Physician Practice Transactions: NY’s Proposed Review and Monitoring Increases Visibility and Adds Deal Risk

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

Qualifying Material Transactions

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:

1. Physician practice acquisitions by hospitals and other providers (e.g., employed hospital model);
2. Affiliation agreements with other providers (e.g., integration efforts, clinical service line affiliations, or joint branding);
3. A physician practice entering into an administrative or management services agreement with an MSO;
4. Formation of an MSO, accountable care organization, or a risk bearing entity for physician practices and other health care providers;³
5. Physician retirement from or admitting new physician shareholder(s) to a physician practice; and
6. Investment rounds or sale of a holding company of a management services company.

Review and Approval Process

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.

1. Notice and Submission Material Requirements - Under the proposal, health care entities contemplating material transactions would be required submit notice of material transactions to the Department of Health for approval at least 30 days prior to the closing. The initial submission would be required to include details of the transaction and post-closing plans, including submission of definitive agreements, as to which care will need to be taken to address potential public release of otherwise confidential materials.
2. Review Timing - The Department of Health would have the option to withhold approval within that 30-day period to complete its examination. During that review, the Department would be required to publicly post the proposed transaction for notice and comment. The public posting requirement would require longer and more structured closing lead times and potentially messaging the transaction to patients and outside provider relationships prior to the public notice, which processes are more common with high-value transactions that trigger Hart-Scott-Rodino or state antitrust notices.
3. Approval Criteria - As currently drafted, the Department of Health would focus its review on the following factors, among others: (i) the positive impacts of the transaction outweigh potential negative impacts related to patient costs, access to services generally and by under-served populations, health equity, health outcomes, and competition; (ii) likelihood of anticompetitive effects; and (iii) the fairness of the exchange of consideration in the transaction.

Unexpected Impacts

There are three unexpected impacts on investors and providers from the proposed law.    

1. Indirect Ownership Reporting - The indirect ownership reporting with affidavits of no control for upper tiers of ownership is not typical for MSOs, and the collection of such information and affidavits is practically burdensome. Further, a health care entity would not be permitted to refuse to supply requested information on grounds of confidentiality or privilege.
2. Commitments Required for Approval – The Department of Health can require certain undertakings as a condition for approval, including community investments, competition protections and contributions to state-controlled funds. These business and operational commitments would create economic unpredictability and a closing risk for transactions. These types of commitments are commonly utilized by state antitrust regimes (often a version of Certificate of Public Advantage laws) when approving hospital and health system transactions.
3. Open-ended Material Transactions Definition – There is no de minimus exception to the various material transactions based on revenue, purchase price or ownership in the proposed law. Instead, the proposed law requires the Commissioner of Health to determine the threshold factors. Further, the definition of “material transaction” is broad and includes an open-ended element: “an affiliation or contract formed between a health care provider and another person.” If this language remains in the enacted form of the proposed law, the Department of Health will have rulemaking authority to cover a range of contractual arrangements with a physician practice or a management service company.

What’s Next?

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.