Proposed NY Legislation Requires DOH Approval of Health Care Entity Transactions

The landscape of health care transactions has been constantly evolving and that holds particularly true at present. Recently, the Health Law Observer highlighted new requirements for “change in ownership” transactions in New Jersey, which took effect in November 2022. Now, change may also be forthcoming in neighboring New York.

Specifically, on Feb. 1, 2023, New York Governor Kathy Hochul announced the 2024 Fiscal Year Budget for New York. Among the provisions of the associated Senate Bill (the “Bill”) is a proposal to require New York State Department of Health (“DOH”) approval for certain “Material Transactions” involving “Health Care Entities.”

The legislative history in the Bill reflects New York’s apprehension regarding a “proliferation of large physician practices being managed by entities that are investor-backed” and that “[a]s a general matter, physician practices are subject to far less regulation and oversight than [hospitals, home care agencies, hospice providers, or providers of behavioral health services, as well as managed care organizations or other insurers].”

Specifically, the legislators express concern that investor-backed practices (i) “may have a negative impact on patient care, health care costs, and ultimately access to services” (ii) “shift volume and business away from community hospitals and their ambulatory care networks and other safety net providers” and (iii) “contribut[e] to health care cost inflation.” While the Bill does not contain any data to support these assertions, it implies that the proposed review process will allow the DOH to track and monitor the impact of Material Transactions on “cost, quality, access, equity and competition.”

The Bill applies to “Health Care Entities,” which it defines as inclusive of, but not limited to, “a physician practice or management services organization or similar entity providing all or substantially all administrative or management services under contract with one or more physician practice, provider-sponsored organization, health insurance plan, or any other kind of health care facility, organization or plan providing health care services … ; provided, however, that a ‘Health Care Entity’ [does] not include an insurer directly authorized to do business in [New York], or a pharmacy benefit manager registered or licensed in [New York].”

Further, “Material Transactions” are defined to include, but are expressly not limited to, the following (whether occurring in a single transaction or a series of related transactions):

1. a merger with a Health Care Entity;
2. an acquisition of one or more Health Care Entities including, but not limited to, the assignment, sale or other conveyance of assets, voting securities, membership or partnership interest or the transfer of “Control;”[1]
3. an affiliation or contract formed between a Health Care Entity and another person; or
4. the formation of a partnership, joint venture, accountable care organization, parent organization or management services organization for the purpose of administering contracts with health plans, third-party administrators, pharmacy benefit managers or health care providers as prescribed by the commissioner by regulation.”

The Bill states that the DOH’s review of Material Transactions will assess “impact on cost, quality, access, Health Equity[2] and competition in the health care service market.”

To submit a request for DOH approval, the Health Care Entity’s[3] application to the DOH shall include (among additional items that may be prescribed by future regulations):

1. the names and current addresses of the parties to the proposed Material Transaction;
2. copies of any definitive agreements governing the terms of the Material Transaction, including pre- and post-closing conditions;
3. identification of all locations where health care services are currently provided by each party and the revenue generated in New York from such locations;
4. plans to reduce or eliminate services and/or participation in specific plan networks;
5. the anticipated closing date;
6. a brief description of the nature and purpose of the proposed Material Transaction, which will be used to inform the DOH’s review, including:
   1. 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; and
   2. any commitments by the Health Care Entity to address anticipated impacts; and
7. a non-refundable application fee.

Under the Bill’s proposal, the DOH will consider the following in assessing a Material Transaction:

1. whether the transaction parties demonstrate that the potential positive impacts of the Material Transaction outweigh potential negative impacts relating to factors such as:
   1. patient costs;
   2. access to services;
   3. Health Equity; and
   4. health outcomes.
2. whether there is a substantial likelihood of anticompetitive effects from the Material Transaction that outweigh the benefits of the Material Transaction, including increasing or maintaining services to underserved populations or stabilizing the operations of the existing delivery system;
3. the financial condition of the parties;
4. the character and competence of the parties and any officers or directors thereof;
5. the source of the funds or assets for the Material Transaction;
6. the fairness of any exchange of shares, assets, cash, or other consideration to be received; and
7. any other relevant information necessary to determine the impact of the Material Transaction.

After receipt of the required materials from the Health Care Entity, the DOH will publicly post notice of the proposed Material Transaction and allow the public to comment on it.

If the DOH does not act on the application within 30 days of receipt of written notice and application, then the transaction shall be deemed approved; otherwise, the DOH shall issue a final order on the request for approval.

Further, the DOH may, within 30 days of the submission, determine to withhold approval of the Material Transaction and request additional time and materials[4] to review and assess the proposed Material Transaction. In addition, the DOH may mandate conditions necessary for approval of the Material Transaction, which can include, but are not limited to “investments in the communities affected by such Material Transaction, competition protections and contributions to state-controlled funds, including the health care transformation fund … to preserve access or to otherwise mitigate the impact of the Material Transaction on the health care delivery system.”

Lastly, the Bill provides that if the DOH denies the request or conditionally approves the request, the DOH may notify the New York State Attorney General of its findings so that office may, if appropriate, investigate whether the Health Care Entities have engaged in unfair competition or anticompetitive behavior.

As is evident, passage of the Bill would vest substantial authority in the DOH to not only scrutinize Material Transactions, but also apply additional, material conditions on Health Care Entities that wish to consummate covered transactions. This, in turn, imposes additional obligations on Health Care Entities and could increase costs to consummate Material Transactions. Given the potentially significant impact of the Bill, we will be carefully monitoring further developments on this matter.

[1] The Bill defines “Control” as “the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of a Health Care Entity, whether through the ownership of voting securities, by contract (except a commercial contract for goods or non-management services) or otherwise; but no person shall be deemed to control another person solely by reason of being an officer or director of a Health Care Entity. ‘Control’ shall be presumed to exist if any person directly or indirectly owns, controls, or holds with the power to vote 10 percent or more of the voting securities of a Health Care Entity.” [emphasis added]

[2] The Bill defines “Health Equity” as “achieving the highest level of health for all people and shall entail focused efforts to address avoidable inequalities by equalizing those conditions for health for those that have experienced injustices, socioeconomic disadvantages, and systemic disadvantages.”

[3] Interestingly, the language of the Bill does not specify whether this is a buyer’s or seller’s obligation to submit a request for approval. Rather, the Bill provides for “requests by Health Care entities to consummate a Material Transaction.” Nevertheless, the materials to be submitted to DOH seemingly require joint participation by the buyer and seller.

[4] The Bill expressly provides that a party involved in the Material Transaction may not refuse a request for information on the basis that such information is privileged or confidential.