The proliferation of private investor-backed management of health care practices continues to draw scrutiny from regulators into the impact on patient care, health care costs, and access to services. State regulators play a key role in monitoring and challenging anticompetitive behavior at the local level but have varying degrees of authority across the country to review or approve health care consolidation transactions. There are a growing number of states that are proposing or enacting laws requiring regulatory review of health care transactions that will significantly reshape the health care investment landscape. States have typically limited review and approval of health care transactions to larger provider types, such as hospitals. Recently, however, some states have expanded statutory requirements for review of health care transactions to physician provider groups and even management service organizations. For example, Massachusetts, Nevada and Washington have all enacted laws that require notice of material changes for certain transactions involving physician practices and other entities. Recently, New York and California, two of the states that are most active in reviewing and enforcing the corporate practice of medicine prohibitions and the activities of physician entities, have taken more direct steps towards broadening the reach of state regulatory authority to cover a wide array of transactions and entities.
I. New York State Department of Health Proposal
On February 1, 2023, Governor Kathy Hochul released the New York State Executive Budget (“State Budget”) for fiscal year 2023-24. Embedded within the executive budget is a proposal that would give the State Department of Health (DOH) new authority to review and approve certain “material transactions” involving physician practices and other “health care entities” taking place in the state (“Proposal”). If enacted, this bill would add a new Article 45-A to the New York Public Health Law and subject health care transactions involving private equity and investor-backed entities to review. In articulating the purpose of the Proposal, the Governor cited an increasing number of physician practices that are managed by investor-backed entities, noting that these entities have assumed characteristics associated with clinics, insurers, and diagnostic and treatment centers, but remain “largely unregulated by the state.”
a. Definition of “Health Care Entity” and “Material Transaction”
The Proposal defines a “health care entity” to include a management services organization or similar entity providing all or substantially all of the administrative or management services under contract with one or more physician practices, provider organizations, health insurance plans, or any other kind of facility, organization, or plan providing health care service. Additionally, a “material transaction” is broadly defined to include mergers, acquisitions or affiliations with a health care entity, as well as “an affiliation or contract formed between a health care entity and another person” and the “formation of an … [MSO] for the purpose of administering contracts with health plans, third-party administrators, pharmacy benefit managers, or health care providers.”
b. Review Process
Under the Proposal, the health care entities engaging in a material transaction must submit written notice of the transaction to DOH at least 30 days prior to the closing date. If DOH does not respond within the 30-day timeframe, the transaction will be deemed approved, but DOH may extend the 30-day period if “necessary to conduct a thorough examination and complete analysis” of the transaction. The Proposal authorizes DOH to hire independent third-party entities to assist in a review and to charge the cost of retaining such third-party entities to the applicant. Furthermore, DOH will publicly post all written notices received regarding proposed transactions and will request public comments on the transactions.
In its review, DOH would be authorized to consider a variety of factors, such as the financial condition of the transaction parties, the character and competence of the parties, the source of funds for the transaction, and whether the benefits of the transaction outweigh the potential negative effects on cost, access, health equity, and health outcomes.
c. Penalties for Noncompliance
The Proposal would grant DOH the power to impose a civil penalty of up to $10,000 for each day that a transaction is out of compliance, which would presumably extend into perpetuity until and unless an application is filed. The Proposal would also enable DOH to pursue an injunction against the closing of a material transaction that has not been submitted for review to DOH.
d. Key Takeaways
The Proposal expands the scope of DOH regulatory authority to a very broad range of “health care entities,” which includes purely administrative service organizations, such as MSOs. The approval and public comment process under the Proposal could severely impact the landscape of health care related transactions within the State of New York, especially given that the factors to be considered in approving such a transaction include highly subjective criteria, such as the “character and competence of the parties.” Investors and entities in the health care space should carefully follow the progress of the Proposal, which could significantly hinder new investments in health care companies if adopted.
II. California Office of Health Care Affordability
On June 30, 2022, California Governor Gavin Newsom signed SB-184 into law, which created a new Office of Health Care Affordability (OHCA) within the California Department of Health Care Access and Information. To “increase public transparency,” OHCA is granted authority to “[r]eview and evaluate consolidation, market power, and other market failures through cost and market impact reviews of mergers, acquisitions, or corporate affiliations involving health care service plans, health insurers, hospitals, physician organizations, pharmacy benefit managers, and other health care entities.”
a. Definition of “Health Care Entity”
The statute defines “health care entity” as a “payer, provider, or fully integrated delivery system,” including health care service plans, health insurers, hospitals, hospital systems, pharmacy benefit managers, certain physician organizations, other providers (e.g., clinical labs), and other payers. [1] Entities excluded from the definition of health care entity include dentists, pharmacies, drug manufacturers, DME suppliers, home health agencies, and emergency medical transportation service providers.
b. Transactions Subject to OHCA Review
Generally, transactions that involve a change in ownership, operations, or governance structure that (i) sell, transfer, lease, exchange, option, encumber, convey, or otherwise dispose of a material amount of a health care entity’s assets to one or more entities; or (ii) transfer control, responsibility, or governance of a material amount of the assets or operations of the health care entity to one or more entities will be subject to review. [2]
c. Review Process
The cost and market impact review process requires transaction parties to notify OHCA at least 90 days prior to closing. Within 60 days after receipt of the notice, OHCA will either advise the notifying party that OHCA will conduct a cost and market impact review or provide a written waiver from the review. During the cost and market impact review process, OHCA will evaluate (i) changes in size or market share in a given service or geographic region, (ii) prices relative to other providers, (iii) quality, equity, access, and other factors in the public interest, and (iv) benefits of the transaction, such as improvements in access, quality, and efficiency. [3] The review process includes an investigation by OHCA, which may subpoena health care entities and other relevant market participants to submit data and documents. An agreement or transaction subject to a cost and market impact review may not proceed until 60 days after OHCA issues a final report. During this time, OHCA may refer the transaction to the attorney general for review, and the attorney general may pursue litigation to block the transaction or allow it to proceed subject to specified conditions, such as the implementation of monitoring or ongoing reporting requirements.
The advance review of these health care transactions is slated to begin on April 1, 2024, and OHCA will begin accepting required transaction notices in January 2024. OHCA is expected to promulgate regulations to provide additional details on the types of transactions subject to review and qualifying factors.
d. Key Takeaways
Although the statute does not grant OHCA authority to block or challenge health care transactions, OHCA does have the ability to significantly delay transactions that fall under its purview, given that no transaction for which OHCA conducts a review may close for 60 days following its delivery of a final report. Similar to the New York Proposal, SB-184 covers a wide array of transactions, including those that involve, for instance, MSOs, to the extent the transaction would cause a change in responsibility for operations of a health care entity. Investors that use MSOs as the investment vehicle for health care entities should carefully navigate the new requirements and oversight imposed by SB-184, beginning in 2024, and follow the promulgation of regulations over the coming months, which will further clarify the scope and nature of the law.
****
If you have any questions about the current trends in regulatory oversight of the practice of medicine, please contact Wendy Chow or Rachel Park.
[1] CA Health and Safety Code § 127500.2(k).
[2] CA Health and Safety Code § 127507(c)(2); CA Health and Safety Code §§ 127507(c)(1)(A)-(B).
[3] CA Health and Safety Code § 127507.2(a)(1).