IMPORTANT TAKEAWAYS

• Article 45-A aims to regulate large physician's practices managed by entities that are investor-backed.

• The proposed legislation would authorize the New York Department of Health (DOH) to review and approve material health care transactions within the state.

• Health care entities involved in a material transaction would be required to provide written notice of the transaction and submit an application to the DOH at least 30 days prior to the target closing date. 

• During the 30-day period, the DOH could submit the transaction to public notice and comment.

• Despite the DOH’s approval or disapproval of a material transaction, the DOH may notify the state attorney general of the department’s findings.

BACKGROUND ON PROPOSED LEGISLATION

On 1 February 2023, the Governor of New York, Kathy Hochul, revealed her executive budget, which included a proposal that would give the DOH oversight of material transactions involving certain health care entities. The proposal would amend the Public Health Law by adding a new Article 45-A, labeled “Review and Oversight of Material Transactions,” which can be found in the newly introduced legislation Senate Bill 4007and Assembly Bill A3007, Part M Section 5.¹ 

The legislation aims to address the “proliferation of large physician practices being managed by entities that are investor-backed,”² asserting that such practices are “subject to far less regulation and oversight”³ than other health care providers, including hospitals, home care agencies, providers of behavioral health services, and managed care organizations within the state. Moreover, the bill posits that “larger investor-backed health care entities shift volume and business away from community hospitals and their ambulatory care networks and other safety net providers, undermining their financial sustainability,”⁴ and “the concentration of these investor-backed physician practices is a significant contributor to health care cost inflation…”⁵ 

WHAT TRANSACTIONS AND WHAT PROVIDERS WOULD BE SUBJECT TO REVIEW?

According to the bill, “material transactions” involving “health care entities” would need to be approved by the DOH.⁶ A health care entity is defined as 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 in the state.⁷ A material transaction means: (i) a merger with a health care entity; (ii) an acquisition of one or more health care entities; (iii) an affiliation or contract formed between a health care entity and another person; or (iv) 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.⁸ 

REVIEW PROCESS 

The DOH’s review process would require health care entities involved in material transactions to provide written notice and submit an application at least 30 days before the target closing date.⁹ In addition to the application, the parties to the transaction would be required to submit supporting documentation such as copies of any definitive agreements governing the terms of the material transaction, including pre- and post-closing conditions, among other arguably privileged and confidential information.¹⁰ The transaction would be deemed approved if the DOH does not act upon the application within the 30-day timeframe.

Notably, among other factors to consider, when reviewing a material transaction, the DOH may consider whether the parties can demonstrate that the potential positive impacts of the material transaction outweigh the potential negative impacts and whether there is a substantial likelihood of anticompetitive effects from the transaction that outweigh the benefits of the transaction including by increasing or maintaining services to underserved populations or stabilizing the operations of the existing delivery system.¹¹ Such competition-based criteria by the DOH is indicative of state regulators’ growing concern to protect competition and consumers from the anticompetitive effects of consolidation.¹² 

During the 30-day period, the DOH could subject the transaction to public notice and comment which would include a summary of the proposed material transaction, an explanation of the groups or individuals likely to be impacted by the transaction, information about services currently provided by the health care entity, commitments by the health care entity to continue such services and any services that will be reduced or eliminated, and details about how to submit comments. 

Despite approval or disapproval of a material transaction, the DOH may notify the state attorney general of the department’s findings and analysis so that the attorney general may, if appropriate, conduct an investigation into whether such health care entity has engaged in unfair competition or anticompetitive behavior.

KEY CONSIDERATIONS

This bill is an important one to track during the 2023 legislative session, because it has the potential to significantly impact investors in the health care industry in New York. Other states such as Washington, Oregon, and California have already enacted similar legislation relating to mandatory notice and approval of certain health care transactions.

The bill, as currently written, is considerably broad and the DOH would need to promulgate regulations to enforce the statute. It would be unsurprising to see later iterations of the bill even if unsuccessful during this legislative session, as state officials across the country are increasingly turning their attention to health care transactions involving smaller health care providers as such transactions are rarely subject to federal oversight and federal antitrust laws.

FOOTNOTES

¹ New York State’s budget process uses an executive budget model. Under this system, the executive is responsible for developing and preparing a comprehensive, balanced budget proposal, which the Legislature modifies and enacts into law. The Governor is required by the State Constitution to seek and coordinate requests from agencies of State government, develop a “complete” plan of proposed expenditures and the revenues available to support them (a “balanced budget”), and submit a budget to the Legislature along with the appropriation bills and other legislation required to carry out budgetary recommendations. The Budget Process | Citizen's Guide (ny.gov).

² Assembly Bill No. A30007, Part M Section 5, Article 45-A Review and Oversight of Material Transactions, Section 4550. Bill Search and Legislative Information | New York State Assembly.

³ Id.

⁴ Id.

⁵ Id.

⁶ Id. at Section 4453.

⁷ Id. at Section 4451.

⁸ Id.

⁹ Id. at Section 4554 (3).

¹⁰ Id. at Section 4553.

¹¹ Id.

¹² See generally, State Action to Oversee Consolidation of Health Care Providers, Alexandra Montague, Katherin Gudiksen, Jaime King. State Action to Oversee Consolidation of Health Care Providers | Milbank Memorial Fund.