New York governor introduces proposal to require regulatory review of certain healthcare transactions
On February 1, 2023, New York Governor Kathy Hochul released the New York State Executive Budget for fiscal year 2024 (the Budget), which included a proposal impacting what were previously standard healthcare transactions in the state.
Under the proposal, the New York Health Department (the Department) would review “material transactions” involving certain healthcare entities, including management services organizations (MSOs) and physician practices (together, the Proposal). Citing a “proliferation of large physician practices being managed by entities that are investor-backed” through transactions not subject to comprehensive state review and oversight, unlike other healthcare entities regulated by the Department, the Proposal intends to “track and monitor the impact of these transactions on cost, quality, access, equity, and competition.”
Further, the Proposal also seems to hint at investor-backed entities as they relate to the corporate practice of medicine doctrine, noting that investor-backed entities increasingly take on the characteristics associated with diagnostic and treatment centers or other licensed provider types regulated by the Department; however, outside of the individual licensure of a practitioner, they remain unregulated. If implemented, the Proposal would add a substantial regulatory hurdle to certain standard healthcare transactions in New York.
If passed by the New York Legislature (the Legislature), the Proposal would require healthcare entities – namely, physician practices, MSOs, non-insurance subsidiaries and affiliates of insurance companies – to file a written notice and an application of any “material transaction.” The Proposal defines “material transaction” broadly to include not only mergers, acquisitions or affiliations with a healthcare entity but also “an affiliation or contract formed between a healthcare entity and another person” and the “formation of a…[MSO] for the purpose of administering contracts with health plans, third-party administrators, pharmacy benefit managers, or healthcare providers.” As a result, contracts between physician practices and MSOs, non-clinical asset acquisitions of physician practices by MSOs and physician investments in MSOs could all soon be subject to regulatory review and approval in New York.
Under the Proposal’s review process, healthcare entities that engage in material transactions would need to submit written notice of the material transaction to the Department at least 30 days prior to the closing date. If the Department does not respond within the 30-day timeframe, then the transaction will be deemed approved; however, the Department may extend this 30-day approval period if “necessary to conduct a thorough examination and complete analysis” of the transaction.
During this initial 30-day timeframe, the Department will also publicly post all written notices it receives regarding proposed transactions to allow the public to comment. Effectively, this will allow competitors or other members of the public to interject into a proposed transaction, and affected parties will need to consider this increased level of public disclosure regarding their transactions.
The Proposal also authorizes the Department to hire independent entities (eg, accountants) to assist with its review and to place the cost of retaining such entities on the applicant. Accordingly, given the nature and complexity of many transactions, it is possible that the Department will not complete its review process within the 30-day timeframe, and therefore this new process may significantly affect the timing and cost associated with such healthcare transactions in New York.
In the following weeks, the Legislature will evaluate the Proposal to determine whether to accept, modify or reject it. The Legislature will need to adopt the Proposal by April 1, 2023 for it to be included in the Budget. If the Proposal is adopted during these budget negotiations, its requirements will apply to material transactions closing on or after April 1, 2024. However, we note that, even if the Legislature fails to adopt the Proposal during these budget negotiations, it may still consider adopting it during the remainder of the legislative session, which closes in June 2023.
It will be important for healthcare entities and investor-backed MSOs to monitor the development of the proposed changes. While there is a chance that the Legislature will not finalize the Proposal as part of the Budget, we expect that the content of the Proposal, and the desire to review these transactions by the Department, will continue. If the Proposal passes, physician practices and MSOs must ensure that business relationships are structured to carefully navigate the changed landscape as the law will require these entities, who have historically entered into business relationships with limited or no regulatory scrutiny, to now undergo a detailed review and approval process prior to finalizing material transactions.
Trends across the country
This Proposal appears to be part of a developing nationwide trend – including, most notably, in California. In June 2022, the Governor of California signed into law the California Health Care Quality and Affordability Act (the CHCQAA), which explicitly empowered the California Office of Health Care Affordability (the OHCA) to oversee transactions involving a material change in ownership, operations or governance of various healthcare entities, including healthcare service plans, health insurers, hospitals or hospital systems, physician organizations and pharmacy benefit managers.
Specifically, starting April 1, 2024, California will require these covered healthcare entities to submit written notice to the OHCA 90-days prior to entering into any agreement or transaction that involves a “material change,” which the CHCQAA defines to include any change in ownership, operations, or governance for a health care entity, involving a material amount of assets. Similarly, in North Carolina, the State Board of Dental Examiners must approve all management services agreements between a dental practice and management entity.
In addition to California and North Carolina, we note that there is a growing list of other states that have regulatory review measures that subject healthcare entities to varying levels of disclosure and potential scrutiny, by requiring advanced notification of certain material change transactions. For example, Connecticut, Massachusetts, Nevada, Oregon and Washington require notice of material changes upon the satisfaction of certain thresholds with respect to transactions involving physician practices and other entities.
This introduces a degree of uncertainty into the timing of healthcare transactions. For instance, since 2014, Connecticut has required 30-day prior written notification to the State Attorney General if a “group practice,” consisting of two or more physicians, engages in a transaction that results in a material change to its business or corporate structure. Similarly, Massachusetts requires all providers and provider organizations to provide 60-day prior written notice to the State Attorney General and the Health Policy Commission of proposed transactions that will result in a “material change.”
Accordingly, we encourage healthcare entities and investors in the healthcare industry to begin working with corporate and healthcare counsel to carefully evaluate their transactions in New York and in other states with similar proposals and laws, to better gauge existing and future investment strategies.
If you have any questions about the New York Proposal or related matters, please contact your DLA Piper relationship partner, the authors of this alert, or any member of our Corporate or Healthcare industry groups.