Proposed New York Law Calls for Private Practice Transaction Oversight

The 2024 New York State Executive Budget included a first-of-its-kind bill that would require certain physician practice and management services organization (MSO) transactions to undergo regulatory review and approval by the state Department of Health (DOH). Positing that the "proliferation of large physician practices being managed by entities that are investor-backed" is a "phenomenon" that "may have a negative impact on patient care, health care costs, and ultimately access to services," the Legislature suggests that the lack of regulatory oversight has rendered the state unable to "track or monitor the impact of these transactions on cost, quality, access, equity, and competition." Titled "Review and Oversight of Material Transactions," new Article 45-A of the Public Health Law would address these concerns by adding a regulatory hurdle to both standard private practice mergers and acquisitions, as well as MSO and private-equity-backed transactions that, notwithstanding the statements in the legislative intent, look to lower costs by improving management and leveraging economies of scale, while ensuring provider autonomy at the patient care level.

Providers and Transactions Subject to Review

The proposed legislation confers upon DOH the authority to review and approve "material transactions" involving a "health care entity," which is a physician practice and "management services organization or similar entity providing all or substantially all administrative or management services under contract with one or more physician practice … or any other kind of health care facility." A "material transaction" is not only a merger, acquisition or affiliation with a healthcare entity, but also "an affiliation or contract formed between a health care entity and another person" and the "formation of a…management services organization for the purpose of administering contracts with health plans, third-party administrators, pharmacy benefit managers, or health care providers." Thus, contracts between physician practices and MSOs, nonclinical asset acquisitions of physician practices by MSOs, and physician investments in MSOs may all be subject to regulatory review and approval.

Regulatory Review Process

Healthcare entities that engage in material transactions will need to submit a written notice and an application for consent with supporting documents to DOH at least 30 days prior to the target closing date. The transaction can be a single transaction or a series of related transactions that occur within a designated period of time or meet or exceed a financial threshold, in each case as determined by DOH pursuant to regulation. If DOH does not act on the application within the 30-day notice period, the transaction will be deemed approved.

In addition to submitting the names of the parties to the transaction and copies of any agreements governing the terms of such transaction, applicants will be required to, among other things, disclose any plans to eliminate or reduce services or participate in specific plan networks, identify the revenue generated at each practice location, and provide a brief description of the nature and purpose of the transaction, which will be used by DOH to assess the "anticipated impact of the material transaction on cost, quality, access, health equity, and competition in the impacted markets."

In addition to the foregoing terms of review, DOH will also consider the financial wherewithal of the parties to the transaction, their character and competence, source of funding, and the fairness of the financial consideration. DOH may also, as a condition to approval, require the parties to make investments in their communities or contributions to state-controlled funds "to preserve access or to otherwise mitigate the impact of the material transaction on the health care delivery system."

Notwithstanding its concise, 30-day review period, the regulatory review process is not unlike the certificate of need (CON) process that hospitals, ambulatory surgery centers, home healthcare and other licensed providers undergo. In this regard, the bill allows DOH to seek public comment, withhold approval "if necessary to conduct a thorough examination and complete analysis of whether the transaction is consistent with the criteria established" under the law and to retain actuaries and other professionals to assist in its analysis. In other words, for large or more complex transactions, the likelihood of receiving approval within 30 days appears to be remote.

If DOH does not approve a transaction or grants approval subject to conditions, it may refer the transaction to the state Attorney General (AG) so that it "may, if appropriate, conduct an investigation into whether the health care entities have engaged in unfair competition of anticompetitive behavior, and if necessary, take steps to protect consumers in the health care services market."

Conclusion

Should it pass, the Review and Oversight of Material Transactions law is bound to have a significant impact on healthcare transactions in New York. Physicians and management services organizations, whether or not private-equity-backed, that have long enjoyed entering into business relationships without regulatory scrutiny will be obligated to undergo a detailed review process, including financial, character and competence review, all of which had previously been reserved to licensed entities. The fact that the legislative intent proffers a blanket assertion that investor-backed practices contribute significantly to cost inflation, and intimates that they negatively impact both access and health equity, should not go unnoticed by providers and investors who have experienced just the opposite, including successes that go beyond economic efficiencies and growth, such as improved care delivery and patient outcomes, broadening patient demographics, and greater engagement with payers and providers along the care continuum. For these and other reasons, we expect the bill to face formidable opposition.

Holland & Knight healthcare attorneys will continue to monitor the legislation and provide updates when available.