1001-00001 · Ardent Capital Partners · Antitrust Analysis

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MEMORANDUM

PRIVILEGED AND CONFIDENTIAL — ATTORNEY-CLIENT PRIVILEGE / ATTORNEY WORK PRODUCT This memorandum is a privileged and confidential attorney-client communication and attorney work product prepared in anticipation of litigation and in connection with the provision of legal advice. This memorandum and its contents are not to be disclosed to any person or entity outside Calderwood & Harkness LLP and the client without the prior written consent of counsel.

TO: Howard Bellamy, Partner, Antitrust & Competition Practice Group, Calderwood & Harkness LLP

FROM: Elliot Nguyen, Associate, Antitrust & Competition Practice Group, Calderwood & Harkness LLP

DATE: February 7, 2024

RE: State Regulatory and Certificate of Need Analysis — Ambulatory Surgical Centers — Acquisition of Pinnacle Health Systems, Inc. by Ardent Capital Partners III LP

MATTER NO.: 1001-00001

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I. Executive Summary

This memorandum analyzes Certificate of Need ("CON") requirements and other state-level regulatory considerations applicable to ambulatory surgical centers ("ASCs") in the nine states where Pinnacle Health Systems, Inc. ("Pinnacle" or "PHS") currently operates: North Carolina, South Carolina, Virginia, Tennessee, Georgia, Florida, Alabama, Ohio, and Texas. This analysis has been prepared at the request of the deal team to support the substantive antitrust analysis being developed for the Hart-Scott-Rodino ("HSR") Notification Forms to be filed for the acquiring person, Ardent Capital Partners III LP ("Ardent Capital"), as well as the voluntary submission white paper to be submitted to the Federal Trade Commission ("FTC") Bureau of Competition in connection with the proposed acquisition.

Pinnacle currently operates a portfolio of forty-two (42) freestanding ASC facilities and thirty-one (31) affiliated physician practice management entities across these nine states. The company employs approximately 4,700 individuals across its platform, with the largest concentration of personnel and facilities in the Charlotte-Concord-Gastonia, NC-SC Metropolitan Statistical Area ("Charlotte MSA"), where Pinnacle operates fourteen (14) of the approximately sixty-seven (67) ASCs in the market.

Our analysis reveals the following high-level findings. Six of the nine states in which Pinnacle operates — Virginia, North Carolina, Tennessee, Georgia, Alabama, and Ohio — impose some form of CON or comparable licensure requirement applicable to the establishment, expansion, or relocation of ASC facilities. The remaining three states — South Carolina, Florida, and Texas — do not impose CON requirements on ASCs, though all three require facility licensure and impose change-of-ownership notification requirements as a matter of general healthcare regulatory compliance.

Our principal conclusion is as follows: CON requirements constitute a meaningful barrier to entry in several of the relevant geographic markets identified in the competitive analysis and are therefore relevant to the barrier-to-entry discussion being prepared for inclusion in the HSR voluntary submission white paper. However, these CON requirements do not give rise to additional antitrust risk for this specific transaction for three independent and reinforcing reasons:

(a) No divestiture, hold-separate arrangement, or new facility construction is contemplated as part of the transaction. Ardent Capital intends to acquire and operate the existing Pinnacle platform without adding or consolidating facilities.

(b) The change of ownership of existing licensed ASC facilities generally does not trigger CON review in any of the six CON states. While post-closing notification may be required in certain states, none of the six CON states requires a new CON application or full CON review process in connection with the change of upstream equity ownership of an existing CON-approved facility.

(c) The transaction is structured as a stock purchase — specifically, a 100% equity acquisition of all outstanding shares of Pinnacle Health Systems, Inc. — that does not alter the existing licensure status of the individual ASC facility subsidiaries. Each licensed entity remains legally unchanged; only the ultimate parent shareholder changes. This structure further insulates the transaction from CON triggering events in all six states.

This memorandum is prepared to support, and should be read in conjunction with, the following related work product being developed by the Antitrust & Competition Practice Group for this matter:

• Market Definition & Competitive Analysis Memorandum (anticipated completion date: February 10, 2024);

• Portfolio Company Overlap Analysis Memorandum (anticipated completion date: February 8, 2024);

• HHI Concentration Analysis Workpaper (anticipated completion date: February 10, 2024); and

• Vertical Relationship Analysis Memorandum (anticipated completion date: February 9, 2024).

The state-by-state analysis set forth below is based on our review of applicable statutes, regulations, and administrative guidance in each of the nine states, as well as informal consultations with regulatory counsel at Whitfield & Crane LLP (David Ostrander) and Fendowell Thornton LLP (Kate Yardley), who are handling state regulatory compliance matters for this transaction. No formal opinions have been requested from state agencies, and the analysis below reflects our interpretation of applicable law as of the date of this memorandum.

II. Background: Transaction Overview

A. Parties to the Transaction

Ardent Capital Partners III LP ("Ardent Capital"), a Delaware limited partnership, proposes to acquire 100% of the outstanding equity of Pinnacle Health Systems, Inc. ("Pinnacle" or "PHS"), a Delaware corporation headquartered at 2200 Lakeshore Boulevard, Suite 500, Charlotte, North Carolina 28202. Pinnacle is the ultimate parent holding company for the forty-two ASC facility subsidiaries and thirty-one affiliated physician practice management entities that constitute the Pinnacle operating platform.

Ardent Capital is a private equity fund managed by Ardent Capital Management LLC (SEC File No. 801-119247). The general partner of Ardent Capital is Ardent Capital GP III LLC, a Delaware limited liability company. The co-founders and managing partners of the Ardent Capital platform are Julian Desmond and Priya Chandrasekar. Fund III closed in November 2021 with approximately $4.8 billion in total committed capital from institutional limited partners.

The selling sponsor is Veltrano Equity Holdings LLC, which holds its equity interest in Pinnacle through Veltrano Equity Partners Fund V LP, a $3.2 billion private equity fund. Veltrano acquired Pinnacle in 2017 at an enterprise value of approximately $340 million. During its period of ownership, Veltrano completed nineteen (19) add-on acquisitions that expanded Pinnacle's geographic footprint and increased the number of ASC facilities from twelve (12) at acquisition to the current forty-two (42). The growth of the platform under Veltrano's ownership reflects both organic development and strategic acquisitions of existing ASC facilities across the nine-state operating footprint.

B. Transaction Terms and Structure

The transaction is governed by an Equity Purchase Agreement ("EPA") executed on January 31, 2024, with an outside date of June 30, 2024. The enterprise value of the transaction is $952 million, and the equity value is $534 million. The consideration consists of $505.5 million in cash and approximately $28.5 million in management rollover equity contributed by Dr. Marcus Ellsworth, Chief Executive Officer of Pinnacle, who will retain a minority equity stake in the post-closing entity and continue to serve as CEO.

The transaction is structured as a stock purchase. Ardent Capital will acquire all outstanding shares of Pinnacle Health Systems, Inc. directly from Veltrano Equity Holdings LLC and the other existing equity holders. This structure is significant for purposes of this memorandum because it means that the individual ASC subsidiaries — each of which holds its own state facility license, CON approval (where applicable), and Medicare certification — will remain legally unchanged following the closing. There will be no asset transfers at the subsidiary level, no changes to the corporate identity of any licensed entity, and no issuance or cancellation of facility-level licenses. The only change is in the identity of the ultimate parent shareholder of Pinnacle Health Systems, Inc.

C. Ardent Capital's Existing Healthcare Portfolio

Ardent Capital's existing healthcare portfolio includes two operating companies that are relevant to the competitive analysis:

Marlowe Asset Management Rehabilitation Holdings LLC. Marlowe Asset Management operates seventy-four (74) outpatient physical therapy clinics in Texas, Florida, and Georgia. Marlowe Asset Management's services consist exclusively of outpatient physical and occupational therapy services; it does not operate any ASC facilities, does not perform surgical procedures, and does not hold any ASC licenses or CON approvals. However, twelve (12) Marlowe Asset Management physical therapy clinic locations are co-located with or geographically adjacent to Pinnacle ASC facilities in Texas, Florida, and Georgia. The vertical relationship between Marlowe Asset Management's physical therapy services and Pinnacle's ASC services, including potential referral patterns, is being analyzed in a separate Vertical Relationship Analysis Memorandum anticipated for completion on February 9, 2024.

Clearpath Diagnostics Inc. Clearpath provides clinical laboratory services in Pennsylvania, New Jersey, and New York, with approximately $218 million in annual revenue. Clearpath's geographic footprint does not overlap with any of Pinnacle's nine operating states, and clinical laboratory services constitute a separate product market from ASC services. Clearpath is therefore not relevant to the competitive analysis of this transaction.

D. HSR Filing Timeline

The parties plan to file their respective HSR Notification Forms with the FTC and the Antitrust Division of the U.S. Department of Justice on February 16, 2024. The applicable filing fee is $280,000, based on the 2024 FTC fee schedule for transactions with a value between $500 million and $999.9 million. A request for early termination of the statutory thirty-day waiting period will be submitted concurrently with the HSR filings.

III. Overview of Certificate of Need Regulatory Framework

A. Purpose and History of CON Programs

Certificate of Need programs in the United States originated under the National Health Planning and Resources Development Act of 1974, Pub. L. No. 93-641, 88 Stat. 2225, which conditioned certain federal funding on state adoption of health planning programs, including CON requirements for healthcare facility construction and expansion. The federal mandate was intended to control the growth of healthcare costs by preventing the duplication of expensive healthcare facilities and services, particularly hospital beds and major medical equipment.

Congress repealed the National Health Planning and Resources Development Act in 1987, eliminating the federal mandate for state CON programs. However, the repeal left states with full discretion to maintain, modify, or eliminate their existing CON programs. In the intervening decades, states have taken widely divergent approaches. Approximately thirty-five states and the District of Columbia currently maintain some form of CON requirement, though the scope of covered services, the applicable thresholds, the procedural requirements, and the stringency of review vary dramatically from state to state. A number of states have progressively narrowed their CON programs, exempting certain categories of facilities (including, in some cases, ASCs) from CON review or raising the capital expenditure thresholds to reduce the number of projects subject to review.

The stated policy objectives of CON programs generally include: (i) regulating the supply of healthcare facilities and services to avoid unnecessary duplication of resources; (ii) controlling healthcare costs by preventing capital expenditure overbuilding that may drive up utilization and overall system costs; (iii) ensuring equitable geographic distribution of healthcare services, particularly in rural and underserved areas; and (iv) maintaining the financial viability of existing safety-net and community healthcare providers by limiting competitive entry. Critics of CON programs have argued that these requirements function as protectionist barriers that limit competition, entrench incumbent providers, and result in higher prices and reduced access for consumers — criticisms that have been echoed by the FTC in multiple advocacy filings and reports over the past two decades.

In the typical CON state, the regulatory framework requires that a healthcare provider obtain approval from a designated state health planning agency before undertaking certain covered activities, which commonly include: constructing a new healthcare facility, expanding bed capacity or adding operating rooms to an existing facility, acquiring major medical equipment above a specified cost threshold, or commencing new covered services at an existing facility. The CON application process typically involves submission of a detailed application demonstrating need for the proposed project, compliance with the state health plan, financial feasibility, and other criteria, followed by a public comment period and, in many states, an evidentiary hearing at which competing applicants and affected incumbent providers may present testimony. The review process can span anywhere from several months to more than two years, depending on the state and the complexity of the application.

B. Relevance to ASCs

Not all CON states regulate ASCs within their CON programs. The scope of facilities and services covered by CON varies significantly from state to state, and a number of states have carved out exemptions for freestanding ASCs or have phased out CON requirements for outpatient surgical facilities while retaining CON for inpatient hospital beds and other categories of healthcare services. As a general matter, states that do subject ASCs to CON review typically require CON approval for the establishment of a new ASC facility, the addition of operating rooms beyond the number previously approved, the relocation of an existing ASC to a new geographic location, and certain capital expenditure projects that exceed applicable statutory or regulatory thresholds. Some states also require CON approval for the conversion of a physician office-based surgical suite into a licensed ASC.

Where CON requirements are applicable to ASCs, they represent a significant barrier to entry in the competitive analysis of ASC markets. The CON application process is costly, time-consuming, and uncertain in outcome. Applicants must invest substantial resources in preparing applications, hiring consultants, and participating in contested review proceedings, with no guarantee of approval. The time required to obtain a CON — often twelve to twenty-four months or more — further delays the entry of new competitors. These characteristics make CON requirements directly relevant to the antitrust analysis of ASC acquisitions under the FTC/DOJ Merger Guidelines, which assess whether new entry would be timely, likely, and sufficient to counteract potential anticompetitive effects of a proposed merger or acquisition.

For purposes of this transaction, the presence of CON requirements in six of the nine states where Pinnacle operates supports the conclusion that existing ASC operators in those states benefit from a degree of regulatory protection from new competition. However, since Ardent Capital has no existing ASC presence in any market — and therefore this transaction creates no horizontal overlap in any ASC market — the CON framework does not create additional antitrust risk associated with the transaction itself. Rather, the CON analysis is relevant as contextual background for the competitive conditions discussion in the voluntary submission white paper.

C. Change-of-Ownership Considerations

A critical distinction for purposes of this transaction is the difference between CON requirements triggered by the establishment of a new facility or expansion of existing capacity, on the one hand, and the regulatory treatment of changes of ownership of existing licensed facilities, on the other. In the vast majority of CON states, a change of ownership of an existing CON-approved facility does not require a new CON application. The original CON approval "runs with" the facility, not with the individual or entity that originally obtained the CON, and a transfer of ownership of the facility (whether by asset sale or stock sale) is treated as a licensure matter rather than a CON matter. This distinction is well-established in the administrative practice of state CON agencies, though the specific requirements for change-of-ownership notification, approval, or reporting vary from state to state.

The distinction is even more pronounced in a stock purchase transaction such as the one at issue here. In a stock purchase, the licensed entity itself does not change. The facility-level subsidiary that holds the CON approval and the facility license remains the same legal entity with the same taxpayer identification number, the same state organizational documents, and the same license. The change occurs only at the shareholder level — the identity of the ultimate parent entity that owns the stock of the licensed subsidiary changes. This further reduces the likelihood that the transaction will trigger any CON-related regulatory requirements, as many state CON agencies do not treat a change in the upstream equity ownership of a licensed entity as a "change of ownership" of the facility for CON purposes.

That said, several CON states do impose notification requirements for changes in "controlling interest" or "controlling ownership" of CON-approved facilities, even where the licensed entity itself remains unchanged. These notification requirements are generally administrative in nature and do not require prior approval, but they should be complied with post-closing as a matter of regulatory good practice. The state-by-state analysis set forth in Sections IV and V below addresses the specific change-of-ownership and change-of-control requirements applicable in each of the nine Pinnacle states.

IV. State-by-State Analysis: CON States

This section provides a detailed analysis of the CON requirements and change-of-ownership treatment in each of the six states where Pinnacle operates ASC facilities and where some form of CON or comparable regulatory requirement is applicable to ASCs.

A. Virginia

Governing Authority. Virginia Department of Health ("VDH"), Division of Certificate of Public Need ("COPN"). The COPN program is administered by the VDH Division of Certificate of Public Need, which reports to the State Health Commissioner. The COPN program operates pursuant to regulations promulgated by the State Board of Health and is subject to oversight by the Virginia General Assembly.

Statutory and Regulatory Framework. Virginia Code §§ 32.1-102.1 through 32.1-102.12 (the "Virginia COPN Act"). The implementing regulations are set forth in 12 VAC 5-220-10 et seq. The Virginia COPN Act requires a Certificate of Public Need for the establishment of specified categories of healthcare facilities and services, including what Virginia law terms "outpatient surgical hospitals," which correspond to the freestanding ASC facilities operated by Pinnacle's Virginia subsidiaries.

ASC Coverage. Virginia requires a COPN for the establishment of a new outpatient surgical hospital (ASC), for the addition of operating rooms beyond the number approved in the original COPN, and for certain capital expenditure projects that exceed the statutory threshold. The capital expenditure threshold is adjusted periodically by the State Board of Health and is currently set at a level that captures most significant ASC construction and renovation projects. Virginia's COPN program is considered moderately restrictive, with a structured review process that includes public comment, staff analysis, a recommendation by the State Health Commissioner, and final action by the Commissioner. Competing applicants and affected healthcare providers may participate in the review process.

Pinnacle's Virginia Operations. Pinnacle, through its wholly-owned subsidiaries, operates ASC facilities in the Richmond, Virginia Metropolitan Statistical Area. Each of these facilities holds an existing COPN issued by the Virginia Department of Health. The COPNs authorize the operation of the respective facilities at their approved locations with the number of operating rooms specified in each COPN. Pinnacle's Virginia ASC subsidiaries are current on all licensure and COPN compliance requirements, based on the representations and warranties set forth in the EPA and confirmed through the due diligence process.

Change-of-Ownership Treatment. Virginia requires notification to the Department of Health upon a change of ownership of a COPN-holder. Specifically, 12 VAC 5-220-200 requires that the holder of a COPN notify the Commissioner of a change in ownership within a specified period. However, Virginia does not require a new COPN application for the transfer of an existing facility to a new owner. The existing COPN remains in effect and transfers with the facility.

In a stock purchase transaction such as the one at issue here, the COPN holder — the Pinnacle subsidiary that holds the COPN and the facility license — does not change. The licensed entity remains the same corporation with the same legal identity. The change occurs only at the shareholder level, as Ardent Capital replaces Veltrano as the ultimate parent of the Pinnacle holding company structure. This structure further reduces the notification burden, as the COPN holder itself is not being transferred to a new owner; rather, the upstream equity ownership of the COPN holder is changing. Based on our review of VDH's administrative practice and informal guidance from regulatory counsel, notification to the Virginia Department of Health regarding the change in upstream ownership is advisable as a matter of regulatory best practice but does not require prior approval and will not delay the closing of the transaction.

Competitive Analysis Relevance. Virginia's COPN requirement constitutes a significant barrier to entry for new ASC competitors in the Richmond MSA. The COPN application process for a new outpatient surgical hospital can take twelve to eighteen months from initial application to final approval, and the process involves public comment and evidentiary review in which incumbent providers routinely participate and oppose new applications. The time, cost, and uncertainty of the COPN process make de novo ASC entry in Virginia substantially more difficult than in non-CON states. This factor should be noted in the voluntary submission white paper as part of the barrier-to-entry analysis for the Richmond MSA.

Transaction Impact. None. No new COPNs are required for this transaction. All existing COPNs remain with the licensed Pinnacle subsidiaries. Notification to the Virginia Department of Health regarding the change in upstream equity ownership is advisable but does not require prior regulatory approval and does not affect the transaction timeline.

B. North Carolina

Governing Authority. North Carolina Department of Health and Human Services ("NCDHHS"), Division of Health Service Regulation ("DHSR"), Certificate of Need Section. The CON Section administers the CON program under the supervision of the DHSR Director and the Secretary of NCDHHS. North Carolina's CON program is one of the more active and contested in the southeastern United States, with a well-developed body of administrative decisions and judicial precedent governing the review process.

Statutory and Regulatory Framework. N.C. Gen. Stat. §§ 131E-175 through 131E-191 (the "North Carolina CON Act" or "Article 9"). The implementing regulations are set forth in 10A NCAC 14C. The North Carolina CON Act establishes a comprehensive regulatory framework governing the construction, expansion, and relocation of specified categories of healthcare facilities, including "ambulatory surgical facilities," which are defined under North Carolina law as facilities that provide surgical services to patients who do not require overnight hospitalization.

ASC Coverage. North Carolina requires a CON for the establishment of a new ambulatory surgical facility, for the relocation of an existing ambulatory surgical facility from one county or service area to another, for the addition of operating rooms at an existing facility beyond the number approved in the original CON, and for capital expenditure projects at existing facilities that exceed the applicable statutory threshold. The capital expenditure threshold is adjusted annually based on changes in construction cost indices. North Carolina's CON review process involves a competitive batch review cycle in which applications for similar facilities in the same service area are reviewed simultaneously and evaluated comparatively. This competitive review structure makes the process particularly adversarial, as incumbent providers routinely file competing applications or opposition comments designed to prevent new entrants from obtaining CON approval.

Pinnacle's North Carolina Operations. North Carolina is Pinnacle's largest state of operations and includes its most significant market concentration. Pinnacle operates ASC facilities in both the Charlotte-Concord-Gastonia, NC-SC MSA (the "Charlotte MSA") and the Raleigh-Cary, NC MSA (the "Raleigh MSA").

In the Charlotte MSA, Pinnacle operates fourteen (14) of the approximately sixty-seven (67) ASC facilities in the metropolitan area, representing approximately 20.9% of the total ASC facility count and approximately 18.3% of total ASC net patient revenue in the MSA. These market share figures are based on data compiled in the HHI Concentration Analysis Workpaper being prepared for completion on February 10, 2024. The pre-transaction Herfindahl-Hirschman Index ("HHI") for the Charlotte MSA ASC market is approximately 1,280, and the post-transaction HHI will be unchanged because Ardent Capital has no existing ASC operations in the Charlotte MSA or any other market. The zero delta in HHI confirms that the transaction does not increase concentration in any relevant market.

All of Pinnacle's North Carolina ASC facilities hold existing CON approvals issued by the NCDHHS CON Section. These CON approvals authorize the operation of each facility at its approved location with the specified number of operating rooms and approved services.

Change-of-Ownership Treatment. North Carolina requires that a change of ownership of a CON-approved facility be reported to the CON Section. The reporting requirement is set forth in 10A NCAC 14C .0303 and related provisions. However, the critical question for this transaction is whether a stock purchase at the parent holding company level — in which the licensed facility entity itself does not change — constitutes a "change of ownership" under North Carolina's CON rules.

Based on our review of the applicable regulations and administrative guidance, a stock purchase at the parent level does not constitute a "change of ownership" of the licensed facility entity itself under the North Carolina Administrative Code. The licensed subsidiary retains its corporate identity, its CON approval, and its facility license. The change in the identity of the ultimate parent shareholder is not a change in the ownership of the licensed entity in the legal sense relevant to CON administration. However, the NCDHHS Division of Health Service Regulation may require notification of material changes in the controlling ownership of a CON-approved facility, even where the licensed entity remains unchanged, as a matter of regulatory transparency and ongoing compliance.

We recommend that post-closing notification be provided to the NC Division of Health Service Regulation regarding the change in ultimate parent ownership of Pinnacle's North Carolina ASC subsidiaries. This notification does not require prior approval, does not trigger a new CON review, and does not affect the closing timeline for the transaction. Transaction counsel at Whitfield & Crane LLP should include this notification in the post-closing regulatory compliance checklist.

Competitive Analysis Relevance. North Carolina's CON program is among the most restrictive in the southeastern United States and represents a substantial barrier to de novo ASC entry in both the Charlotte MSA and the Raleigh MSA. The competitive batch review process, combined with the active participation of incumbent providers in opposing new applications, creates significant time, cost, and outcome uncertainty for prospective new entrants. New ASC applicants in North Carolina routinely face review processes lasting twelve to twenty-four months, with the possibility of administrative appeals and judicial review that can extend the timeline further. The cost of preparing a CON application, including expert consultants, legal counsel, and application fees, can be substantial. These factors make North Carolina's CON program one of the most significant regulatory barriers to ASC entry in Pinnacle's nine-state operating footprint.

For purposes of the voluntary submission white paper, the North Carolina CON program should be highlighted as a significant barrier to entry in both the Charlotte and Raleigh MSAs. However, because the transaction creates no horizontal overlap — Ardent Capital has no existing ASC operations in any market — the barrier-to-entry analysis is relevant only to the broader description of competitive conditions, not to an assessment of whether the transaction is likely to result in anticompetitive effects that new entry could or could not counteract.

Transaction Impact. No new CON approvals are required. Post-closing notification to the NC Division of Health Service Regulation regarding the change in ultimate parent ownership is recommended as a matter of regulatory compliance. This notification does not require prior approval and does not delay closing.

C. Tennessee

Governing Authority. Tennessee Health Services and Development Agency ("HSDA"). HSDA is an independent state agency responsible for administering Tennessee's CON program and making decisions on CON applications. HSDA is governed by a multi-member board appointed by the Governor and confirmed by the General Assembly.

Statutory and Regulatory Framework. Tenn. Code Ann. §§ 68-11-1601 through 68-11-1625 (the "Tennessee Health Services and Planning Act"). The implementing rules are promulgated by HSDA and are set forth in the Tennessee Administrative Code. Tennessee's CON program has been the subject of periodic legislative reform efforts, but as of 2024, the program remains in effect for ASCs and other covered healthcare facilities.

ASC Coverage. Tennessee requires a CON for the establishment of a new ASC, for the addition of operating rooms at an existing ASC, and for the introduction of specified new services at an existing facility. The CON review process involves submission of a letter of intent, a formal application, a public comment period, staff review and analysis, and a decision by the HSDA board. HSDA's review criteria include an assessment of need based on the state health plan, the financial feasibility of the project, the adequacy of the applicant's resources, and the impact on existing healthcare providers and services in the service area.

Pinnacle's Tennessee Operations. Pinnacle operates ASC facilities in the Nashville-Davidson-Murfreesboro-Franklin, TN MSA (the "Nashville MSA"). The Nashville MSA is one of the most dynamic healthcare markets in the United States, with a high concentration of hospital systems, physician groups, and outpatient service providers. All of Pinnacle's Tennessee ASC facilities hold current CON approvals issued by HSDA.

Change-of-Ownership Treatment. Tennessee requires a "Change of Ownership/Change of Location" application for transfers of licensed healthcare facilities. The specific requirements are set forth in HSDA rules and in guidance documents issued by the agency. However, where the transaction is structured as a stock purchase of the parent entity — with no change in the identity of the licensed facility entity — HSDA has historically treated such transactions as not requiring a new CON application. The rationale is consistent with the general principle that the CON runs with the facility, not with the upstream equity holders, and a change in the identity of the parent shareholder does not alter the identity of the licensed entity or the terms of its CON approval.

Notification to HSDA of the change in upstream ownership is required, and we recommend that such notification be provided post-closing in accordance with HSDA's procedural requirements. This notification is administrative in nature, does not require prior approval, and does not affect the transaction timeline.

Competitive Analysis Relevance. Tennessee's CON requirement creates a moderate barrier to entry in the Nashville MSA. While the Nashville market is highly competitive and has a substantial number of existing ASC facilities, the CON requirement imposes additional time and cost on prospective new entrants beyond what would be required in a non-CON state. The characterization of the barrier as "moderate" reflects the fact that the Nashville market has seen a relatively high rate of CON approvals for new ASC facilities in recent years, suggesting that the CON process, while time-consuming, is not an absolute barrier to entry. This nuance should be reflected in the voluntary submission white paper.

Transaction Impact. No new CON is required. Post-closing HSDA notification is recommended. There is no impact on the transaction timeline or antitrust risk assessment.

D. Georgia

Governing Authority. Georgia Department of Community Health ("DCH"), Healthcare Facility Regulation Division. The CON program in Georgia is administered by the DCH under the authority of the Board of Community Health. Georgia's CON program has been the subject of significant legislative reform in recent years, with several amendments narrowing the scope of covered facilities and services.

Statutory and Regulatory Framework. O.C.G.A. §§ 31-6-40 through 31-6-49 (the "Georgia CON Act"). The implementing regulations are set forth in the Georgia Administrative Code. Georgia's CON Act establishes the framework for review of proposed new healthcare facilities and services, including ASCs, which are referred to as "ambulatory surgical treatment centers" under Georgia law.

ASC Coverage. Georgia requires a CON for the establishment of new ambulatory surgical treatment centers, for the addition of operating rooms at existing facilities, and for certain capital expenditure projects that exceed statutory thresholds. However, Georgia has been progressively narrowing its CON program through legislative amendments enacted over the past several years. Notably, certain categories of single-specialty ASCs — including those limited to specified surgical specialties such as ophthalmology, gastroenterology, or orthopedics — may be exempt from CON requirements under recent legislative amendments. The scope of these exemptions is evolving and should be monitored for purposes of updating the competitive analysis.

Pinnacle's Georgia Operations. Pinnacle operates ASC facilities in the Atlanta-Sandy Springs-Alpharetta, GA MSA (the "Atlanta MSA"). The Atlanta MSA is a large and competitive healthcare market with a substantial number of ASC facilities operated by hospital systems, physician groups, and national ASC management companies. Pinnacle's Georgia ASC subsidiaries hold existing CON approvals issued by the Georgia Department of Community Health.

Change-of-Ownership Treatment. Georgia requires notification of changes in ownership or control of CON-approved facilities. The notification requirement extends to changes in "controlling interest" of a CON-approved facility, which may be triggered by a change in the ultimate parent entity of the licensed subsidiary. In a stock purchase transaction such as this one, where the licensed entity remains unchanged but the upstream equity ownership changes, a "change of controlling interest" notification may be required. Based on our review of the applicable regulations and DCH guidance, this notification is administrative in nature and does not require a new CON application or prior approval from DCH.

Competitive Analysis Relevance. Georgia's CON regime represents a moderate barrier to entry in the Atlanta MSA. The recent legislative reforms that have eased CON requirements for certain categories of ASCs are a relevant factor in the competitive analysis, as they suggest that barriers to entry in the Atlanta MSA may be declining over time. This trend should be noted in the voluntary submission white paper as a factor that may make new entry more timely and more likely than would be the case under a more restrictive CON regime. The characterization of Georgia's barrier to entry as "moderate" reflects both the existing CON requirements and the direction of recent legislative reform.

Transaction Impact. No new CON is required. Notification to the Georgia Department of Community Health post-closing is advisable. There is no impact on the transaction timeline or antitrust risk assessment.

E. Alabama

Governing Authority. Alabama State Health Planning and Development Agency ("SHPDA"), Certificate of Need Review Board ("CON Review Board"). SHPDA is an independent state agency responsible for administering Alabama's CON program. The CON Review Board is a multi-member board that makes final decisions on CON applications following staff review and public hearing.

Statutory and Regulatory Framework. Ala. Code §§ 22-21-260 through 22-21-276 (the "Alabama CON Act"). The implementing regulations are set forth in the Alabama Administrative Code. Alabama's CON program is widely regarded as one of the more restrictive CON programs in the southeastern United States, with broad coverage of healthcare facilities and services and a contested review process in which incumbent providers actively participate.

ASC Coverage. Alabama requires a CON for the establishment of new ASCs, for the addition of operating rooms at existing facilities, and for certain capital expenditure projects exceeding the statutory threshold. The CON review process in Alabama involves submission of a letter of intent, a formal application, a public comment period, staff analysis, and a hearing before the CON Review Board. Incumbent healthcare providers have standing to oppose CON applications and frequently exercise that right, making the Alabama CON process particularly adversarial and time-consuming.

Pinnacle's Alabama Operations. Pinnacle operates ASC facilities in the Birmingham-Hoover, AL MSA (the "Birmingham MSA"). Pinnacle's Alabama ASC subsidiaries hold existing CON approvals issued by SHPDA. The Birmingham MSA is a moderately sized healthcare market with a significant presence of hospital systems and established ASC operators.

Change-of-Ownership Treatment. Alabama requires CON Review Board approval for changes of ownership of CON-approved facilities. This requirement is set forth in Ala. Code § 22-21-265 and the implementing regulations. However, SHPDA has historically interpreted the change-of-ownership provisions in the context of stock purchase transactions. Where a stock purchase at the parent holding company level results in a change in the ultimate equity ownership of a CON-approved facility, but the licensed facility entity itself remains unchanged, SHPDA has historically treated such transactions as not constituting a "change of ownership" of the facility-level licensee that would require a new CON application or CON Review Board approval. Notification to SHPDA is still required as a matter of regulatory compliance.

It should be noted that Alabama's interpretation of the change-of-ownership provisions in the context of multi-level holding company structures is based on administrative practice and informal guidance rather than express statutory or regulatory language. We recommend that post-closing notification to SHPDA be provided promptly and that transaction counsel at Whitfield & Crane LLP monitor any developments in SHPDA's administrative practice on this issue.

Competitive Analysis Relevance. Alabama's CON program is considered one of the more restrictive in the Southeast and constitutes a significant barrier to entry in the Birmingham MSA. New ASC entrants face a lengthy and contested review process with active opposition from incumbent providers. The combination of the time required to obtain a CON (often twelve to twenty-four months), the cost of the application process, and the uncertainty of outcome make de novo ASC entry in Alabama particularly difficult. This factor should be highlighted in the voluntary submission white paper as a significant barrier to entry in the Birmingham MSA.

Transaction Impact. No new CON is required based on the stock purchase structure. Post-closing notification to SHPDA is advisable. There is no impact on the transaction timeline or antitrust risk assessment.

F. Ohio

Governing Authority. Ohio Department of Health ("ODH"), Certificate of Need Program (partially repealed). Ohio's CON program has been the subject of extensive legislative reform over the past two decades, and the current program is significantly narrower in scope than the original program enacted in the 1970s.

Statutory and Regulatory Framework. Ohio Rev. Code §§ 3702.51 through 3702.62 (as amended). The Ohio CON program was significantly narrowed by legislation enacted in the early 2000s and has been further reduced in scope through subsequent amendments. As of 2024, Ohio's CON requirements are limited to a narrow set of healthcare services and facilities, primarily focused on long-term care facilities and certain high-cost services.

ASC Coverage. Ohio's CON program has been significantly narrowed with respect to ASCs. As of 2024, CON requirements for general multi-specialty ASCs have been largely repealed or rendered inapplicable under current Ohio law. Facilities that provide specific high-cost services, such as cardiac catheterization or open-heart surgery, may still be subject to CON requirements, but the general establishment of a multi-specialty ASC does not require CON approval in Ohio under the current statutory framework. This represents a substantial change from Ohio's historical regulatory landscape and means that regulatory barriers to ASC entry in Ohio are substantially lower than in the southeastern CON states discussed above.

Pinnacle's Ohio Operations. Pinnacle operates ASC facilities in the Columbus, OH MSA (the "Columbus MSA"). These facilities were originally established under prior CON approvals at a time when Ohio's CON program covered ASCs more broadly. Under current Ohio law, comparable new ASC facilities could be established without CON approval, which is relevant to the barrier-to-entry analysis for the Columbus MSA.

Change-of-Ownership Treatment. Given the limited scope of Ohio's remaining CON program, change-of-ownership review under the CON framework is generally not applicable to multi-specialty ASC facilities. The relevant regulatory requirement is facility licensure, which is administered separately by the Ohio Department of Health. Facility licensure transfer or change-of-ownership notification is a standard administrative process that does not involve CON review or health planning analysis.

Competitive Analysis Relevance. Ohio's largely repealed CON program means that regulatory barriers to entry in the Columbus MSA are substantially lower than in the southeastern CON states where Pinnacle operates. New ASC entrants in Ohio face primarily capital, market, and operational barriers — including the need to recruit physicians, secure managed care contracts, and make the capital investment required to build and equip a new facility — rather than the additional regulatory barrier of obtaining CON approval. This distinction should be noted in the voluntary submission white paper, as it supports a characterization of the Columbus MSA as a market with relatively lower barriers to entry.

Transaction Impact. No CON-related regulatory approvals or notifications are required in Ohio. Standard facility licensure notification to the Ohio Department of Health post-closing is recommended as a matter of best practice, consistent with the general approach taken across all nine states. There is no impact on the transaction timeline or antitrust risk assessment.

V. State-by-State Analysis: Non-CON States

This section provides a brief analysis of the three states where Pinnacle operates ASC facilities and where no CON requirement is applicable to ASCs. Although these states do not impose CON requirements, they do require facility licensure and may impose change-of-ownership notification requirements that should be tracked for post-closing compliance purposes.

A. South Carolina

Governing Authority. South Carolina Department of Health and Environmental Control ("DHEC"). DHEC is responsible for the licensure and regulation of healthcare facilities in South Carolina, including ASCs.

CON Status. South Carolina has repealed its CON program as it applies to ASCs. While South Carolina historically maintained a CON program that covered a broad range of healthcare facilities, the legislature has eliminated CON requirements for ASCs, meaning that new ASC facilities can be established in South Carolina without obtaining CON approval. ASCs remain subject to facility licensure requirements administered by DHEC.

Pinnacle's South Carolina Operations. Pinnacle operates ASC facilities in the South Carolina portion of the Charlotte-Concord-Gastonia, NC-SC MSA. These facilities hold DHEC facility licenses. Pinnacle's South Carolina ASC operations are geographically proximate to its larger North Carolina operations in the Charlotte MSA, and the two sets of facilities serve overlapping patient populations within the broader metropolitan area.

Competitive Analysis Relevance. The absence of CON requirements in South Carolina is a notable factor in the geographic market definition analysis for the Charlotte MSA. Because the Charlotte MSA spans the North Carolina-South Carolina border, the competitive conditions for ASC entry differ between the two states. In the North Carolina portion of the MSA, prospective new ASC entrants face the significant barrier of North Carolina's CON program. In the South Carolina portion of the MSA, new entrants can establish ASC facilities without CON review, facing only the capital, market, and operational barriers common to all markets. This asymmetry in regulatory barriers is relevant to the geographic market definition analysis and should be discussed in the Market Definition & Competitive Analysis Memorandum and the voluntary submission white paper, as it may affect the FTC's assessment of whether new entry in the South Carolina portion of the MSA could counteract any theoretical competitive concerns in the broader Charlotte MSA.

Transaction Impact. No CON-related approvals are required. Standard facility licensure notification to DHEC post-closing is recommended.

B. Florida

Governing Authority. Florida Agency for Health Care Administration ("AHCA"). AHCA is responsible for the licensure and regulation of healthcare facilities in Florida, including ASCs, under the authority of Florida Statutes Chapter 395.

CON Status. Florida eliminated its CON program for ASCs. Florida's CON program historically covered a broad range of healthcare facilities, but the state legislature progressively narrowed the program over the course of the 2000s and 2010s, ultimately eliminating CON requirements for ASCs. As of 2024, ASCs in Florida are subject to licensure requirements under Fla. Stat. ch. 395 but are not subject to CON review for new construction, expansion, or relocation.

Pinnacle's Florida Operations. Pinnacle operates ASC facilities in the Tampa-St. Petersburg-Clearwater, FL MSA (the "Tampa MSA"). These facilities hold AHCA facility licenses.

Note on Ardent Capital Portfolio. Marlowe Asset Management Rehabilitation Holdings LLC, an Ardent Capital portfolio company, operates outpatient physical therapy clinics in Florida. Twelve (12) Marlowe Asset Management physical therapy clinic locations are co-located with or geographically adjacent to Pinnacle ASC facilities in Texas, Florida, and Georgia. The potential vertical relationship between Marlowe Asset Management's physical therapy services and Pinnacle's ASC services, including referral patterns between the two types of facilities, is being analyzed in a separate Vertical Relationship Analysis Memorandum anticipated for completion on February 9, 2024. Physical therapy clinics are not subject to ASC-level CON or licensure requirements and are not included in the CON analysis set forth in this memorandum.

Competitive Analysis Relevance. The absence of CON requirements in Florida means that barriers to entry in the Tampa MSA are lower than in the southeastern CON states where Pinnacle operates. New ASC entrants in Florida face capital, market, and operational barriers but not the additional regulatory burden of obtaining CON approval. This factor weighs against any potential concentration concerns in the Tampa MSA, as new entry can be achieved more quickly and with greater certainty than in CON states. The relatively lower barriers to entry in Florida should be noted in the voluntary submission white paper.

Transaction Impact. No CON-related approvals are required. Standard AHCA licensure notification is required post-closing. Under Florida's licensure rules, a change-of-ownership notification must be submitted to AHCA within sixty (60) days of the closing of the transaction. Transaction counsel at Whitfield & Crane LLP should ensure that this deadline is tracked on the post-closing compliance checklist.

C. Texas

Governing Authority. Texas Health and Human Services Commission ("HHSC"). HHSC is responsible for the licensure and regulation of ASCs in Texas under the authority of Tex. Health & Safety Code ch. 243.

CON Status. Texas does not impose CON requirements on ASCs. Texas has historically been one of the most permissive states for healthcare facility development, and the state has never imposed CON requirements on freestanding ASC facilities. ASCs in Texas are subject to licensure requirements under Tex. Health & Safety Code ch. 243 but can be established without any form of CON or certificate of public need review.

Pinnacle's Texas Operations. Pinnacle operates ASC facilities in the Dallas-Fort Worth-Arlington, TX MSA (the "Dallas-Fort Worth MSA"). These facilities hold HHSC facility licenses. The Dallas-Fort Worth MSA is one of the largest and most competitive healthcare markets in the United States, with a high density of ASC facilities operated by a diverse range of providers.

Note on Ardent Capital Portfolio. Marlowe Asset Management Rehabilitation Holdings LLC operates outpatient physical therapy clinics in Texas, with certain locations co-located with or geographically adjacent to Pinnacle ASC facilities in the Dallas-Fort Worth MSA. As noted above, the vertical relationship between Marlowe Asset Management's physical therapy services and Pinnacle's ASC services is being analyzed in the separate Vertical Relationship Analysis Memorandum. The Portfolio Company Overlap Analysis Memorandum, anticipated for completion on February 8, 2024, concludes that physical therapy and ASC services are separate product markets and that there is no horizontal overlap between Marlowe Asset Management's physical therapy operations and Pinnacle's ASC operations.

Competitive Analysis Relevance. The absence of CON requirements in Texas means that the Dallas-Fort Worth MSA is among the most open markets for ASC development in Pinnacle's nine-state operating footprint. Barriers to entry are limited to capital, market, and operational considerations, with no regulatory barrier to de novo ASC construction. The Dallas-Fort Worth MSA has experienced significant ASC development in recent years, reflecting the relatively low barriers to entry. This competitive environment should be described in the voluntary submission white paper as a factor supporting the conclusion that the transaction does not raise competitive concerns in the Dallas-Fort Worth MSA.

Transaction Impact. No CON-related approvals are required. Standard HHSC licensure change-of-ownership notification is required post-closing, generally within thirty (30) days of the closing of the transaction. Transaction counsel at Whitfield & Crane LLP should ensure that this deadline is tracked on the post-closing compliance checklist.

VI. Summary of CON Implications Across All Nine States

A. Summary Table

The following table summarizes the CON status, transaction-specific CON implications, post-closing notification requirements, and barrier-to-entry characterization for each of the nine states where Pinnacle operates ASC facilities:

As the table illustrates, the transaction does not trigger CON review in any of the nine states. In the six CON states, the stock purchase structure preserves the identity of each licensed facility entity and avoids the triggering events — new facility construction, operating room additions, and facility-level asset transfers — that would require a new CON application. Post-closing notification to the applicable state regulatory agencies is recommended in seven of the nine states (all except Ohio and South Carolina, where only routine licensure notifications are applicable), and specific filing deadlines apply in Florida (60 days) and Texas (30 days).

B. Barrier-to-Entry Analysis for Competitive Assessment

The barrier-to-entry analysis presented in this memorandum is directly relevant to the competitive assessment being prepared for the voluntary submission white paper. The key findings are as follows:

In six of the nine states where Pinnacle operates, CON requirements create regulatory barriers to de novo ASC entry that are relevant to the analysis of entry conditions under the FTC/DOJ Merger Guidelines. The 2023 Merger Guidelines, like their predecessors, assess whether new entry into a relevant market would be timely, likely, and sufficient to counteract any anticompetitive effects of a proposed transaction. CON requirements directly affect the timeliness and likelihood of new entry by imposing regulatory delays of twelve to twenty-four months (or more) and by introducing outcome uncertainty into the entry process.

The barrier-to-entry characterizations set forth in this memorandum — "Significant" for Virginia, North Carolina, and Alabama; "Moderate" for Tennessee and Georgia; and "Low" for Ohio, South Carolina, Florida, and Texas — reflect our assessment of the relative restrictiveness of each state's regulatory framework as applied to ASC facilities. These characterizations are consistent with the general consensus in healthcare regulatory and antitrust practice and should provide a useful framework for the competitive analysis in the voluntary submission white paper.

In the Charlotte MSA, which is Pinnacle's largest market — with fourteen of approximately sixty-seven ASCs, approximately 20.9% facility share, and approximately 18.3% of ASC net patient revenue — North Carolina's CON program constitutes the most significant regulatory barrier to new ASC entry. The pre-transaction HHI in the Charlotte MSA is approximately 1,280, and the post-transaction HHI will be identical (no delta) because Ardent Capital has no existing ASC operations in the Charlotte MSA or any other geographic market. The HHI of approximately 1,280 places the Charlotte MSA below the "moderately concentrated" threshold of 1,500 under the 2023 Merger Guidelines, and the zero change in HHI confirms that the transaction has no effect on market concentration.

Because there is no horizontal overlap between Ardent Capital (or any of its portfolio companies) and Pinnacle in any ASC market, the barrier-to-entry analysis is relevant only to the broader description of competitive conditions in each MSA. It does not bear on the question of whether the transaction is likely to result in anticompetitive effects, because no such effects are predicted by any standard measure of competitive impact. The barrier-to-entry discussion should be included in the voluntary submission white paper to provide the FTC with a complete picture of the competitive landscape in each MSA, while clearly emphasizing that the absence of horizontal overlap means that entry conditions are not outcome-determinative for purposes of evaluating this transaction.

VII. Other State Regulatory Considerations

While the primary focus of this memorandum is on CON requirements and their relevance to the antitrust analysis, several other categories of state regulatory requirements are relevant to the transaction and are briefly summarized below. These additional regulatory considerations are primarily the responsibility of transaction counsel at Whitfield & Crane LLP and healthcare regulatory counsel at Fendowell Thornton LLP, and they are noted here for purposes of completeness and cross-reference.

A. Medicare/Medicaid Certification and Provider Enrollment

Each of Pinnacle's forty-two ASC facilities is certified as a Medicare-participating ASC under the Medicare program and enrolled as a provider in the applicable state Medicaid program. A change of ownership of a Medicare-certified ASC requires the filing of a CMS Form 855A (Medicare Enrollment Application — Institutional Providers) with the applicable Medicare Administrative Contractor ("MAC"). The CMS Form 855A filing notifies CMS of the change in ownership and enables the new owner to assume the existing Medicare provider agreement. This process is administrative in nature and does not involve a substantive review of the merits of the change of ownership. It does not affect the antitrust analysis or the HSR filing, but it is an important element of the post-closing regulatory compliance process that should be tracked by transaction counsel.

State Medicaid enrollment requirements vary by state. In general, each state Medicaid agency requires notification of a change in ownership of an enrolled Medicaid provider, and some states require submission of a new or updated Medicaid provider enrollment application. The specific requirements, deadlines, and procedures vary from state to state and should be addressed in the post-closing compliance plan being developed by Whitfield & Crane LLP and Fendowell Thornton LLP.

B. State Licensure Transfer/Notification Requirements (Beyond CON)

Each of the nine states where Pinnacle operates requires facility licensure for ASCs independent of any CON requirements. Facility licensure is the baseline regulatory requirement for operating an ASC in any state and is separate from, and in addition to, any applicable CON requirements. In a stock purchase transaction such as this one, most states do not require a new facility license application, because the licensed entity remains the same legal entity. However, most states do require notification of changes in controlling ownership of a licensed healthcare facility, even where the licensed entity itself does not change.

The s

MEMORANDUM
PRIVILEGED AND CONFIDENTIAL — ATTORNEY-CLIENT PRIVILEGE / ATTORNEY WORK PRODUCT This memorandum is a privileged and confidential attorney-client communication and attorney work product prepared in anticipation of litigation and in connection with the provision of legal advice. This memorandum and its contents are not to be disclosed to any person or entity outside Calderwood & Harkness LLP and the client without the prior written consent of counsel.
TO: Howard Bellamy, Partner, Antitrust & Competition Practice Group, Calderwood & Harkness LLP
FROM: Elliot Nguyen, Associate, Antitrust & Competition Practice Group, Calderwood & Harkness LLP
DATE: February 7, 2024
RE: State Regulatory and Certificate of Need Analysis — Ambulatory Surgical Centers — Acquisition of Pinnacle Health Systems, Inc. by Ardent Capital Partners III LP
MATTER NO.: 1001-00001
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I. Executive Summary
This memorandum analyzes Certificate of Need ("CON") requirements and other state-level regulatory considerations applicable to ambulatory surgical centers ("ASCs") in the nine states where Pinnacle Health Systems, Inc. ("Pinnacle" or "PHS") currently operates: North Carolina, South Carolina, Virginia, Tennessee, Georgia, Florida, Alabama, Ohio, and Texas. This analysis has been prepared at the request of the deal team to support the substantive antitrust analysis being developed for the Hart-Scott-Rodino ("HSR") Notification Forms to be filed for the acquiring person, Ardent Capital Partners III LP ("Ardent Capital"), as well as the voluntary submission white paper to be submitted to the Federal Trade Commission ("FTC") Bureau of Competition in connection with the proposed acquisition.
Pinnacle currently operates a portfolio of forty-two (42) freestanding ASC facilities and thirty-one (31) affiliated physician practice management entities across these nine states. The company employs approximately 4,700 individuals across its platform, with the largest concentration of personnel and facilities in the Charlotte-Concord-Gastonia, NC-SC Metropolitan Statistical Area ("Charlotte MSA"), where Pinnacle operates fourteen (14) of the approximately sixty-seven (67) ASCs in the market.
Our analysis reveals the following high-level findings. Six of the nine states in which Pinnacle operates — Virginia, North Carolina, Tennessee, Georgia, Alabama, and Ohio — impose some form of CON or comparable licensure requirement applicable to the establishment, expansion, or relocation of ASC facilities. The remaining three states — South Carolina, Florida, and Texas — do not impose CON requirements on ASCs, though all three require facility licensure and impose change-of-ownership notification requirements as a matter of general healthcare regulatory compliance.
Our principal conclusion is as follows: CON requirements constitute a meaningful barrier to entry in several of the relevant geographic markets identified in the competitive analysis and are therefore relevant to the barrier-to-entry discussion being prepared for inclusion in the HSR voluntary submission white paper. However, these CON requirements do not give rise to additional antitrust risk for this specific transaction for three independent and reinforcing reasons:
(a) No divestiture, hold-separate arrangement, or new facility construction is contemplated as part of the transaction. Ardent Capital intends to acquire and operate the existing Pinnacle platform without adding or consolidating facilities.
(b) The change of ownership of existing licensed ASC facilities generally does not trigger CON review in any of the six CON states. While post-closing notification may be required in certain states, none of the six CON states requires a new CON application or full CON review process in connection with the change of upstream equity ownership of an existing CON-approved facility.
(c) The transaction is structured as a stock purchase — specifically, a 100% equity acquisition of all outstanding shares of Pinnacle Health Systems, Inc. — that does not alter the existing licensure status of the individual ASC facility subsidiaries. Each licensed entity remains legally unchanged; only the ultimate parent shareholder changes. This structure further insulates the transaction from CON triggering events in all six states.
This memorandum is prepared to support, and should be read in conjunction with, the following related work product being developed by the Antitrust & Competition Practice Group for this matter:
• Market Definition & Competitive Analysis Memorandum (anticipated completion date: February 10, 2024);
• Portfolio Company Overlap Analysis Memorandum (anticipated completion date: February 8, 2024);
• HHI Concentration Analysis Workpaper (anticipated completion date: February 10, 2024); and
• Vertical Relationship Analysis Memorandum (anticipated completion date: February 9, 2024).
The state-by-state analysis set forth below is based on our review of applicable statutes, regulations, and administrative guidance in each of the nine states, as well as informal consultations with regulatory counsel at Whitfield & Crane LLP (David Ostrander) and Fendowell Thornton LLP (Kate Yardley), who are handling state regulatory compliance matters for this transaction. No formal opinions have been requested from state agencies, and the analysis below reflects our interpretation of applicable law as of the date of this memorandum.
II. Background: Transaction Overview
A. Parties to the Transaction
Ardent Capital Partners III LP ("Ardent Capital"), a Delaware limited partnership, proposes to acquire 100% of the outstanding equity of Pinnacle Health Systems, Inc. ("Pinnacle" or "PHS"), a Delaware corporation headquartered at 2200 Lakeshore Boulevard, Suite 500, Charlotte, North Carolina 28202. Pinnacle is the ultimate parent holding company for the forty-two ASC facility subsidiaries and thirty-one affiliated physician practice management entities that constitute the Pinnacle operating platform.
Ardent Capital is a private equity fund managed by Ardent Capital Management LLC (SEC File No. 801-119247). The general partner of Ardent Capital is Ardent Capital GP III LLC, a Delaware limited liability company. The co-founders and managing partners of the Ardent Capital platform are Julian Desmond and Priya Chandrasekar. Fund III closed in November 2021 with approximately $4.8 billion in total committed capital from institutional limited partners.
The selling sponsor is Veltrano Equity Holdings LLC, which holds its equity interest in Pinnacle through Veltrano Equity Partners Fund V LP, a $3.2 billion private equity fund. Veltrano acquired Pinnacle in 2017 at an enterprise value of approximately $340 million. During its period of ownership, Veltrano completed nineteen (19) add-on acquisitions that expanded Pinnacle's geographic footprint and increased the number of ASC facilities from twelve (12) at acquisition to the current forty-two (42). The growth of the platform under Veltrano's ownership reflects both organic development and strategic acquisitions of existing ASC facilities across the nine-state operating footprint.
B. Transaction Terms and Structure
The transaction is governed by an Equity Purchase Agreement ("EPA") executed on January 31, 2024, with an outside date of June 30, 2024. The enterprise value of the transaction is $952 million, and the equity value is $534 million. The consideration consists of $505.5 million in cash and approximately $28.5 million in management rollover equity contributed by Dr. Marcus Ellsworth, Chief Executive Officer of Pinnacle, who will retain a minority equity stake in the post-closing entity and continue to serve as CEO.
The transaction is structured as a stock purchase. Ardent Capital will acquire all outstanding shares of Pinnacle Health Systems, Inc. directly from Veltrano Equity Holdings LLC and the other existing equity holders. This structure is significant for purposes of this memorandum because it means that the individual ASC subsidiaries — each of which holds its own state facility license, CON approval (where applicable), and Medicare certification — will remain legally unchanged following the closing. There will be no asset transfers at the subsidiary level, no changes to the corporate identity of any licensed entity, and no issuance or cancellation of facility-level licenses. The only change is in the identity of the ultimate parent shareholder of Pinnacle Health Systems, Inc.
C. Ardent Capital's Existing Healthcare Portfolio
Ardent Capital's existing healthcare portfolio includes two operating companies that are relevant to the competitive analysis:
Marlowe Asset Management Rehabilitation Holdings LLC. Marlowe Asset Management operates seventy-four (74) outpatient physical therapy clinics in Texas, Florida, and Georgia. Marlowe Asset Management's services consist exclusively of outpatient physical and occupational therapy services; it does not operate any ASC facilities, does not perform surgical procedures, and does not hold any ASC licenses or CON approvals. However, twelve (12) Marlowe Asset Management physical therapy clinic locations are co-located with or geographically adjacent to Pinnacle ASC facilities in Texas, Florida, and Georgia. The vertical relationship between Marlowe Asset Management's physical therapy services and Pinnacle's ASC services, including potential referral patterns, is being analyzed in a separate Vertical Relationship Analysis Memorandum anticipated for completion on February 9, 2024.
Clearpath Diagnostics Inc. Clearpath provides clinical laboratory services in Pennsylvania, New Jersey, and New York, with approximately $218 million in annual revenue. Clearpath's geographic footprint does not overlap with any of Pinnacle's nine operating states, and clinical laboratory services constitute a separate product market from ASC services. Clearpath is therefore not relevant to the competitive analysis of this transaction.
D. HSR Filing Timeline
The parties plan to file their respective HSR Notification Forms with the FTC and the Antitrust Division of the U.S. Department of Justice on February 16, 2024. The applicable filing fee is $280,000, based on the 2024 FTC fee schedule for transactions with a value between $500 million and $999.9 million. A request for early termination of the statutory thirty-day waiting period will be submitted concurrently with the HSR filings.
III. Overview of Certificate of Need Regulatory Framework
A. Purpose and History of CON Programs
Certificate of Need programs in the United States originated under the National Health Planning and Resources Development Act of 1974, Pub. L. No. 93-641, 88 Stat. 2225, which conditioned certain federal funding on state adoption of health planning programs, including CON requirements for healthcare facility construction and expansion. The federal mandate was intended to control the growth of healthcare costs by preventing the duplication of expensive healthcare facilities and services, particularly hospital beds and major medical equipment.
Congress repealed the National Health Planning and Resources Development Act in 1987, eliminating the federal mandate for state CON programs. However, the repeal left states with full discretion to maintain, modify, or eliminate their existing CON programs. In the intervening decades, states have taken widely divergent approaches. Approximately thirty-five states and the District of Columbia currently maintain some form of CON requirement, though the scope of covered services, the applicable thresholds, the procedural requirements, and the stringency of review vary dramatically from state to state. A number of states have progressively narrowed their CON programs, exempting certain categories of facilities (including, in some cases, ASCs) from CON review or raising the capital expenditure thresholds to reduce the number of projects subject to review.
The stated policy objectives of CON programs generally include: (i) regulating the supply of healthcare facilities and services to avoid unnecessary duplication of resources; (ii) controlling healthcare costs by preventing capital expenditure overbuilding that may drive up utilization and overall system costs; (iii) ensuring equitable geographic distribution of healthcare services, particularly in rural and underserved areas; and (iv) maintaining the financial viability of existing safety-net and community healthcare providers by limiting competitive entry. Critics of CON programs have argued that these requirements function as protectionist barriers that limit competition, entrench incumbent providers, and result in higher prices and reduced access for consumers — criticisms that have been echoed by the FTC in multiple advocacy filings and reports over the past two decades.
In the typical CON state, the regulatory framework requires that a healthcare provider obtain approval from a designated state health planning agency before undertaking certain covered activities, which commonly include: constructing a new healthcare facility, expanding bed capacity or adding operating rooms to an existing facility, acquiring major medical equipment above a specified cost threshold, or commencing new covered services at an existing facility. The CON application process typically involves submission of a detailed application demonstrating need for the proposed project, compliance with the state health plan, financial feasibility, and other criteria, followed by a public comment period and, in many states, an evidentiary hearing at which competing applicants and affected incumbent providers may present testimony. The review process can span anywhere from several months to more than two years, depending on the state and the complexity of the application.
B. Relevance to ASCs
Not all CON states regulate ASCs within their CON programs. The scope of facilities and services covered by CON varies significantly from state to state, and a number of states have carved out exemptions for freestanding ASCs or have phased out CON requirements for outpatient surgical facilities while retaining CON for inpatient hospital beds and other categories of healthcare services. As a general matter, states that do subject ASCs to CON review typically require CON approval for the establishment of a new ASC facility, the addition of operating rooms beyond the number previously approved, the relocation of an existing ASC to a new geographic location, and certain capital expenditure projects that exceed applicable statutory or regulatory thresholds. Some states also require CON approval for the conversion of a physician office-based surgical suite into a licensed ASC.
Where CON requirements are applicable to ASCs, they represent a significant barrier to entry in the competitive analysis of ASC markets. The CON application process is costly, time-consuming, and uncertain in outcome. Applicants must invest substantial resources in preparing applications, hiring consultants, and participating in contested review proceedings, with no guarantee of approval. The time required to obtain a CON — often twelve to twenty-four months or more — further delays the entry of new competitors. These characteristics make CON requirements directly relevant to the antitrust analysis of ASC acquisitions under the FTC/DOJ Merger Guidelines, which assess whether new entry would be timely, likely, and sufficient to counteract potential anticompetitive effects of a proposed merger or acquisition.
For purposes of this transaction, the presence of CON requirements in six of the nine states where Pinnacle operates supports the conclusion that existing ASC operators in those states benefit from a degree of regulatory protection from new competition. However, since Ardent Capital has no existing ASC presence in any market — and therefore this transaction creates no horizontal overlap in any ASC market — the CON framework does not create additional antitrust risk associated with the transaction itself. Rather, the CON analysis is relevant as contextual background for the competitive conditions discussion in the voluntary submission white paper.
C. Change-of-Ownership Considerations
A critical distinction for purposes of this transaction is the difference between CON requirements triggered by the establishment of a new facility or expansion of existing capacity, on the one hand, and the regulatory treatment of changes of ownership of existing licensed facilities, on the other. In the vast majority of CON states, a change of ownership of an existing CON-approved facility does not require a new CON application. The original CON approval "runs with" the facility, not with the individual or entity that originally obtained the CON, and a transfer of ownership of the facility (whether by asset sale or stock sale) is treated as a licensure matter rather than a CON matter. This distinction is well-established in the administrative practice of state CON agencies, though the specific requirements for change-of-ownership notification, approval, or reporting vary from state to state.
The distinction is even more pronounced in a stock purchase transaction such as the one at issue here. In a stock purchase, the licensed entity itself does not change. The facility-level subsidiary that holds the CON approval and the facility license remains the same legal entity with the same taxpayer identification number, the same state organizational documents, and the same license. The change occurs only at the shareholder level — the identity of the ultimate parent entity that owns the stock of the licensed subsidiary changes. This further reduces the likelihood that the transaction will trigger any CON-related regulatory requirements, as many state CON agencies do not treat a change in the upstream equity ownership of a licensed entity as a "change of ownership" of the facility for CON purposes.
That said, several CON states do impose notification requirements for changes in "controlling interest" or "controlling ownership" of CON-approved facilities, even where the licensed entity itself remains unchanged. These notification requirements are generally administrative in nature and do not require prior approval, but they should be complied with post-closing as a matter of regulatory good practice. The state-by-state analysis set forth in Sections IV and V below addresses the specific change-of-ownership and change-of-control requirements applicable in each of the nine Pinnacle states.
IV. State-by-State Analysis: CON States
This section provides a detailed analysis of the CON requirements and change-of-ownership treatment in each of the six states where Pinnacle operates ASC facilities and where some form of CON or comparable regulatory requirement is applicable to ASCs.
A. Virginia
Governing Authority. Virginia Department of Health ("VDH"), Division of Certificate of Public Need ("COPN"). The COPN program is administered by the VDH Division of Certificate of Public Need, which reports to the State Health Commissioner. The COPN program operates pursuant to regulations promulgated by the State Board of Health and is subject to oversight by the Virginia General Assembly.
Statutory and Regulatory Framework. Virginia Code §§ 32.1-102.1 through 32.1-102.12 (the "Virginia COPN Act"). The implementing regulations are set forth in 12 VAC 5-220-10 et seq. The Virginia COPN Act requires a Certificate of Public Need for the establishment of specified categories of healthcare facilities and services, including what Virginia law terms "outpatient surgical hospitals," which correspond to the freestanding ASC facilities operated by Pinnacle's Virginia subsidiaries.
ASC Coverage. Virginia requires a COPN for the establishment of a new outpatient surgical hospital (ASC), for the addition of operating rooms beyond the number approved in the original COPN, and for certain capital expenditure projects that exceed the statutory threshold. The capital expenditure threshold is adjusted periodically by the State Board of Health and is currently set at a level that captures most significant ASC construction and renovation projects. Virginia's COPN program is considered moderately restrictive, with a structured review process that includes public comment, staff analysis, a recommendation by the State Health Commissioner, and final action by the Commissioner. Competing applicants and affected healthcare providers may participate in the review process.
Pinnacle's Virginia Operations. Pinnacle, through its wholly-owned subsidiaries, operates ASC facilities in the Richmond, Virginia Metropolitan Statistical Area. Each of these facilities holds an existing COPN issued by the Virginia Department of Health. The COPNs authorize the operation of the respective facilities at their approved locations with the number of operating rooms specified in each COPN. Pinnacle's Virginia ASC subsidiaries are current on all licensure and COPN compliance requirements, based on the representations and warranties set forth in the EPA and confirmed through the due diligence process.
Change-of-Ownership Treatment. Virginia requires notification to the Department of Health upon a change of ownership of a COPN-holder. Specifically, 12 VAC 5-220-200 requires that the holder of a COPN notify the Commissioner of a change in ownership within a specified period. However, Virginia does not require a new COPN application for the transfer of an existing facility to a new owner. The existing COPN remains in effect and transfers with the facility.
In a stock purchase transaction such as the one at issue here, the COPN holder — the Pinnacle subsidiary that holds the COPN and the facility license — does not change. The licensed entity remains the same corporation with the same legal identity. The change occurs only at the shareholder level, as Ardent Capital replaces Veltrano as the ultimate parent of the Pinnacle holding company structure. This structure further reduces the notification burden, as the COPN holder itself is not being transferred to a new owner; rather, the upstream equity ownership of the COPN holder is changing. Based on our review of VDH's administrative practice and informal guidance from regulatory counsel, notification to the Virginia Department of Health regarding the change in upstream ownership is advisable as a matter of regulatory best practice but does not require prior approval and will not delay the closing of the transaction.
Competitive Analysis Relevance. Virginia's COPN requirement constitutes a significant barrier to entry for new ASC competitors in the Richmond MSA. The COPN application process for a new outpatient surgical hospital can take twelve to eighteen months from initial application to final approval, and the process involves public comment and evidentiary review in which incumbent providers routinely participate and oppose new applications. The time, cost, and uncertainty of the COPN process make de novo ASC entry in Virginia substantially more difficult than in non-CON states. This factor should be noted in the voluntary submission white paper as part of the barrier-to-entry analysis for the Richmond MSA.
Transaction Impact. None. No new COPNs are required for this transaction. All existing COPNs remain with the licensed Pinnacle subsidiaries. Notification to the Virginia Department of Health regarding the change in upstream equity ownership is advisable but does not require prior regulatory approval and does not affect the transaction timeline.
B. North Carolina
Governing Authority. North Carolina Department of Health and Human Services ("NCDHHS"), Division of Health Service Regulation ("DHSR"), Certificate of Need Section. The CON Section administers the CON program under the supervision of the DHSR Director and the Secretary of NCDHHS. North Carolina's CON program is one of the more active and contested in the southeastern United States, with a well-developed body of administrative decisions and judicial precedent governing the review process.
Statutory and Regulatory Framework. N.C. Gen. Stat. §§ 131E-175 through 131E-191 (the "North Carolina CON Act" or "Article 9"). The implementing regulations are set forth in 10A NCAC 14C. The North Carolina CON Act establishes a comprehensive regulatory framework governing the construction, expansion, and relocation of specified categories of healthcare facilities, including "ambulatory surgical facilities," which are defined under North Carolina law as facilities that provide surgical services to patients who do not require overnight hospitalization.
ASC Coverage. North Carolina requires a CON for the establishment of a new ambulatory surgical facility, for the relocation of an existing ambulatory surgical facility from one county or service area to another, for the addition of operating rooms at an existing facility beyond the number approved in the original CON, and for capital expenditure projects at existing facilities that exceed the applicable statutory threshold. The capital expenditure threshold is adjusted annually based on changes in construction cost indices. North Carolina's CON review process involves a competitive batch review cycle in which applications for similar facilities in the same service area are reviewed simultaneously and evaluated comparatively. This competitive review structure makes the process particularly adversarial, as incumbent providers routinely file competing applications or opposition comments designed to prevent new entrants from obtaining CON approval.
Pinnacle's North Carolina Operations. North Carolina is Pinnacle's largest state of operations and includes its most significant market concentration. Pinnacle operates ASC facilities in both the Charlotte-Concord-Gastonia, NC-SC MSA (the "Charlotte MSA") and the Raleigh-Cary, NC MSA (the "Raleigh MSA").
In the Charlotte MSA, Pinnacle operates fourteen (14) of the approximately sixty-seven (67) ASC facilities in the metropolitan area, representing approximately 20.9% of the total ASC facility count and approximately 18.3% of total ASC net patient revenue in the MSA. These market share figures are based on data compiled in the HHI Concentration Analysis Workpaper being prepared for completion on February 10, 2024. The pre-transaction Herfindahl-Hirschman Index ("HHI") for the Charlotte MSA ASC market is approximately 1,280, and the post-transaction HHI will be unchanged because Ardent Capital has no existing ASC operations in the Charlotte MSA or any other market. The zero delta in HHI confirms that the transaction does not increase concentration in any relevant market.
All of Pinnacle's North Carolina ASC facilities hold existing CON approvals issued by the NCDHHS CON Section. These CON approvals authorize the operation of each facility at its approved location with the specified number of operating rooms and approved services.
Change-of-Ownership Treatment. North Carolina requires that a change of ownership of a CON-approved facility be reported to the CON Section. The reporting requirement is set forth in 10A NCAC 14C .0303 and related provisions. However, the critical question for this transaction is whether a stock purchase at the parent holding company level — in which the licensed facility entity itself does not change — constitutes a "change of ownership" under North Carolina's CON rules.
Based on our review of the applicable regulations and administrative guidance, a stock purchase at the parent level does not constitute a "change of ownership" of the licensed facility entity itself under the North Carolina Administrative Code. The licensed subsidiary retains its corporate identity, its CON approval, and its facility license. The change in the identity of the ultimate parent shareholder is not a change in the ownership of the licensed entity in the legal sense relevant to CON administration. However, the NCDHHS Division of Health Service Regulation may require notification of material changes in the controlling ownership of a CON-approved facility, even where the licensed entity remains unchanged, as a matter of regulatory transparency and ongoing compliance.
We recommend that post-closing notification be provided to the NC Division of Health Service Regulation regarding the change in ultimate parent ownership of Pinnacle's North Carolina ASC subsidiaries. This notification does not require prior approval, does not trigger a new CON review, and does not affect the closing timeline for the transaction. Transaction counsel at Whitfield & Crane LLP should include this notification in the post-closing regulatory compliance checklist.
Competitive Analysis Relevance. North Carolina's CON program is among the most restrictive in the southeastern United States and represents a substantial barrier to de novo ASC entry in both the Charlotte MSA and the Raleigh MSA. The competitive batch review process, combined with the active participation of incumbent providers in opposing new applications, creates significant time, cost, and outcome uncertainty for prospective new entrants. New ASC applicants in North Carolina routinely face review processes lasting twelve to twenty-four months, with the possibility of administrative appeals and judicial review that can extend the timeline further. The cost of preparing a CON application, including expert consultants, legal counsel, and application fees, can be substantial. These factors make North Carolina's CON program one of the most significant regulatory barriers to ASC entry in Pinnacle's nine-state operating footprint.
For purposes of the voluntary submission white paper, the North Carolina CON program should be highlighted as a significant barrier to entry in both the Charlotte and Raleigh MSAs. However, because the transaction creates no horizontal overlap — Ardent Capital has no existing ASC operations in any market — the barrier-to-entry analysis is relevant only to the broader description of competitive conditions, not to an assessment of whether the transaction is likely to result in anticompetitive effects that new entry could or could not counteract.
Transaction Impact. No new CON approvals are required. Post-closing notification to the NC Division of Health Service Regulation regarding the change in ultimate parent ownership is recommended as a matter of regulatory compliance. This notification does not require prior approval and does not delay closing.
C. Tennessee
Governing Authority. Tennessee Health Services and Development Agency ("HSDA"). HSDA is an independent state agency responsible for administering Tennessee's CON program and making decisions on CON applications. HSDA is governed by a multi-member board appointed by the Governor and confirmed by the General Assembly.
Statutory and Regulatory Framework. Tenn. Code Ann. §§ 68-11-1601 through 68-11-1625 (the "Tennessee Health Services and Planning Act"). The implementing rules are promulgated by HSDA and are set forth in the Tennessee Administrative Code. Tennessee's CON program has been the subject of periodic legislative reform efforts, but as of 2024, the program remains in effect for ASCs and other covered healthcare facilities.
ASC Coverage. Tennessee requires a CON for the establishment of a new ASC, for the addition of operating rooms at an existing ASC, and for the introduction of specified new services at an existing facility. The CON review process involves submission of a letter of intent, a formal application, a public comment period, staff review and analysis, and a decision by the HSDA board. HSDA's review criteria include an assessment of need based on the state health plan, the financial feasibility of the project, the adequacy of the applicant's resources, and the impact on existing healthcare providers and services in the service area.
Pinnacle's Tennessee Operations. Pinnacle operates ASC facilities in the Nashville-Davidson-Murfreesboro-Franklin, TN MSA (the "Nashville MSA"). The Nashville MSA is one of the most dynamic healthcare markets in the United States, with a high concentration of hospital systems, physician groups, and outpatient service providers. All of Pinnacle's Tennessee ASC facilities hold current CON approvals issued by HSDA.
Change-of-Ownership Treatment. Tennessee requires a "Change of Ownership/Change of Location" application for transfers of licensed healthcare facilities. The specific requirements are set forth in HSDA rules and in guidance documents issued by the agency. However, where the transaction is structured as a stock purchase of the parent entity — with no change in the identity of the licensed facility entity — HSDA has historically treated such transactions as not requiring a new CON application. The rationale is consistent with the general principle that the CON runs with the facility, not with the upstream equity holders, and a change in the identity of the parent shareholder does not alter the identity of the licensed entity or the terms of its CON approval.
Notification to HSDA of the change in upstream ownership is required, and we recommend that such notification be provided post-closing in accordance with HSDA's procedural requirements. This notification is administrative in nature, does not require prior approval, and does not affect the transaction timeline.
Competitive Analysis Relevance. Tennessee's CON requirement creates a moderate barrier to entry in the Nashville MSA. While the Nashville market is highly competitive and has a substantial number of existing ASC facilities, the CON requirement imposes additional time and cost on prospective new entrants beyond what would be required in a non-CON state. The characterization of the barrier as "moderate" reflects the fact that the Nashville market has seen a relatively high rate of CON approvals for new ASC facilities in recent years, suggesting that the CON process, while time-consuming, is not an absolute barrier to entry. This nuance should be reflected in the voluntary submission white paper.
Transaction Impact. No new CON is required. Post-closing HSDA notification is recommended. There is no impact on the transaction timeline or antitrust risk assessment.
D. Georgia
Governing Authority. Georgia Department of Community Health ("DCH"), Healthcare Facility Regulation Division. The CON program in Georgia is administered by the DCH under the authority of the Board of Community Health. Georgia's CON program has been the subject of significant legislative reform in recent years, with several amendments narrowing the scope of covered facilities and services.
Statutory and Regulatory Framework. O.C.G.A. §§ 31-6-40 through 31-6-49 (the "Georgia CON Act"). The implementing regulations are set forth in the Georgia Administrative Code. Georgia's CON Act establishes the framework for review of proposed new healthcare facilities and services, including ASCs, which are referred to as "ambulatory surgical treatment centers" under Georgia law.
ASC Coverage. Georgia requires a CON for the establishment of new ambulatory surgical treatment centers, for the addition of operating rooms at existing facilities, and for certain capital expenditure projects that exceed statutory thresholds. However, Georgia has been progressively narrowing its CON program through legislative amendments enacted over the past several years. Notably, certain categories of single-specialty ASCs — including those limited to specified surgical specialties such as ophthalmology, gastroenterology, or orthopedics — may be exempt from CON requirements under recent legislative amendments. The scope of these exemptions is evolving and should be monitored for purposes of updating the competitive analysis.
Pinnacle's Georgia Operations. Pinnacle operates ASC facilities in the Atlanta-Sandy Springs-Alpharetta, GA MSA (the "Atlanta MSA"). The Atlanta MSA is a large and competitive healthcare market with a substantial number of ASC facilities operated by hospital systems, physician groups, and national ASC management companies. Pinnacle's Georgia ASC subsidiaries hold existing CON approvals issued by the Georgia Department of Community Health.
Change-of-Ownership Treatment. Georgia requires notification of changes in ownership or control of CON-approved facilities. The notification requirement extends to changes in "controlling interest" of a CON-approved facility, which may be triggered by a change in the ultimate parent entity of the licensed subsidiary. In a stock purchase transaction such as this one, where the licensed entity remains unchanged but the upstream equity ownership changes, a "change of controlling interest" notification may be required. Based on our review of the applicable regulations and DCH guidance, this notification is administrative in nature and does not require a new CON application or prior approval from DCH.
Competitive Analysis Relevance. Georgia's CON regime represents a moderate barrier to entry in the Atlanta MSA. The recent legislative reforms that have eased CON requirements for certain categories of ASCs are a relevant factor in the competitive analysis, as they suggest that barriers to entry in the Atlanta MSA may be declining over time. This trend should be noted in the voluntary submission white paper as a factor that may make new entry more timely and more likely than would be the case under a more restrictive CON regime. The characterization of Georgia's barrier to entry as "moderate" reflects both the existing CON requirements and the direction of recent legislative reform.
Transaction Impact. No new CON is required. Notification to the Georgia Department of Community Health post-closing is advisable. There is no impact on the transaction timeline or antitrust risk assessment.
E. Alabama
Governing Authority. Alabama State Health Planning and Development Agency ("SHPDA"), Certificate of Need Review Board ("CON Review Board"). SHPDA is an independent state agency responsible for administering Alabama's CON program. The CON Review Board is a multi-member board that makes final decisions on CON applications following staff review and public hearing.
Statutory and Regulatory Framework. Ala. Code §§ 22-21-260 through 22-21-276 (the "Alabama CON Act"). The implementing regulations are set forth in the Alabama Administrative Code. Alabama's CON program is widely regarded as one of the more restrictive CON programs in the southeastern United States, with broad coverage of healthcare facilities and services and a contested review process in which incumbent providers actively participate.
ASC Coverage. Alabama requires a CON for the establishment of new ASCs, for the addition of operating rooms at existing facilities, and for certain capital expenditure projects exceeding the statutory threshold. The CON review process in Alabama involves submission of a letter of intent, a formal application, a public comment period, staff analysis, and a hearing before the CON Review Board. Incumbent healthcare providers have standing to oppose CON applications and frequently exercise that right, making the Alabama CON process particularly adversarial and time-consuming.
Pinnacle's Alabama Operations. Pinnacle operates ASC facilities in the Birmingham-Hoover, AL MSA (the "Birmingham MSA"). Pinnacle's Alabama ASC subsidiaries hold existing CON approvals issued by SHPDA. The Birmingham MSA is a moderately sized healthcare market with a significant presence of hospital systems and established ASC operators.
Change-of-Ownership Treatment. Alabama requires CON Review Board approval for changes of ownership of CON-approved facilities. This requirement is set forth in Ala. Code § 22-21-265 and the implementing regulations. However, SHPDA has historically interpreted the change-of-ownership provisions in the context of stock purchase transactions. Where a stock purchase at the parent holding company level results in a change in the ultimate equity ownership of a CON-approved facility, but the licensed facility entity itself remains unchanged, SHPDA has historically treated such transactions as not constituting a "change of ownership" of the facility-level licensee that would require a new CON application or CON Review Board approval. Notification to SHPDA is still required as a matter of regulatory compliance.
It should be noted that Alabama's interpretation of the change-of-ownership provisions in the context of multi-level holding company structures is based on administrative practice and informal guidance rather than express statutory or regulatory language. We recommend that post-closing notification to SHPDA be provided promptly and that transaction counsel at Whitfield & Crane LLP monitor any developments in SHPDA's administrative practice on this issue.
Competitive Analysis Relevance. Alabama's CON program is considered one of the more restrictive in the Southeast and constitutes a significant barrier to entry in the Birmingham MSA. New ASC entrants face a lengthy and contested review process with active opposition from incumbent providers. The combination of the time required to obtain a CON (often twelve to twenty-four months), the cost of the application process, and the uncertainty of outcome make de novo ASC entry in Alabama particularly difficult. This factor should be highlighted in the voluntary submission white paper as a significant barrier to entry in the Birmingham MSA.
Transaction Impact. No new CON is required based on the stock purchase structure. Post-closing notification to SHPDA is advisable. There is no impact on the transaction timeline or antitrust risk assessment.
F. Ohio
Governing Authority. Ohio Department of Health ("ODH"), Certificate of Need Program (partially repealed). Ohio's CON program has been the subject of extensive legislative reform over the past two decades, and the current program is significantly narrower in scope than the original program enacted in the 1970s.
Statutory and Regulatory Framework. Ohio Rev. Code §§ 3702.51 through 3702.62 (as amended). The Ohio CON program was significantly narrowed by legislation enacted in the early 2000s and has been further reduced in scope through subsequent amendments. As of 2024, Ohio's CON requirements are limited to a narrow set of healthcare services and facilities, primarily focused on long-term care facilities and certain high-cost services.
ASC Coverage. Ohio's CON program has been significantly narrowed with respect to ASCs. As of 2024, CON requirements for general multi-specialty ASCs have been largely repealed or rendered inapplicable under current Ohio law. Facilities that provide specific high-cost services, such as cardiac catheterization or open-heart surgery, may still be subject to CON requirements, but the general establishment of a multi-specialty ASC does not require CON approval in Ohio under the current statutory framework. This represents a substantial change from Ohio's historical regulatory landscape and means that regulatory barriers to ASC entry in Ohio are substantially lower than in the southeastern CON states discussed above.
Pinnacle's Ohio Operations. Pinnacle operates ASC facilities in the Columbus, OH MSA (the "Columbus MSA"). These facilities were originally established under prior CON approvals at a time when Ohio's CON program covered ASCs more broadly. Under current Ohio law, comparable new ASC facilities could be established without CON approval, which is relevant to the barrier-to-entry analysis for the Columbus MSA.
Change-of-Ownership Treatment. Given the limited scope of Ohio's remaining CON program, change-of-ownership review under the CON framework is generally not applicable to multi-specialty ASC facilities. The relevant regulatory requirement is facility licensure, which is administered separately by the Ohio Department of Health. Facility licensure transfer or change-of-ownership notification is a standard administrative process that does not involve CON review or health planning analysis.
Competitive Analysis Relevance. Ohio's largely repealed CON program means that regulatory barriers to entry in the Columbus MSA are substantially lower than in the southeastern CON states where Pinnacle operates. New ASC entrants in Ohio face primarily capital, market, and operational barriers — including the need to recruit physicians, secure managed care contracts, and make the capital investment required to build and equip a new facility — rather than the additional regulatory barrier of obtaining CON approval. This distinction should be noted in the voluntary submission white paper, as it supports a characterization of the Columbus MSA as a market with relatively lower barriers to entry.
Transaction Impact. No CON-related regulatory approvals or notifications are required in Ohio. Standard facility licensure notification to the Ohio Department of Health post-closing is recommended as a matter of best practice, consistent with the general approach taken across all nine states. There is no impact on the transaction timeline or antitrust risk assessment.
V. State-by-State Analysis: Non-CON States
This section provides a brief analysis of the three states where Pinnacle operates ASC facilities and where no CON requirement is applicable to ASCs. Although these states do not impose CON requirements, they do require facility licensure and may impose change-of-ownership notification requirements that should be tracked for post-closing compliance purposes.
A. South Carolina
Governing Authority. South Carolina Department of Health and Environmental Control ("DHEC"). DHEC is responsible for the licensure and regulation of healthcare facilities in South Carolina, including ASCs.
CON Status. South Carolina has repealed its CON program as it applies to ASCs. While South Carolina historically maintained a CON program that covered a broad range of healthcare facilities, the legislature has eliminated CON requirements for ASCs, meaning that new ASC facilities can be established in South Carolina without obtaining CON approval. ASCs remain subject to facility licensure requirements administered by DHEC.
Pinnacle's South Carolina Operations. Pinnacle operates ASC facilities in the South Carolina portion of the Charlotte-Concord-Gastonia, NC-SC MSA. These facilities hold DHEC facility licenses. Pinnacle's South Carolina ASC operations are geographically proximate to its larger North Carolina operations in the Charlotte MSA, and the two sets of facilities serve overlapping patient populations within the broader metropolitan area.
Competitive Analysis Relevance. The absence of CON requirements in South Carolina is a notable factor in the geographic market definition analysis for the Charlotte MSA. Because the Charlotte MSA spans the North Carolina-South Carolina border, the competitive conditions for ASC entry differ between the two states. In the North Carolina portion of the MSA, prospective new ASC entrants face the significant barrier of North Carolina's CON program. In the South Carolina portion of the MSA, new entrants can establish ASC facilities without CON review, facing only the capital, market, and operational barriers common to all markets. This asymmetry in regulatory barriers is relevant to the geographic market definition analysis and should be discussed in the Market Definition & Competitive Analysis Memorandum and the voluntary submission white paper, as it may affect the FTC's assessment of whether new entry in the South Carolina portion of the MSA could counteract any theoretical competitive concerns in the broader Charlotte MSA.
Transaction Impact. No CON-related approvals are required. Standard facility licensure notification to DHEC post-closing is recommended.
B. Florida
Governing Authority. Florida Agency for Health Care Administration ("AHCA"). AHCA is responsible for the licensure and regulation of healthcare facilities in Florida, including ASCs, under the authority of Florida Statutes Chapter 395.
CON Status. Florida eliminated its CON program for ASCs. Florida's CON program historically covered a broad range of healthcare facilities, but the state legislature progressively narrowed the program over the course of the 2000s and 2010s, ultimately eliminating CON requirements for ASCs. As of 2024, ASCs in Florida are subject to licensure requirements under Fla. Stat. ch. 395 but are not subject to CON review for new construction, expansion, or relocation.
Pinnacle's Florida Operations. Pinnacle operates ASC facilities in the Tampa-St. Petersburg-Clearwater, FL MSA (the "Tampa MSA"). These facilities hold AHCA facility licenses.
Note on Ardent Capital Portfolio. Marlowe Asset Management Rehabilitation Holdings LLC, an Ardent Capital portfolio company, operates outpatient physical therapy clinics in Florida. Twelve (12) Marlowe Asset Management physical therapy clinic locations are co-located with or geographically adjacent to Pinnacle ASC facilities in Texas, Florida, and Georgia. The potential vertical relationship between Marlowe Asset Management's physical therapy services and Pinnacle's ASC services, including referral patterns between the two types of facilities, is being analyzed in a separate Vertical Relationship Analysis Memorandum anticipated for completion on February 9, 2024. Physical therapy clinics are not subject to ASC-level CON or licensure requirements and are not included in the CON analysis set forth in this memorandum.
Competitive Analysis Relevance. The absence of CON requirements in Florida means that barriers to entry in the Tampa MSA are lower than in the southeastern CON states where Pinnacle operates. New ASC entrants in Florida face capital, market, and operational barriers but not the additional regulatory burden of obtaining CON approval. This factor weighs against any potential concentration concerns in the Tampa MSA, as new entry can be achieved more quickly and with greater certainty than in CON states. The relatively lower barriers to entry in Florida should be noted in the voluntary submission white paper.
Transaction Impact. No CON-related approvals are required. Standard AHCA licensure notification is required post-closing. Under Florida's licensure rules, a change-of-ownership notification must be submitted to AHCA within sixty (60) days of the closing of the transaction. Transaction counsel at Whitfield & Crane LLP should ensure that this deadline is tracked on the post-closing compliance checklist.
C. Texas
Governing Authority. Texas Health and Human Services Commission ("HHSC"). HHSC is responsible for the licensure and regulation of ASCs in Texas under the authority of Tex. Health & Safety Code ch. 243.
CON Status. Texas does not impose CON requirements on ASCs. Texas has historically been one of the most permissive states for healthcare facility development, and the state has never imposed CON requirements on freestanding ASC facilities. ASCs in Texas are subject to licensure requirements under Tex. Health & Safety Code ch. 243 but can be established without any form of CON or certificate of public need review.
Pinnacle's Texas Operations. Pinnacle operates ASC facilities in the Dallas-Fort Worth-Arlington, TX MSA (the "Dallas-Fort Worth MSA"). These facilities hold HHSC facility licenses. The Dallas-Fort Worth MSA is one of the largest and most competitive healthcare markets in the United States, with a high density of ASC facilities operated by a diverse range of providers.
Note on Ardent Capital Portfolio. Marlowe Asset Management Rehabilitation Holdings LLC operates outpatient physical therapy clinics in Texas, with certain locations co-located with or geographically adjacent to Pinnacle ASC facilities in the Dallas-Fort Worth MSA. As noted above, the vertical relationship between Marlowe Asset Management's physical therapy services and Pinnacle's ASC services is being analyzed in the separate Vertical Relationship Analysis Memorandum. The Portfolio Company Overlap Analysis Memorandum, anticipated for completion on February 8, 2024, concludes that physical therapy and ASC services are separate product markets and that there is no horizontal overlap between Marlowe Asset Management's physical therapy operations and Pinnacle's ASC operations.
Competitive Analysis Relevance. The absence of CON requirements in Texas means that the Dallas-Fort Worth MSA is among the most open markets for ASC development in Pinnacle's nine-state operating footprint. Barriers to entry are limited to capital, market, and operational considerations, with no regulatory barrier to de novo ASC construction. The Dallas-Fort Worth MSA has experienced significant ASC development in recent years, reflecting the relatively low barriers to entry. This competitive environment should be described in the voluntary submission white paper as a factor supporting the conclusion that the transaction does not raise competitive concerns in the Dallas-Fort Worth MSA.
Transaction Impact. No CON-related approvals are required. Standard HHSC licensure change-of-ownership notification is required post-closing, generally within thirty (30) days of the closing of the transaction. Transaction counsel at Whitfield & Crane LLP should ensure that this deadline is tracked on the post-closing compliance checklist.
VI. Summary of CON Implications Across All Nine States
A. Summary Table
The following table summarizes the CON status, transaction-specific CON implications, post-closing notification requirements, and barrier-to-entry characterization for each of the nine states where Pinnacle operates ASC facilities:
As the table illustrates, the transaction does not trigger CON review in any of the nine states. In the six CON states, the stock purchase structure preserves the identity of each licensed facility entity and avoids the triggering events — new facility construction, operating room additions, and facility-level asset transfers — that would require a new CON application. Post-closing notification to the applicable state regulatory agencies is recommended in seven of the nine states (all except Ohio and South Carolina, where only routine licensure notifications are applicable), and specific filing deadlines apply in Florida (60 days) and Texas (30 days).
B. Barrier-to-Entry Analysis for Competitive Assessment
The barrier-to-entry analysis presented in this memorandum is directly relevant to the competitive assessment being prepared for the voluntary submission white paper. The key findings are as follows:
In six of the nine states where Pinnacle operates, CON requirements create regulatory barriers to de novo ASC entry that are relevant to the analysis of entry conditions under the FTC/DOJ Merger Guidelines. The 2023 Merger Guidelines, like their predecessors, assess whether new entry into a relevant market would be timely, likely, and sufficient to counteract any anticompetitive effects of a proposed transaction. CON requirements directly affect the timeliness and likelihood of new entry by imposing regulatory delays of twelve to twenty-four months (or more) and by introducing outcome uncertainty into the entry process.
The barrier-to-entry characterizations set forth in this memorandum — "Significant" for Virginia, North Carolina, and Alabama; "Moderate" for Tennessee and Georgia; and "Low" for Ohio, South Carolina, Florida, and Texas — reflect our assessment of the relative restrictiveness of each state's regulatory framework as applied to ASC facilities. These characterizations are consistent with the general consensus in healthcare regulatory and antitrust practice and should provide a useful framework for the competitive analysis in the voluntary submission white paper.
In the Charlotte MSA, which is Pinnacle's largest market — with fourteen of approximately sixty-seven ASCs, approximately 20.9% facility share, and approximately 18.3% of ASC net patient revenue — North Carolina's CON program constitutes the most significant regulatory barrier to new ASC entry. The pre-transaction HHI in the Charlotte MSA is approximately 1,280, and the post-transaction HHI will be identical (no delta) because Ardent Capital has no existing ASC operations in the Charlotte MSA or any other geographic market. The HHI of approximately 1,280 places the Charlotte MSA below the "moderately concentrated" threshold of 1,500 under the 2023 Merger Guidelines, and the zero change in HHI confirms that the transaction has no effect on market concentration.
Because there is no horizontal overlap between Ardent Capital (or any of its portfolio companies) and Pinnacle in any ASC market, the barrier-to-entry analysis is relevant only to the broader description of competitive conditions in each MSA. It does not bear on the question of whether the transaction is likely to result in anticompetitive effects, because no such effects are predicted by any standard measure of competitive impact. The barrier-to-entry discussion should be included in the voluntary submission white paper to provide the FTC with a complete picture of the competitive landscape in each MSA, while clearly emphasizing that the absence of horizontal overlap means that entry conditions are not outcome-determinative for purposes of evaluating this transaction.
VII. Other State Regulatory Considerations
While the primary focus of this memorandum is on CON requirements and their relevance to the antitrust analysis, several other categories of state regulatory requirements are relevant to the transaction and are briefly summarized below. These additional regulatory considerations are primarily the responsibility of transaction counsel at Whitfield & Crane LLP and healthcare regulatory counsel at Fendowell Thornton LLP, and they are noted here for purposes of completeness and cross-reference.
A. Medicare/Medicaid Certification and Provider Enrollment
Each of Pinnacle's forty-two ASC facilities is certified as a Medicare-participating ASC under the Medicare program and enrolled as a provider in the applicable state Medicaid program. A change of ownership of a Medicare-certified ASC requires the filing of a CMS Form 855A (Medicare Enrollment Application — Institutional Providers) with the applicable Medicare Administrative Contractor ("MAC"). The CMS Form 855A filing notifies CMS of the change in ownership and enables the new owner to assume the existing Medicare provider agreement. This process is administrative in nature and does not involve a substantive review of the merits of the change of ownership. It does not affect the antitrust analysis or the HSR filing, but it is an important element of the post-closing regulatory compliance process that should be tracked by transaction counsel.
State Medicaid enrollment requirements vary by state. In general, each state Medicaid agency requires notification of a change in ownership of an enrolled Medicaid provider, and some states require submission of a new or updated Medicaid provider enrollment application. The specific requirements, deadlines, and procedures vary from state to state and should be addressed in the post-closing compliance plan being developed by Whitfield & Crane LLP and Fendowell Thornton LLP.
B. State Licensure Transfer/Notification Requirements (Beyond CON)
Each of the nine states where Pinnacle operates requires facility licensure for ASCs independent of any CON requirements. Facility licensure is the baseline regulatory requirement for operating an ASC in any state and is separate from, and in addition to, any applicable CON requirements. In a stock purchase transaction such as this one, most states do not require a new facility license application, because the licensed entity remains the same legal entity. However, most states do require notification of changes in controlling ownership of a licensed healthcare facility, even where the licensed entity itself does not change.
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