New York State Department of Health Issues Long-Awaited Guidance on Material Transactions Law

The New York State Department of Health (DOH) has published a set of Frequently Asked Questions (FAQs) to provide guidance on the "Disclosure of Material Transactions" law that took effect on Aug. 1, 2023. Pursuant to Article 45-A of the Public Health Law (PHL) (referred to in the FAQs as the "Material Transactions Law"), "health care entities" (HCEs) involved in a "material transactions" are obligated to provide written notice to DOH at least 30 days prior to the closing of the transaction.

The guidance comes in the midst of significant proposed amendments included in Gov. Kathy Hochul's executive budget proposal for State Fiscal Year 2025-2026. If enacted, the proposed amendments would, among other things, expand the notice and disclosure requirements and subject the transaction to a preliminary review by DOH. (For more on the proposed amendments, see Holland & Knight's previous Healthcare Blog post, "Proposed Changes to New York's Material Transactions Law Expand Oversight," Jan. 24, 2025.)

While those changes are pending, the FAQs shed light on the entities and transactions subject to the current Material Transactions Law's obligations. Notably, they identify dental practices, clinical laboratories and pharmacies as HCEs within the meaning of the law and explain how to calculate the $25 million threshold for purposes of determining whether a transaction meets the de minimis exception, as discussed in more detail below.

"Health Care Entities"

PHL Section 4450(2) defines a "health care entity" to include, but not be limited to, physician practices, management services organizations or similar entities "providing all or substantially all of the administrative or management services … [to] physician practices, provider-sponsored organization, health insurance plan, or any other kind of health care facility, organization or plan providing health care services in the state."

The definition expressly excludes licensed insurers and pharmacy benefit managers (PBMs) regulated by the New York State Department of Financial Services but omits a wide range of potentially regulated entities, such as dental and veterinary practices.

In response to a request for clarity around the definition, DOH provided an "illustrative" but not "exhaustive" list of additional entities that it considers to be HCEs under the Material Transactions Law. These include:

• dental practices
• clinical laboratories
• pharmacies
• wholesale pharmacies, including secondary wholesalers
• Independent Practice Associations (IPAs)
• Accountable Care Organizations (ACOs)

Many industry stakeholders may question why DOH's clarification of the HCE definition fails to name any allied health professions, including physical therapists, occupational therapists, applied behavior analysts, chiropractors or clinical social workers. These licensed professions could have been captured by the Material Transactions Law or DOH guidance with clarification that it applies to HCEs owned by healthcare providers licensed pursuant to Title VIII of New York's Education Law.

Although DOH acknowledges the list is not comprehensive, a plain reading of the statute, combined with the examples given (five out of six are licensed or subject to additional regulatory requirements, unlike private practices), leave open the possibility that these professions are in fact not subject to the Material Transactions Law.

Indeed, when the law was initially introduced as the "Review and Oversight of Material Transactions" law, the legislature focused on physician practices and the proliferation of "investor-backed" management arrangements, which it characterized as a "phenomenon" that lacks regulatory oversight, rendering the state unable to "track or monitor the impact of these transactions on cost, quality, access, equity and competition."

If oversight of broader private equity management of health care providers (rather than just physician practices) is the impetus for the current iteration of the law, it begs the question why didn't the FAQs list the allied health professions, but instead listed intermediaries (such as IPAs and ACOs), which are not licensed but are regulated insofar as their upstream and downstream contracts are concerned, and pharmacies and clinical labs, which are licensed.

If the answer is that the language stating "any other kind of health care facility, organization or plan providing health care services in the state" is intended to capture every type of "material" healthcare provider transaction in the state, the FAQs could have made this more clear.

Additionally, DOH clarifies that the Material Transactions Law applies to all HCEs regardless if the entity is located in-state or out-of-state, and that the relevant metric for determining a reporting obligation is whether the proposed transaction stands to generate the requisite threshold amount of gross New York in-state revenue.

"Material Transactions" and Related Exceptions

PHL Section 4550(4) defines a "material transaction" as a single or series of related transactions that result in an HCE increasing its gross New York revenues by $25 million or more within a rolling 12-month period. These transactions include, but are not limited to, mergers, acquisitions, affiliation agreements or contracts formed between HCEs and another person, partnerships, joint ventures, ACOs, parent organizations or other entities formed for the purpose of administering contracts with health plans, third-party administrators, PBMs or healthcare providers. The FAQs clarify that an "acquisition" is not merely an asset or equity deal between providers, but also "the transfer of control, such as contracting for services commonly provided through a management or administrative services agreement between a practice and a management services organization."

Excluded from the definition of a "material transaction" is a "de minimis" transaction generating less than $25 million of gross in-state revenue. Also excluded are clinical affiliations of HCEs formed for the purpose of collaborating on clinical trials or graduate medical education programs and transactions subject to the DOH's Certificate of Need (CON) or insurance-entity approval processes.

Calculating Gross In-State Revenue

Health care entities have asked how to calculate "in-state revenue" for purposes of meeting the "de minimis" exception. In the FAQs, DOH explains that the revenue threshold is calculated by using the 12-month lookback period as a baseline (i.e., what was the target entity's gross in-state revenue during the 12-month period immediately prior to the transaction's closing) and then determining whether the transaction would increase the target's revenue by $25 million or more. DOH offered the following examples:

• Single Transaction: In an acquisition, determine whether the entity to be acquired had $25 million or more of gross in-state revenue during the lookback period so as to allow the parties to assess whether the acquisition will increase the surviving entity's revenue by $25 million or more. In a merger, if two companies have a combined in-state gross revenue of more than $25 million during the lookback period, the merger transaction would be reportable.
• Series of Related Transactions: When there is a series of related transactions, the revenue for each individual transaction's 12-month lookback period must be calculated and accumulated with the revenue of the other transactions. For example, if a company with gross in-state revenue of $5 million will be acquired in September and the buyer acquired another company with gross in-state revenue of $10 million in January and another with gross in-state revenue of $12 million in March, the three combined transactions are considered "material" because the sum of the gross in-state revenues involved in the three transactions is more than $25 million.

While these examples are illustrative, the guidance does not provide a clear definition for "gross in-state revenue" or shed any light on how the transaction's purchase price may or may not play a role in the transaction's value from a materiality perspective. It remains to be seen whether any of these ambiguities will be clarified in future regulations.

Breaking Down the CON Exception

Although a transaction subject to New York's CON laws is excepted from the Material Transactions Law, the FAQs clarify that if one element of the transaction would be subject to the Material Transactions Law, then that component (i.e., the non-CON portion of the transaction) would remain subject to disclosure. Specifically, the transactions may still be considered "material" if the gross in-state revenues for the portions of the transaction not subject to the CON laws meets or exceeds the $25 million "de minimis" threshold. This sum is calculated by subtracting the revenue attributable to the elements that are expected to require a CON application from the total gross in-state revenues for the relevant lookback period.

Assessing the Impacts of a Material Transaction

PHL Section 4552 (f) currently requires parties to a "material transaction" to provide a brief description of the nature and purpose of the proposed transaction, including "the anticipated impact…on cost, quality, access, health equity and competition in the impacted markets." DOH explains that satisfying this requirement includes conducting a "good faith assessment" of the impacts of the proposed transaction, considering a "variety of circumstances" that vary depending on the situation, such as:

• changes in availability of services
• elimination or addition of contracts with certain insurance carriers, including potential impacts to Medicaid participation
• location openings or closings, as well as changes in services available
• expected healthcare staffing changes
• anticipated contracted commercial payor rate increases
• anticipated changes in the share of services provided to historically underserved populations
• any expected increase in market consolidation

DOH notes that the release of a Material Transactions Notice Form may require more specific information to conduct the impact assessment.

Conclusion

While industry stakeholders await official action on the proposed revisions to the Material Transactions Law as well as potential regulations, parties to a New York healthcare transaction are encouraged to review and take into careful consideration these FAQs when trying assess whether it is reportable. Holland & Knight will continue to monitor for additional guidance and provide updates when available. For more information or questions regarding a specific matter, please contact the authors.

Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem, and it should not be substituted for legal advice, which relies on a specific factual analysis. Moreover, the laws of each jurisdiction are different and are constantly changing. This information is not intended to create, and receipt of it does not constitute, an attorney-client relationship. If you have specific questions regarding a particular fact situation, we urge you to consult the authors of this publication, your Holland & Knight representative or other competent legal counsel.