February 16, 2023

New York Governor Proposes Regulatory Overhaul for Investor-Backed Healthcare Transactions

7 min

The recently released New York State Executive Budget for 2024 includes proposed legislation that would significantly expand the state's regulatory authority over healthcare transactions. The bill introduces Article 45-A "Review and Oversight of Material Transactions." This article of the Public Health Law would provide the State Department of Health (DOH) increased regulatory oversight over healthcare transactions involving a change of ownership or control in physician practices, management service organizations under contract with healthcare entities, and any other healthcare facility or organization within New York. Currently such transactions are predominantly unregulated. The law proposes a regulatory review process that would subject transactions resulting in private investment in certain healthcare entities to DOH review. The bill presents a serious risk of not only increasing transaction costs associated with new regulatory hurdles, but also delaying the closing of transactions and exposing the parties to public scrutiny.

Purpose of Article 45-A's Proposed Review Process

Over the last ten years, private investment in outpatient care entities has increased dramatically.[1] The introductory section of Article 45-A indicates that New York is concerned with the rapid growth of this investment model and the potential risks posed to local healthcare system stability. Article 45-A classifies these investments as "material transactions." These transactions are broadly defined to include the sale or assignment of a healthcare entity to private investors, as well as the formation of partnerships or other venture structures that intend to provide medical practitioners with managerial and administrative support.

The bill suggests that if these transactions and the resulting relationships are not thoroughly vetted, serious risks are posed to "patient care, health care costs, and ultimately services." Regulators assert that these transactions undermine the financial sustainability of community healthcare options and contribute to rising healthcare costs. Currently, the resulting organizations are largely unregulated outside of practitioner licensure requirements. In filling this oversight gap, the proposed regulation would preemptively assess all transactions meeting the definition of "material" and look to negate potential negative impacts on healthcare in New York.

Proposed Review Process

Article 45-A specifically vests DOH with the ability to review material transactions and their impact on healthcare costs, quality, access, and equity. The legislation requires that parties seeking to complete a transaction meeting the material transaction definition must submit an application with supporting documentation to DOH for review at least thirty (30) days before the transaction's scheduled closing. Supporting documentation may include a description of the "nature and purpose" of the transaction, the anticipated impacts the transaction will have on key review factors, and any commitments the parties will make to offset negative impacts.

While a detailed review process is not directly outlined, the bill provides several key factors by which DOH could assess the transaction. DOH is authorized to appraise the parties' ability to demonstrate that potential positive impacts of the transaction outweigh negative impacts. Specifically, this analysis would be made with patient costs, access to services, and health equity and outcomes in mind. DOH is also empowered to consider the transaction's anticompetitive impact in relation to potential benefits. Benefits DOH may consider when reviewing anticompetitive impact include the increase of services to underserved communities and the stabilization of existing community health care systems. Last, the bill includes traditional economic factors for assessing transactions, such as the financial condition of the parties; sources of transaction funding; and the overall fairness of the transaction.

During the review period, DOH must post public notice of the transaction and provide for public comment. The purpose of these comments is to provide insight into possible public concern relating to a transaction's impact at a local level. Public concern may be taken into account when DOH decides whether to approve the transaction or move for an extend review period.

The initial review of the transaction must be conducted within thirty (30) days of the parties submitting their application and required materials to DOH. If DOH believes that the transaction requires a more thorough review, the parties will be notified, and additional documents may be requested to aid in this assessment. Article 45-A does not suggest how long this additional review process may stretch on for before DOH issues its determination.

At the conclusion of its assessment, DOH may approve, approve subject to conditions, or entirely reject the transaction. Conditions the transaction could be subjected to include monetary investment in the community and the inclusion of competition protections in any final agreement. If the final order rejects or approves the transaction subject to conditions, DOH is authorized to relay its findings to the attorney general for further investigation into whether the parties are engaging in anticompetitive practices. It is worth noting that any failure to comply with the proposed regulatory review process will leave the parties subject to civil penalties of up to $10,000 per day until the violations have been corrected.

Impact for Healthcare Transactions

While the proposed bill must still undergo legislative review and survive a vote by the state legislature, New York's historically hostile stance toward private investment in healthcare suggests the bill has a good chance of becoming law. If the bill is passed, New York would follow in the footsteps of Washington, Oregon, and California, all of which recently enacted similar review processes. Whether or not the bill passes, it is clear that New York state regulators are growing increasingly worried about the lack of oversight over certain transactions and the risks healthcare services in underserved communities may face as a result.

For investors involved this space, the bill presents serious regulatory hurdles that must be considered when identifying healthcare opportunities. Article 45-A's review period alone will extend the time before closing by at least thirty (30) days, with the potential for transactions that raise regulatory concern being extended for unknown amounts of time. This suggests that investors will be unable to pursue a simultaneous sign and close. Likewise, the diligence burden for investors is increased based on the bill's application requirements, as investors must now seriously consider not only the entity involved, but its relationship with the local community and the healthcare system.

Additionally, Article 45-A introduces a degree of transparency that investors may be uncomfortable with. The proposed notice and comment system will subject transactions and associated parties to significant levels of scrutiny, whether warranted or not. This presents the additional costs of not only having to convince regulators to approve the transaction, but also winning over public commentators as well.

Perhaps the largest concern for investors is the ability Article 45-A grants regulators in stipulating the imposition of conditions on transactions. It is currently unknown how sizable these conditions may be, but the bill's description should lead investors to plan for added regulatory costs when pursuing transaction approval. While the perceived goal of these conditions is the direction of investment to offset the negative impacts these transactions may produce, there is a strong possibility that if monetary-based conditions are large enough, they will deter investors from targeting healthcare entities located in underserved communities.

As the bill progresses through the legislative process, investors must remain cognizant of the increased regulatory requirements that may soon be imposed on healthcare transactions in New York. And while the bill provides a generalized overview of what investors should expect, a more detailed material transaction review process will likely emerge from both the legislative process and DOH's own implementation through regulation. Therefore, investors should pay considerable attention to the bill until it has ultimately solidified into law or fails to pass a legislative vote.

To access the Executive Budget Legislation, click here.

If you have further questions about the proposed material transaction bill or need assistance interpreting state regulations, please feel free to contact the authors of this alert or your Venable relationship attorney.

* The author would like to thank Patrick Dunbar, a Law Clerk in Venable's New York office, for his assistance in writing this article.

[1] Rich M. Scheffler, et. al., Soaring Private Equity Investment in the Healthcare Sector: Consolidation Accelerated, Competition Undermined, and Patients at Risk, at 2 (May 18, 2021).