On February 1, 2023, New York Governor Kathy Hochul announced the FY 2024 New York State Executive Budget, which included a proposal for the New York Department of Health (the Department) to review and approve material transactions involving physician practices and physician practice management organizations. If the proposal is finalized, it will create a potentially lengthy regulatory approval process for common transactions in New York State.

IN DEPTH

1. Review of “Material Transactions”

At its core, the legislation requires a “health care entity” to obtain approval from the Department before consummating a “material transaction.” The definition of “health care entity” includes both physician practices and management services organizations among other entities, although it excludes a number of other types of healthcare providers already subject to the Certificate of Need process (for example, ambulatory surgery centers (ASCs) and diagnostic and treatment centers (D&TCs), including end-stage renal disease dialysis clinics). The definition of a “material transaction” includes a broad range of transactions:

(i)    A merger with a healthcare entity;
(ii)   An acquisition of one or more healthcare 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;
(iii)   An affiliation or contract formed between a healthcare 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 healthcare providers as prescribed by the commissioner by regulation.

“Control” is presumed to exist if a person directly or indirectly owns, controls or holds the power to vote 10 percent (10%) or more of the voting securities of a healthcare entity.

The Department’s review would assess material transactions’ “impact on cost, quality, access, health equity and competition in the healthcare service market.” The Department may consider the following factors in its review:

(a)   Whether the “potential positive impacts” of the transaction outweigh the negative ones with respect to patient costs, access to services, health equity and health outcomes;
(b)   Whether there will be anticompetitive effects;
(c)   The financial condition of the parties to the transaction;
(d)   The character and competence of the parties;
(e)   The source of the funds or assets for the transaction;
(f)   The fairness of any exchange or other consideration; and
(g)   Any other relevant information to determine the impact of the material transaction.

2. Notices and Consents

Healthcare entities contemplating material transactions would need to submit notice of a material transaction at least 30 days pre-closing. Although the Department would be required to decide on the request within 30 days, the Department could withhold approval in order “to conduct a thorough examination and complete analysis of whether the transaction is consistent with” state policy.

During its review, the Department would be required to publicly post the proposed transaction for notice and comment. Such public notice would include:

(a)   A summary of the proposed transaction;
(b)   An explanation of the groups or individuals likely to be impacted by the transaction;
(c)   Information about services currently provided by the healthcare entity, commitments by the healthcare entity to continue such services and any services that will be reduced or eliminated; and
(d)   Details about how to submit comments in a format that is easy to find and easy to read.

3. Penalties

The legislation permits the Department to impose civil penalties of up to $10,000 per day for a violation of the requirements.

4. Timeline

The bill must still pass both the New York Senate and Assembly before the Governor can either sign or veto it. The timeline for inclusion in the budget is dictated by the budget process. The New York State Budget is set to be passed by April 1, 2023. If passed with the budget as proposed, the proposed law would apply to material transactions closing on or after April 1, 2024.

New York State budgets tend to change between proposal and finalization. The budgets for the years 2022-2023, 2021-2022, 2020-2021, 2019-2020 and 2018-2019 were finalized after four rounds of changes. The 2017-2018 budget is the least edited in recent memory, with the proposal finalized after three rounds of changes.

5. Analysis and Takeaways

The “purpose and intent” of the proposed law focuses on recent trends in patient care shifting from the hospital setting to the physician office setting. The legislation cites a general lack of regulatory oversight of investor-backed physician practices particularly as these entities “increasingly take on the characteristics associated with diagnostic and treatment centers. . . or . . . assume more risk from managed care organizations and licensed insurers.” In addition, the legislation notes that change in control transactions of these organizations are not currently subject to state oversight, limiting the state’s ability to “track or monitor the impact of these transactions on cost, quality, access, equity, and competition.”

The legislation speculates that this trend may negatively impact patient care, cost and access, and it asserts that it also undermines hospital financial sustainability. Interestingly, the proposed law states that the concentration of investor-backed physician practices is a “significant contributor” to healthcare cost inflation, although it does not explain how the transition from the hospital ambulatory setting to the physician office setting results in increased costs to patients. Indeed, the Division has historically taken the position that moving avoidable institutional care to community and outpatient-based care can lead to better care, better health and lower costs. Nonetheless, our ongoing discussions have suggested that the proposed law is primarily motivated by reimbursement and financial sustainability considerations for those health care entities exempted from the proposed law.

The proposed law was included in the Executive Budget, and it will be subject to extensive review and scrutiny before the budget is finalized. Since the release of the proposed legislation, there has been a sense that the broad implications of the proposed legislation may not yet have been fully vetted, particularly where this legislation has never been proposed in the New York Senate or Assembly or otherwise subject to public comment. Historically, the Executive Budget has been subject to multiple revisions before finalizing, and many are suggesting that the proposal be removed from the budget and transitioned to the Commission on the Future of Health Care, the committee that the Governor is proposing study the future of healthcare provision in New York State.

The proposed law’s requirements are broad and would likely require the promulgation of regulations to confine its scope if it were advanced through the legislative and regulatory processes. The process for proposing and finalizing regulations in New York is lengthy and subject to public comment, making the April 1, 2024, target implementation date unlikely even if the law were to be passed with the State Budget in April.

Given the legislation’s references to the Certificate of Need and other related regulatory approval processes, we might expect the legislation or promulgating regulations to gravitate towards these existing approval structures and their definitions, as relating to reviewable changes of ownership and management services agreements. It is noteworthy, however, that the proposed legislation would not authorize the Public Health and Health Planning Council (PHHPC) to approve material transactions (PHHPC is authorized to approve various other healthcare transactions, including changes in the ownership of hospitals, ASCs and D&TCs). While the absence of PHHPC review may offer a relatively more streamlined process for review under the proposed legislation, the subject matter to be considered is vast and would consume significant resources to prepare and review.

The proposed “character and competence” review could be quite invasive, and ownership disclosure requirements for management services organization may raise significant challenges given the complexity of most investor-backed management services organizations. However, whether the “character and competence” review would be limited to the parties or also include their direct and indirect owners is unspecified in the proposed legislation. While the 30-day timeframe appears manageable, this timeframe may be extended by the Department upon simple notice to accommodate a more extensive review. A protracted review process may result in delays to ordinary course physician transactions and significantly affect the timing of transactions in New York.

While there is a chance that the proposal will not be finalized as part of the FY 2024 budget (and some would argue a significant chance), the proposal will certainly be subject to continued discussion and potential future permutations. Notably, a number of other states have implemented notice requirements for certain physician practice transactions. If New York does take action to review material transactions involving physician practices and administrative services organizations, it will be critical to ensure existing and future investment strategies are structured to navigate the changed landscape.

Benjamin Glass, a law clerk in the New York office, also contributed to this article.