New Notice Requirement for Healthcare Transactions in New York
Last month, New York State passed an amendment to the New York Public Health Law (the “NYPHL”) to require certain “health care entities” that are party to “material transactions,” including mergers and other change-of-control transactions, to provide written notice to the State Department of Health (the “DOH”) 30 days prior to the closing of the transaction (the “Amendment”). The Amendment, signed into law on May 3, 2023, by Governor Kathy Hochul, excludes certain entities from the notice requirement based on their industry or in-state revenues, and does not require that the parties obtain the approval of the DOH before closing the proposed transaction. However, the DOH will notify the office of the New York Attorney General when it receives notice of a transaction and will publish a summary of the proposed transaction on its website, with an invitation for public comment.
The Amendment is effective as of August 1st, 2023. The DOH is required under the Amendment to adopt a process for the disclosure and notice requirements of the new law.
Applicability of Notice Requirement
Pursuant to new Article 45-A of the NYPHL, a “health care entity” must submit to the DOH a written notice, with supporting documentation, of “material transactions” at least 30 days prior to the closing date of the transaction.
Definition of “Health Care Entity”
The Amendment does not give an exhaustive definition of the term “health care entity.” Under new Section 4550 of the NYPHL, a “health care entity” 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 practices;
- a provider-sponsored organization;
- a health insurance plan; or
- any other kind of health care facility, organization or plan providing health care services in the State of New York.
However, Section 4550 explicitly excludes from the definition of “health care entity”:
- an insurer authorized to do business in the state of New York (excluding non-insurance subsidiaries and affiliated entities of insurance companies regulated under the insurance law or NYPHL, which can be considered “health care entities”); or
- a pharmacy benefit manager registered or licensed in the state of New York.
Definition of “Material Transaction”
The term “material transaction” is defined broadly, capturing not just direct mergers with, or acquisitions of, health care entities, but changes in control, affiliation agreements and partnerships as well. Transactions are reportable whether they occur in a single step or in a series of related transactions over the course of a rolling 12-month time period for purposes of meeting control and/or de minimis revenue thresholds. Specifically, “material transaction” includes:
- 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.
The Amendment’s definition of “control,” for purposes of the second type of material transaction, is also broad. It is defined to include the direct or indirect possession 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 certain contract or otherwise. The definition adds that control is presumed to exist if any person directly or indirectly owns, controls, or holds the power to vote 10% or more of the voting securities of a health care entity.
Section 4550 clarifies that no person is deemed to control another person solely by reason of being an officer or director of a health care entity.
The Amendment explicitly excludes the following from the notice requirement:
- clinical affiliations of health care entities formed with the intent to facilitate collaboration between the entities;
- transactions already subject to the Certificate of Need process or an insurance-entity approval process under the NYPHL or Insurance Laws; and
- de minimis transactions, defined as a transaction or series of transactions resulting in a health care entity increasing its total gross in-state revenues by less than $25 million.
Required Disclosures in the Notice of a Material Transaction
Under new Section 4552 of the NYPHL, the DOH is to develop regulations proscribing the form and manner of the required notice and describing the supporting documentation that must be submitted. In any event, Section 4552 mandates that the notice of a material transaction include:
- The names of the parties 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.
- A brief description of the nature and purpose of the proposed material transaction, including:
- the anticipated impact of the material transaction on cost, quality, access, “health equity,” and competition in the impacted markets, which may be supported by data and a formal market impact analysis; and
- any commitments by the health care entity to address anticipated impacts.
The term “health equity,” in turn, is defined in Section 4550 as “achieving the highest level of health for all people and shall entail focused efforts to address avoidable inequalities by equalizing conditions for healthcare for those who have experienced injustices and socioeconomic disadvantages, and systemic disadvantages.”
Once notice of a proposed transaction is received, the DOH will submit the provided written notice and supporting documentation to the antitrust, healthcare and charities bureaus of the Office of the New York Attorney General. Although the approval of the DOH is not required to consummate the proposed transaction, the delivery of the notice and supporting documentation may provide the Office of the New York Attorney General with an opportunity to review the materials and act on them to the extent of its jurisdiction.
Additionally, during the 30-day period prior to the closing date, the DOH will post on its website a summary of the proposed transaction with an explanation of the groups or individuals likely to be impacted, information about services currently provided by the health care entity, and commitments by the health care entity to continue such services and any services that will be reduced or eliminated. The website will also include details about how to submit comments.
Except for what the DOH publishes on its website, the supporting documentation will not be subject to the freedom of information law of New York (Article 6 of the Public Officers Law).
Penalties for Non-Compliance
Section 4552 grants the DOH the power to impose a civil penalty of $2,000 for each day that a material transaction is out of compliance. This penalty may be increased to an amount up to $5,000 for subsequent violations that represent a “serious threat to the health and safety” of individuals. Each day that the violation continues is a separate violation. The Amendment does not provide for a maximum penalty amount, which presumably continues to inflate until a notice is filed.
We note that the Amendment, as written, does not provide for confidential treatment of information, including with respect to transactions that have not been finalized and will sign and close simultaneously. The DOH’s implementing regulations may address this issue when proposed; participants in healthcare transactions should consider commenting on the regulations during any notice and comment period, especially if the confidentiality issue is left unaddressed.