New York Governor Kathy Hochul unveiled a proposal, set forth in the Health and Mental Hygiene Article VII Legislation associated with the proposed State Executive Budget for FY2024 (see Article 45-A) (Executive Budget), that would require the New York State Department of Health (Department of Health) to review and approve any material transaction involving physician practices and physician practice management organizations. The proposal takes aim at, among others, investor-backed physician practice management platforms. If the State of New York enacts the proposed legislation, in its current or a substantially similar form, into law, investors and providers considering transactions in the State of New York will face additional hurdles in consummating their deals, such as an extensive notice and approval process.
The Executive Budget describes the purpose and intent of the proposed law as one solution to the lack of regulatory oversight of investor-backed physician practices. It noted that these practices increasingly take on diagnostic and treatment center characteristics and assume downstream risk from payors. Moreover, according to the Executive Budget, these developments are coupled with historical shifts in health care service delivery from hospital and institutional settings to physician and community provider settings. The state policy underpinning the proposed law is not unique to New York. Similar notice initiatives for physician practice transactions have been implemented and are being discussed in other states.1
The law, in its current proposed form, would require a “health care entity” (including physician practices2, management services organizations (MSOs) and, potentially, risk bearing entities other than insurers) to obtain approval from the Department of Health before consummating a “material transaction.” A “material transaction” includes a variety of arrangements, including, among others: (i) acquisitions of a health care entity’s assets, equity interests or the transfer of at least 10% direct or indirect control; (ii) affiliations between a health care entity and another person; and (iii) the formation of a partnership, joint venture, accountable care organization, parent organization, or MSO for the purpose of administrating contracts with health plans, third-party administrators, pharmacy benefit managers, or health care providers.
Under the proposed law, the Commissioner of Health would determine threshold factors for a material transaction, which include changes in revenue during a specified time period or as a result of a series of transactions, and may also include purchase price amounts or ownership percentages. Most notably, the material transaction definition would encompass typical private equity backed physician recapitalization transaction participants such as target practices, MSOs and their investors. Other common transactions that could be impacted by the proposed law are:
To navigate the review and approval process, investors and providers will need to familiarize themselves with the notice and submission material requirements, review timing and approval criteria.
There are three unexpected impacts on investors and providers from the proposed law.
There is no certainty that the proposed law will be enacted in its current form by the April 1, 2023 deadline for approval of the State Budget. Indeed, if enacted, the proposed law may be in amended and revised form. The enacted law would not be effective until the Department of Health promulgates implementing regulations, subject to a notice and comment process.
The proposed law is another instance of physician practice transactions and accompanying management platform structures increasingly coming under review by state regulators. Investors should keep these trends on their radar.
Foley is here to help you address the short- and long-term impacts in the wake of regulatory changes. We have the resources to help you navigate these and other important legal considerations related to business operations and industry-specific issues. Please reach out to the authors, your Foley relationship partner, or to our Health Care Practice Group with any questions.
1 E.g., California, Connecticut, Massachusetts, Oregon, Nevada, and Washington.
2 “Health care entity” does not currently encompass non-physician health care professionals. It is possible at some point that it could be expanded to include dentists, optometrists, etc. New York’s public policy concerns driving the proposed law are not exclusive to physician practices.
3 Currently, the Commissioner of Health will determine qualifying health care providers by regulation.