New York Gov. Kathy Hochul’s Executive Budget Proposal for FY 2023-2024 includes a proposal to require Department of Health (DOH) approval of certain mergers, acquisitions, and other significant transactions involving medical practices. The proposed legislation would create a cumbersome process and provide the DOH with wide-ranging powers related to the review and approval of transactions involving medical practices, including authority to require undertakings such as community investment and contribution to state-controlled funds as a condition of approving a transaction. If enacted, the legislation would create a significant impediment to the consummation of transactions involving New York medical practices, including, in particular, transactions involving private equity investors. We review the proposed legislation and its current status below.
Purpose of Proposed Legislation
The proposed legislation includes a legislative purposes section that reflects a clear antagonism toward acquisitions of medical practice by “investor-backed entities” and the purported adverse impact of such transactions on health systems and hospitals and healthcare costs. Specifically, the proposed legislation refers to concern with the purported lighter regulation of physician practices as compared to hospitals and other provider entities that are licensed in New York, the proliferation of large physician practices being managed by entities that are investor backed, the shift of services to ambulatory care, and the potential negative impact on patient care, costs, and access to services. The proposed legislation asserts that “large 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” and the “concentration of these investor-backed physician practices is a significant contributor to health care cost inflation[.]”
Among other issues, the legislative purpose section of the proposed legislation ignores studies that find that the limitation of supply of healthcare services through certificate of need (CON) approval processes like the one proposed here has been found to increase the cost of healthcare services rather than reducing costs. For example, a former Federal Trade Commission commissioner appointed by President Obama observed that “[t]he majority of studies fail to establish any definitive link between CON laws and lower unit costs[,]” and “[b]y restricting expansion and new entry, CON laws help to insulate incumbent providers from competition.”1 Similarly, the Federal Trade Commission and Department of Justice have criticized CON laws, noting that “by interfering with the market forces that normally determine the supply of facilities and services, CON laws can suppress supply, misallocate resources, and shield incumbent healthcare providers from competition from new entrants.”2
Key Provisions of the Proposed Legislation
The proposed legislation would require review and oversight of “material transactions” involving “health care entities” for transactions closing on or after April 1, 2024. Healthcare entities are defined to include physician practices, management service organizations (MSOs) providing all or substantially all administrative or management services to a physician practice, provider-sponsored organizations, health insurance plans, or other entities providing healthcare services. A material transaction is defined broadly to include, subject to thresholds to be adopted by DOH, a merger with a healthcare entity; an acquisition of one or more healthcare entities, including a sale of assets, voting securities, or transfer of control; an affiliation or contract formed between a healthcare entity and another person; or 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, pharmaceutical benefit managers, or healthcare providers. Collaborations related to clinical trials or graduate medical education programs and transactions already subject to review under the Public Health Law are excluded from the definition of a material transaction.
Pursuant to the proposed legislation, the parties to a material transaction would be required to provide DOH with notice and apply for approval at least 30 days prior to closing of the transaction. The application would be required to identify the parties; include copies of definitive agreements; identify the locations where services are provided by each party and the revenue generated from such locations; specify any plans to reduce or eliminate services or participation with insurers; give the anticipated closing date; provide a description of the nature and purpose of the transaction, including anticipated impact on cost, quality, access, health equity and competition; and identify commitments to address anticipated impacts.
In reviewing the transaction, DOH would be authorized to consider: (1) whether potential positive impacts outweigh potential negative impacts related to factors such as patient costs, access to services, health equity, and health outcomes; (2) the substantial likelihood of anticompetitive effects that outweigh benefits; (3) the financial condition of the parties; (4) the character and competence of parties or any officers and directors; (5) the source of funds; and (6) the fairness of consideration.
If the DOH does not act on the application within 30 days of receipt, then the transaction must be deemed approved. However, the DOH can notify parties that it is withholding approval to conduct further analysis.
The DOH would be required to provide public notice and accept comments during the 30-day period. The DOH would be authorized to request information from the parties. The parties to a material transaction would be required to certify information submitted as true and accurate under penalty of perjury. The parties would be prohibited from withholding information on the basis that it is privileged or confidential. The DOH would be authorized to engage consultants to assist in review of a transaction at the cost of the parties.
The DOH would be authorized to notify the attorney general of findings so that the attorney general can investigate whether entities have engaged in unfair competition or anticompetitive behavior.
The proposed legislation would also authorize DOH to “require undertakings as a condition of approving a material transaction, including but not limited to, investments in the communities affected by such material transaction, competition protections, and contributions to state-controlled funds[.]”
The DOH can impose civil penalties of up to $10,000 per day for a violation and obtain injunctive relief.
Additional Legislative Developments
On February 28, 2023, the New York State Legislature held a Joint Legislative Budget Hearing on Health. The written testimony submitted for the hearing was mixed. While two trade group representing hospitals supported the addition of the proposed legislation and a trade group representing nurses supported oversight of large physician practices (though it supported oversight through the “regular legislative process” rather than the budget process), a large trade group representing New York physicians strongly opposed the proposed legislation. The physician trade group, the Medical Society of the State of New York, argued that the proposed legislation would “‘rig the game’ of healthcare delivery in New York State in favor of large hospital systems” and was drafted so broadly that approval would be required “for the purchase of one medical practice by another, completely unrelated to the involvement of private equity.”
On March 14, 2023, the Senate3 and Assembly4 passed budget resolutions outlining their respective budgetary visions for the coming fiscal year. The Senate resolution included the proposed legislation, but the Assembly bill did not. As reflected by the witness testimony discussed above, there is disagreement over proceeding with the addition of the onerous requirements for investor-backed healthcare transactions contained in the proposed legislation.
Analysis
It is unclear at this time whether the Legislature will pass the proposed legislation in its current form or in some amended form. If enacted, the legislation will create a significant impediment to executing physician practice acquisitions in New York. Among other things, the legislation will prohibit the simultaneous signing and closing of physician practice transactions and create risk that the parties will not obtain approval or will be required to make significant concessions to obtain approval, or that the review process will create significant delay. If enacted, the proposal will likely decrease interest by investors in transactions involving physician practices in New York; reduce the ability of such practices to access capital; slow the transition to value-based care in New York; increase costs of healthcare services; and limit access to care in New York. In the short term, the legislation could create an incentive to close transactions prior to the legislation taking effect.
[1] Maureen Ohlhausen, Certificate of Need Laws: A Prescription for Higher Costs, Antitrust Vol. 30, No. 1 (2015).
[2] Federal Trade Commission and Department of Justice, Joint Statement on Certificate-of-Need Laws and South Carolina Bill 3250 (January 11, 2016).
[3] N.Y. State Senate, Senate Budget Resolution in Response to the 2023-2024 Executive Budge Submission, Bill No. S4007-B (Mar. 14, 2023), https://legislation.nysenate.gov/pdf/bills/2023/s4007.
[4] N.Y. State Assembly, Assembly Resolution No. 190 in Response to the 2023-2024 Executive Budge Submission, Bill No. A3007-B (March 14, 2023), https://nyassembly.gov/2023budget/?sec=assembly.
Contacts
- /en/people/c/cohen-roger
Roger A. Cohen
Partner - /en/people/s/smith-matthew
Matthew F. Smith
Associate