New York State: Healthcare Entities Must Disclose Certain Material Transactions

As part of the New York State budget for fiscal year 2023–2024, the New York State Assembly amended the New York Public Health Law to impose new notification requirements related to material transactions involving physician practices and management services organizations.

On May 3, 2023, New York Governor Kathy Hochul signed into law an amendment to the New York Public Health Law (NYPHL) that requires certain healthcare-related entities to disclose proposed material transactions to the New York State Department of Health (DOH) at least 30 days prior to the closing of such transactions. The new legislation will require healthcare entities, such as management services organizations (MSOs), physician practices, and other similar entities, to submit filings to DOH when engaging in mergers, acquisitions, and other change-of-control transactions in New York that satisfy certain requirements. The legislation will impose new timing and documentation requirements for these transactions.

New York has now joined other states, including Connecticut, Washington, Massachusetts, and Nevada, that require reporting of certain healthcare transactions prior to the consummation of those transactions, which have not historically been the subject of such reporting requirements. Other states are also considering similar expansive reporting statutes.

While the consummation of covered transactions will not require DOH approval, DOH will provide any filings submitted to various bureaus of the Office of the New York State Attorney General. DOH will also publish information about the parties and the proposed transaction on its website and allow for comments from the public. Additionally, the new legislation provides that DOH may promulgate regulations regarding the submission process.

Parties considering healthcare transactions in New York will need to familiarize themselves with the requirements of this legislation before it takes effect in August 2023 and remain up to date on any future clarifications and developments.

Background

The initial draft of the New York State (NYS) budget for fiscal year 2023–2024, presented February 1, 2023 by Governor Hochul, gave DOH the authority to review and also to approve the material healthcare transactions submitted pursuant to the amended law. DOH’s power to approve (or decline to approve) such transactions was removed from the final draft of the legislation before it was passed.

Discussions surrounding the purpose of the legislation centered on the lack of oversight of healthcare transactions involving private-sector entities in existing NYS legislation, including the certificate of need (CON) process under Article 28 of the NYPHL.

Specifically, NYS regulators came to believe that certain private entities and ownership structures had many characteristics of healthcare entities that were already covered by the NYPHL but were escaping government oversight. The final form of the legislation will allow NYS regulators to collect significant additional data on private commercial entities engaging in healthcare transactions and to make their activities public knowledge. This process could create delays in consummating covered transactions, additional costs for the parties to a transaction, and public disclosure of previously confidential information.

Key Provisions

Who and What Is Covered

The amendment enacted by the NYS Assembly creates a new Chapter 45-A of the NYPHL. The new law requires DOH to adopt a process for the disclosure and notice of “material transactions,” defined as any of the following transactions (whether in a single transaction or a series of transactions over 12 months):

• Mergers with healthcare entities
• The acquisition of one or more healthcare entities by the purchase of assets or equity securities or the transfer of control
• An affiliation agreement or contract with a healthcare entity
• The formation of a joint venture, partnership, MSO, or other entity for the purpose of administering contracts with health plans, third-party administrators, pharmacy benefit managers, or healthcare providers

Material transactions do not include clinical affiliations of healthcare entities formed for the purpose of collaborating on clinical trials or graduate medical education programs. They also do not include transactions already subject to CON approval or approval under New York insurance laws, or de minimis transactions that would result in a healthcare entity increasing its gross in-state revenue by less than $25 million.

Under the new law, a healthcare entity includes, but is not limited to, the following:

• Physician practices
• Physician practice groups
• MSOs or similar entities providing all or substantially all of the administrative or management services under contract with one or more physician practice
• Provider-sponsored organizations, health insurance plans, or any kind of healthcare facility, organization, or plan providing health services in NYS

Notably, a healthcare entity does not include insurers authorized in NYS or pharmacy benefit managers registered or licensed in NYS.

This broad definition ensures that a wide variety of private entities will be covered by the notice requirement and suggests potential increased overall scrutiny by DOH of private equity–backed entities and MSOs looking to engage in transactions with other healthcare entities.

Notice Requirements

The new law requires healthcare entities to provide written notice of a material transaction at least 30 days before the closing of the material transaction. The language of the statute requires written notice “in form and manner prescribed by” DOH, which form and manner will likely be clarified by DOH in future regulations.

The required written notice must include the following:

• Names and addresses of the parties
• Copies of any definitive agreements governing the material transaction, including pre- and post-closing conditions
• Identification of all locations where healthcare services are currently provided by each party and the revenue generated in NYS from such locations
• Any plans to reduce or eliminate services and/or participation in specific plan networks
• Closing date of the material transaction (note the text does not say proposed closing date)
• Brief description of the nature and purpose of the proposed material transaction, including:
  • Anticipated impact of the material transaction on cost, quality, access, health equity, and competition in the impacted markets, which impact may be supported by data and a formal market impact analysis
  • Any commitments by the healthcare entity to address such anticipated impacts

Importantly, the new law defines “health equity” as achieving the highest level of health for all people, which shall entail focused efforts to address avoidable inequalities by equalizing conditions for healthcare for those who have experienced injustices, socioeconomic disadvantages, and systemic disadvantages. This means that any healthcare entity required to make a filing with DOH will need to detail how the proposed transaction will impact each of the foregoing. While DOH will not have the authority to reject a transaction where the parties are not able to satisfactorily provide such details, the information will still be retained and reviewed by DOH and submitted to the public (as further described below).

The new law also states that supporting documentation required for the filing will be “further defined in regulation developed” by DOH, and DOH is required to “adopt a process for disclosure and notice.” This language suggests that DOH will enact additional documentary requirements not currently included in Chapter 45-A, and further developments in terms of process and supporting documentation should be monitored closely.

Review Process and Publishing of Information

Upon receipt of a filing by parties to a proposed material transaction, DOH will submit the provided written notice and supporting documentation to the antitrust, healthcare, and charities bureaus of the Office of the NYS Attorney General. While not explicitly stated in the text of the enacted legislation, this will provide the state attorney general with the opportunity to review and act on materials included with the required written notice even where Chapter 45-A does not provide DOH with the power to take further action itself. This means that another New York agency could use the information provided by DOH to take action with respect to the parties or the material transaction if such agency believed that the proposed transaction would violate laws or regulations subject to its jurisdiction.

During the 30-day period prior to the closing of a given material transaction, DOH will publish the following transaction information on its website:

• A summary of the proposed transaction
• An explanation of the groups or individuals likely to be impacted by the proposed transaction
• 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
• Details, in a format that is easy to find and to read, about how to submit comments

Notably, supporting documentation provided in accordance with any such filing will not be subject to disclosure under the New York Freedom of Information Law (the new legislation does not extend such protection to the information included in the written notice itself).

The new legislation may cause exposure of parties’ confidential information to the public, creating the risk that persons or entities from which the parties would normally withhold such information will view the confidential information, including potential competitors.

Failure to Comply

Parties that fail to provide written notice of a material transaction to DOH as required by the provisions of Chapter 45-A will be liable for a daily civil penalty of up to $2,000 for each day during which parties have failed to comply.

This penalty increases to a maximum of $5,000 per day for subsequent violations that represent a “serious threat to the health and safety” of individuals. There is no cap on the total penalty that may be incurred for failure to provide required written notice, so additional penalties would likely be incurred each day until written notice were provided to DOH.

Next Steps

Chapter 45-A will take effect on or about August 1, 2023. As noted above, DOH will provide specific details in the coming months regarding process and filing requirements.

Healthcare entities that may be covered by this legislation, particularly private equity–backed entities and MSOs, should closely monitor the implementation of this reporting requirement by DOH in order to fully understand the reporting and disclosure requirements that may apply to future transactions.