so, which ones. Additionally, this understanding is crucial in considering possible alternative approaches.

The Advisory Division is also concerned with the interests of investors. Without the assurance of a reasonable return on invested capital, capital providers are unlikely to make high-risk investments in healthcare providers. They want to evaluate, before investing, whether the investment will generate a return and to carefully weigh the associated risks. There should therefore be clear, long-term visibility on profit distribution possibilities.

The introduction of further conditions on profit distribution by Order in Council, rather than in the Act itself, removes this upfront clarity, leaving healthcare investors vulnerable to changes in profit-sharing terms during the investment period.

The Advisory Division, therefore, advises that if the scheme is not waived, it is important that the key conditions for profit distribution are regulated through legislation rather than by Order in Council. This aligns with the framework that legislative lawyers should follow, as outlined in Recommendation 2.19 of the Instructions for Regulations.

The Wibz creates new statutory standards for sound business conduct, supplementing the existing standards in healthcare governance codes. According to the Advisory Division, this is problematic as these statutory standards may (eventually) deviate from the healthcare governance codes. To address this, the Advisory Division advises the VWS to consider a regulatory approach. Should direct public law supervision of compliance with healthcare governance codes be necessary and justifiable, a regulation designating specific healthcare governance codes with which healthcare providers must comply would also suffice. The Advisory Division points to the Dutch corporate governance code designation (Article 2:391a, paragraph 2, introductory words and under the Civil Code) by way of illustration.

The department's advice is non-binding; however, the Minister must set out in a "further report" how this advice will be incorporated into the legislative proposal. This report will accompany the bill when it is submitted to the House of Representatives for consideration. The Minister anticipates presenting the (amended) legislative proposal to the House early next year in the first quarter, in January.

In the cabinet response of early June, former Minister Helder stated that banning healthcare providers from working with private equity financiers is neither legally feasible nor necessary or desirable.

Following this, in July, the VWS Minister received various questions and comments from several groups within the Standing Committee on Health, Welfare and Sport.

In August, the new Minister of VWS, Minister Agema, responded to these questions in a letter,  reaffirming her predecessor’s stance and reiterating several positions outlined in the cabinet’s previous response.

Following the EY study findings, the Minister has concluded that additional research or monitoring of private equity’s impact on healthcare is unnecessary. The Minister argues that a ban on private equity would:

  • complicate financing within parts of the healthcare system, potentially reducing access to care;
  • remove incentives for efficiency and innovation in healthcare, including process innovation, service innovation and product innovation;
  • lack the sound objective justification needed to be legally tenable, making such a ban highly vulnerable in legal terms.

The minister does not oppose profit distribution but aims to curb "excessive" profit distribution to ensure that high-quality, accessible care remains healthcare providers’ primary focus over financial gain.

In relation to Wibz, the Minister elaborates on and signals further tightening of regulations as previously indicated in the June cabinet response. Acknowledging criticism from the State Council's Advisory Division, she is in talks with the regulators (IGJ, NZa, ACM) to explore supervisory capabilities and identify any gaps. She is advocating for amendments to the Wmg concerning the healthcare-specific merger test.

The Minister does not consider a sector-wide prohibition on profit-sharing in healthcare desirable, citing several key concerns:

  • It removes the incentive for innovation and efficiency.
  • Such a measure would infringe on the property rights and legal certainty of healthcare providers who are currently permitted to distribute profits.
  • There is no objective justification for such an expansion, which would make the measure legally vulnerable.

A legal cap on profit distribution is out of the question, as the Minister argues this would fail to account for the fluctuations in company results over time. Previously, VWS tasked SEO to examine, among other things, the possibility of setting a standard for socially acceptable profit distribution. Based on SEO's findings, the Minister intends to impose conditions on profit distribution via the Wibz, rather than implementing a fixed cap. Such a cap, according to the Minister, could:

  • discourage incentives to reduce costs;
  • increase waiting lists;
  • discourage entrepreneurship, potentially at the expense of innovation;
  • create additional administrative burdens and implementation costs, etc.

Notably, the Minister also addresses the role of health insurers and care offices:

  • The Minister expects them to critically assess the quality and efficiency of all contracted parties; and
  • it is primarily the role of health insurers and care offices to consider the implications of (excessive) profit distributions when entering agreements with healthcare providers.

Recent developments following the summer recess

On 10 September, the House of Representatives once again voted in favour of three motions concerning private equity and profit distribution in healthcare. These motions propose:

  • a ban on private equity in healthcare;
  • further rules on profit sharing by extramural healthcare providers;
  • a ban on profit sharing by subcontractors.

In a fierce parliamentary debate on 5 September, the Minister strongly opposed the motion to ban private equity, stressing the importance of 'virtuous investors' to fund essential innovation, automation and digitalisation costs, which cannot be covered solely by public funds. To combat 'locusts and predators' in the sector, the Wibz proposes profit-sharing restrictions and a stricter healthcare-specific merger test.

The Minister was not deterred by the motion calling for further rules on profit distribution by out-of-home care providers, as she already supports additional profit-sharing conditions under the Wibz framework. The motion also calls for an early submission of the Wibz, to which the Minister has committed, aiming for a January 2025 submission.

The Minister was critical of the motion on profit-sharing by subcontractors, noting that subcontractors, such as cleaning companies working with healthcare institutions, should be able to make a profit. On the other hand, she sided with the motion’s petitioner, Bushoff (PvdA-GroenLinks), promising him official support 'in order to bring the intention of your amendment, which I fully support, into line with the Wibz'.

Loyens & Loeff perspective

The House has repeatedly called for a ban on private equity in healthcare over the past year, without success. Despite last week’s passing of another motion to this effect, we do not expect VWS to change its position in light of the EY research report (read more here) and recent comments by the Minister on the legal viability of such a ban.

The extent to which VWS introduces further profit distribution rules for extramural care providers will partly depend on the extent to which the VWS heeds the Division's criticism of the current version of the Wibz. First, a clear understanding of the positive and negative effects of profit-sharing is necessary to determine whether the broad regulation is warranted, whether it is proportionate, whether measures should affect all care and youth assistance providers, or whether they are only necessary for specific categories, such as extramural care providers. Additionally, it is important to assess whether alternatives are conceivable and, if so, what they might be. Without this insight, the need for further regulation of, for example, out-of-home care providers, is highly questionable and legally vulnerable.

The specific aim of Bushoff's motion to ban profit distribution by subcontractors, which has gained the Minister’s support, is anyone's guess. Importantly, the Wibz does not seek to change the profit-sharing framework for subcontractors, as current data does not justify a complete ban on  subcontractor profit-sharing as necessary or proportionate. Given the Advisory Division's criticisms of the Wibz (see above), further research will likely be required before implementing this motion. Proceeding without further research would present significant legal complexities, as subcontracting is widely practiced across diverse situations for many reasons. When the WTZi was introduced in 2006, the then VWS Minister confirmed that healthcare institutions were allowed to outsource work, not only for services such as cleaning, catering and security, but also, in some cases, for direct care provision through a private limited company (BV).

In practice, we frequently encounter unnecessarily complex constructions and structures that involve additional entities, agreements and cash flows. One of the causes is the arbitrary distinction between inpatient and outpatient providers regarding profit distribution. This distinction originated in 2006 when the WTZi was introduced, at a time when the government assumed the risks and costs associated with healthcare real estate. Under the so-called 'building regime', institutions were fully reimbursed by the government for their capital costs and bore no financial risk. Consequently, profit-sharing among inpatient care providers was deemed undesirable, resulting in a proportional differentiation in profit distribution possibilities.

Despite the abolition of the building regime and the transfer of property risks from the state to healthcare providers, the distinction between inpatient and outpatient care continues to be reflected in the exempted categories of institutions outlined in the WTZi implementing decree. This misalignment between law and practice raises questions, as some private healthcare companies can distribute profits, while others, formally prohibited, often do so in practice. This inconsistency calls into question the validity of the distinction between inpatient and outpatient care.

Both the IGJ and NZa signalled in 2019 that the legal structure and management of healthcare providers have become more complex. Additionally, a 2017 study conducted by EY and HVG for VWS recommended simplifying the prohibition on profit distribution to avoid unnecessarily burdensome structures, advocating for profit distribution subject to conditions without distinguishing between inpatient and outpatient care providers. In our view, this approach would enhance the financial transparency the Minister is seeking.

For a comprehensive article with detailed historical and legal analysis surrounding the ban on profit distribution in the healthcare sector, click here.

Conclusion

We are closely monitoring developments in healthcare private equity and profit-sharing. If you have any questions regarding the legislation discussed in this blog, profit-sharing and private equity in healthcare or the Wibz, please feel free to reach out to your usual contact in our Life Sciences & Healthcare team or to me directly.