As part of the Fiscal Year (FY) 2024 New York State Budget, New York adopted legislation that granted the Department of Health (DOH or Department) oversight of certain health care transactions involving physician practices and other health care organizations by requiring that health care entities provide prior notice to DOH of transactions covered by the law. This new law takes effect on August 1, 2023, and applies to any transaction that meets the definition of a material transaction closing on or after that date.
The Department anticipates that a form for submitting the required information for disclosure of a material transaction will be made available by August 1. While the Department is in the process of developing regulations for implementing this requirement, it expects that, starting on August 1, all transactions subject to the new law that meet the materiality threshold will provide the required 30-day notice prior to the scheduled closing.
Background
In January 2023, Governor Kathy Hochul included a proposal in the Executive Budget that would grant DOH oversight of “material transactions” between “health care entities.” This proposal represented a new approach by the state to subject to regulatory review and approval by DOH transactions involving physician practices and management services organizations (MSOs), which traditionally operated outside of any review by the state.
As outlined in the Legislative Intent section of the proposal, New York identified a concern with the unchecked growth of large physician practices and ambulatory care sites being managed by entities that are investor-backed. Further, the proposal outlined that the state views this growth as having a negative impact on patient care and as shifting business away from community hospitals and safety net providers, while being a significant contributor to health care cost inflation. To address these concerns, the state would subject certain physician practice and MSO transactions, as well as other transactions that could be included under the broad definitions of “health care entity” and “material transactions,” to a Certificate of Need-like structure, which to date has been reserved for health care operations seeking licensure under Articles 28, 36 and 40 of the Public Health Law.
The proposal would have granted the Department the authority to evaluate an application for consent for a material transaction as to the financial condition and character and competence of the parties, source of funding for the transaction, and whether the potential positive impacts outweigh the potential negative effects on cost, access, health equity and health outcomes. It would have given DOH the authority to require undertakings to submit such information as a condition of approval, including required community investments. It also would have established a civil monetary penalty of $10,000 per transaction for health care entities that failed to obtain approval.
The enacted FY24 budget significantly modified the original proposal by establishing a requirement that health care entities disclose and provide prior notice to DOH of transactions that meet the materiality threshold, rather than giving DOH the authority to evaluate and approve (or deny) a material transaction. New York joins several other states, including Washington, Nevada, Massachusetts and Oregon, that have established notice and/or approval requirements for health care transactions.
Summary of Disclosure of Material Transactions Law
As enacted, Article 45-a of the Public Health Law requires parties in any material transaction involving a health care entity to provide written notice of such transaction to DOH at least 30 days prior to the closing of the transaction. It appears that unless DOH raises an issue of noncompliance with the written notice, material transactions would be permitted to close in compliance with these requirements after the 30-day notice period expires, provided that the parties notify DOH upon the closing of the transaction.
Health Care Entities
A “health care entity” is broadly defined to include any “physician practice, group, or management service organization (MSO) or similar entity providing all or substantially all of the administrative or management services under contract with one or more physician practices, provider-sponsored organizations, health insurance plans, or any other kind of health care facility, organization or plan providing health care services in New York.”
Material Transactions
The law defines a “material transaction” as any of the following types of transactions, or series of related transactions over a period of 12 months, that result in a health care entity increasing its total gross in-state revenues by more than $25 million:
- A merger with a health care entity
- An acquisition of one or more health care entities, including but not limited to the assignment, sale, or other conveyance of assets, voting securities, or membership or partnership interest, or the transfer of control
- An affiliation agreement or contract formed between a health care entity and another person
- The formation of a partnership, joint venture, accountable care organization, parent organization or MSO for the purpose of administering contracts with health plans, third-party administrators, pharmacy benefit managers or health care providers
The law exempts the following transactions from the notice requirements:
- Clinical affiliations of health care entities formed for the purpose of collaborating on clinical trials or graduate medical education programs
- Transactions that are already subject to review under Articles 28, 30, 36, 40, 44 or 46 of the Public Health Law
- “De minimis transactions,” which are defined as any transaction or series of related transactions that result in a health care entity increasing its total gross in-state revenues by less than $25 million
Notice Requirements
In providing notice to DOH of a material transaction, the parties to the transaction will be required to disclose the following information at least 30 days prior to closing the proposed transaction:
- The names of the parties to the material transaction and their current addresses
- Copies of any definitive agreements governing the terms of the material transaction, including pre- and post-closing conditions
- Identification of all locations where health care services are currently provided by each party and the revenue generated in the state from such locations
- Any plans to reduce or eliminate services and/or participation in specific plan networks
- The closing date of the proposed material transaction
- A brief description of the nature and purpose of the proposed material transaction, including:
-The anticipated impact of the material transaction on cost, quality, access, health equity and competition in the impacted markets, which may be supported by data and a formal market impact analysis
-Any commitments by the health care entity to address anticipated impacts
The law requires DOH to provide a copy of the submitted notice to the Antitrust, Health Care and Charities bureaus of the Office of the New York State Attorney General. In addition, DOH is required, within the 30-day period prior to the closing date, to post the following publicly:
- A summary of the proposed transaction
- An explanation of the groups or individuals likely to be affected by the transaction
- Information about services currently provided by the health care entity and any services that will be reduced or eliminated
- Details regarding how to submit comments
Penalties
The failure to notify the Department of a material transaction that is subject to the notice requirements under this law is subject to a civil penalty under Public Health Law § 12, which establishes a maximum penalty of $2,000 per violation. The law provides that each day the violation continues will constitute a separate violation, resulting in a potential penalty of up to $2,000 per day for noncompliance.
Please contact a member of the Manatt team with any questions related to compliance with the requirements of this law.