On May 3, New York Governor Kathy Hochul signed into law provisions that will require health care entities to submit a notification to the state Department of Health (DOH) providing information about any material transaction involving that health care entity.
The law, passed as part of the state’s budget, was originally crafted to give the DOH authority to review and approve those transactions. Ultimately, following several iterations during the legislative process, that approval power was stripped out by the state general assembly and replaced with the current notice requirement.
The law will take effect on August 1, 2023 and states on its face that it will apply to all “material transactions” involving health care entities that close on or after that date. That said, the requirements for transactions that close between August 1 and August 31 are a somewhat open question, given the 30-day notice requirement in the law. The DOH is tasked by the law with creating regulations that may address this situation.
Affected entities will be required to provide notice and supporting documentation to the DOH, which will then be required to forward the notice and supporting documentation to the antitrust, health care and charities bureaus of the state attorney general’s office.
We further detail below who is covered by this law, what transactions are covered, what is required and what this means for health care entities doing deals in New York.
Who is covered by the law?
The law specifically defines what types of entities are covered by the law. It also defines what constitutes “control” for purposes of a material transaction based on a transfer of control.
A “health care entity” as defined in the law includes, but is not limited to “a physician practice, group, or management services organization or similar entity providing all or substantially all of the 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 New York. This definition is very broad and encompasses most of the health care industry.
There is a carve out in the definition that exempts “insurers” that are authorized to do business in the state and pharmacy benefit managers that are registered and licensed in the state. The insurer exemption, however, does not include any non-insurance subsidiaries or affiliated companies of insurance companies “regulated under insurance law” or the public health law.
“Control” of a health care entity is also defined by the law as “the possession, direct or indirect, of the power to direct or cause the direction of the management, administrative functions, and policies of a health care entity, whether through the ownership of voting securities or rights, control, either directly or indirectly, by contract (except a commercial contract for goods or non-management services) or otherwise.”
As with the health care entity definition, there are exceptions. An individual cannot be deemed to control the health care entity simply by virtue of being an officer or director of the entity. Instead, control is presumed if the person either directly or indirectly owns, controls or holds the voting power of 10 percent or more of the voting stock in the entity.
What transactions are covered by the law?
A “material transaction” is defined as any of the following transactions either “occurring during a single transaction or in a series of related transactions that take place within a rolling twelve month time period”:
- 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, membership, or partnership interest or the transfer of control;
- an affiliation agreement or contract formed between a health care entity and another person; or
- 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.
Again, there are exemptions from the material transaction definition. The exemptions exist for the following types of entities:
- a clinical affiliation of health care entities formed for the purpose of collaborating on clinical trials or graduate medical education programs;
- any transaction involving a hospital (Article 28), emergency medical service (Article 30), home care service (Article 36), hospice (Article 40), health maintenance organization (Article 44), continuing care retirement community (Articles 46 and 46A), or assisted living facility (Article 46B) that is already subject to review under the provisions of the New York Public Health Law that govern those entities; and
- a “de minimis transaction,” which is defined as a “transaction or a series of related transactions which result in a health care entity increasing its total gross in-state revenues by less than twenty-five million dollars.”
What does the law require?
A health care entity covered by the law that is involved in a transaction governed by the law must provide written notice to the DOH at least 30 days before the closing date of the transaction. The written notice must include the following supporting documentation:
- 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; and
- A brief description of the nature and purpose of the proposed material transaction, including the anticipated impact of the transaction on “cost, quality, access, health equity and competition” in the impacted markets and any commitments by the entity to address those impacts. The impacts may be supported by data or a formal market analysis.
Most of this information will not be disclosed to the public under Article 6 of the Public Officers Law. However, it will be immediately shared with the state’s Attorney General, and certain information will be made public, as described in more detail below. Additionally, noncompliance with the law will result in civil fines of up to $2,000 per day
What does this mean?
The broad scope of health care entities and nature of transactions covered by this law will result in extensive scrutiny going forward for affected deals that until now have avoided such scrutiny. Of note, the law is structured to capture either one material transaction or a series of smaller transactions that occur over a 12-month period and result in hitting the materiality threshold – taking clear aim at private equity and non-institutional provider investment in smaller health care providers within one geographic area, given the exemptions for certain institutional providers. Parties with transactions subject to the law will need to be aware of two key components going forward, as outlined below.
First, the law requires DOH to publish on its website a summary of each proposed transaction, along with an explanation of the groups and individuals likely to be impacted by the transaction and information about the services currently provided by the entity. As a result, proposed transaction terms no longer will remain confidential to the parties before closing. Additionally, the DOH will publish any commitments by the health care entity to continue, reduce, or eliminate services, as well as details about how to submit comments on the transaction, essentially creating a certificate of need “light” process for these deals.
Second, the notice and all supporting documentation will be immediately submitted to the state Attorney General who may then review the transaction for compliance with state charity, health care, and antitrust laws. While this second level of review is not the same type of approval process originally envisioned in the law and the Attorney General’s consent is not required for all transactions subject to its requirements, the review process may lay the groundwork for an approval process to exist in the future.
The DOH will engage in rulemaking between now and August 1, 2023 to develop the exact format and requirements for notice submissions under the law. Among the questions to be answered by that regulations would be the effect that the law has on any transactions that close between August 1 and August 31 and thus would have difficulty meeting the 30-day notice requirement once it goes into effect on August 1. Those regulations also will provide more details regarding the review process by the Attorney General and other bodies.
In preparation for the effective date of the law, however, entities that meet the definition above and that are engaged in transactions that were not previously covered by the state’s review laws but that may close after August 1, should begin to gather the information required and be prepared for much closer scrutiny by governmental authorities in New York.
There are a number of other states considering similar legislation, including Illinois, Maine, North Carolina, Minnesota and Texas. Reed Smith will continue to track developments with regard to health care transaction legislation. If you have any questions about this or other health care legislation, please reach out to the authors of this post or other health care lawyers at Reed Smith.