Ropes & Gray attorneys provide timely analysis on legal developments, court decisions and changes in legislation and regulations.
Sharon Jaquez: Hello, and welcome to our podcast series, Health Care Transaction Laws Unwrapped. Today, we will be focusing on updates to state health care transaction laws on the East Coast. My name is Sharon Jaquez, and I am an associate in Ropes & Gray’s health care practice group. With me today are Ben Wilson and Brett Friedman, partners in Ropes & Gray’s health care practice group. Ben represents a variety of health care organizations, academic institutions, and investors in connection with transactions, governance, and health care regulatory counseling both in the U.S. and abroad. Brett represents clients in areas such as government insurance programs, digital health, accountable care, and value-based payments and regulatory compliance, and leverages his prior experience as the leader of the New York Medicaid program.
Welcome back, Ben and Brett. You were both on the podcast just over a year ago. I trust it’s been a quiet year in the East?
Brett Friedman: Not by a long shot, Sharon.
Ben Wilson: Not even close.
Sharon Jaquez: Let’s dive right in then. Can you bring us up to speed on what the landscape looks like on the East Coast for health care transaction laws?
Ben Wilson: It’s a wild ride right now. We have new guidance in Massachusetts, a renewed focus on private equity (PE) and for-profit health care investment after the failed Massachusetts health care reform bill, rumblings in Pennsylvania, and some insights from the rollout of New York’s market oversight law. We also expect an anti-PE bill may be re-introduced in Connecticut during the state’s next legislative session.
Brett Friedman: And you know that large and once PE-backed health system that went bankrupt recently? We’re connecting those dots too. That’s the sort of thing that really gets lawmakers’ attention. We are seeing a huge push for transparency around private equity’s impact on health care. It’s affecting all aspects of transactions—timelines, cost, etc.
Sharon Jaquez: It seems like everyone wants a closer look at what’s happening in deals right now, especially if for-profit investors are involved. So, speaking of closer looks, New York started requiring pre-closing notices for certain transactions back in August. It’s still early days, and it’s just a notice. Brett, can you tell us what this has looked like on the ground?
Brett Friedman: I’m very happy to, Sharon. In fact, it’s been really quiet. New York passed their material transactions law in April 2023, and as you noted, it went live on August of last year. It requires health care entities, including physician practices, physician groups, and certain management services organizations to provide 30-days pre-closing notice to the New York State Department of Health (DOH), and it applies for transactions that are “material,” which is defined as “$25 million or more in increases in a health care entity’s total gross in-state revenue,” which is a very hard test to measure. So far, we haven’t seen the law doing much, especially compared to other state health care transaction laws. As you pointed out, the law is just notice—there is no defined cost and market impact review like in other states, such as Massachusetts and California, and there are no approval rights. The law, however, does grant DOH the power to impose a civil penalty of $2,000 for each day that a transaction does not submit a notice. This penalty may be increased to up to $5,000 for subsequent violations that represent a “serious threat to the health and safety” of individuals, but we are not aware of DOH imposing any such penalties yet.
Sharon Jaquez: Have many transactions been reported to date?
Brett Friedman: In fact, there have not been very many reported to date, Sharon. While it’s only been about a year since DOH’s notice requirements went into effect, we’ve only really seen six or seven transactions posted on the website, largely involving ambulatory surgical centers (ASC) and lab transactions, and it really suggests that there are probably lots of transactions going on that are, in fact, not being reported that DOH would like to see.
Sharon Jaquez: That’s really interesting. Have there been any recent updates to the law or guidance in New York?
Brett Friedman: Very few. DOH recently posted additional guidance on its website that contained new instructions around reporting. In addition to the information and supporting documentation that must be reported to DOH as required by the law, the parties also are now required to include with their notice a transaction summary, which is then posted on the department’s website—which we’ve seen trickle out over the last couple of months. The summary includes things like anticipated transaction closing date, an executive summary of the material transaction, and a description of the transaction’s impact on groups, individuals, and service delivery. DOH has also been developing a form, which really has gone back to the inception of the law in April 2023, but we haven’t seen that come out yet. A lot of people, including myself, in New York, are waiting for that form to come out because it will contain, we think, more robust reporting instructions. The key takeaway is providers and investors who are looking to enter into transactions in New York really need to think about whether this law has an impact, and reach out to their legal advisor, including if you use Ropes & Gray/us, to make sure that you’re complying with the law as currently written.
Sharon Jaquez: Thanks for that helpful overview and update on New York’s health care transaction law, Brett. Ben, could you provide an overview of any similar efforts or laws in other East Coast states? I know you mentioned some movement in Massachusetts, Connecticut, and Pennsylvania.
Ben Wilson: Happy to—thanks, Sharon. Massachusetts and Connecticut both have active state health care transaction laws, and Pennsylvania has pending legislation. As I mentioned, Massachusetts was considering a bill earlier this year that ultimately died in committee negotiations. But taking a step back, as an overview, Massachusetts’s current health care transaction law requires 60-days pre-closing notice of a transaction with the Health Policy Commission (HPC), the state Attorney General, and the Center for Health Information and Analysis (CHIA). While the HPC does not have the right to approve or disapprove a Material Change transaction, it may elect to order a cost and market impact review of the transaction and may make a referral to the Attorney General for further review and action if appropriate. In its nearly decade-long history, the HPC has only ordered around ten cost and market impact reviews—that represents approximately 5% of the notices received. Notably, the state has been pretty active this year—the HPC has issued new guidance and also introduced proposed legislation that would have expanded the scope of the Massachusetts’ law further.
Sharon Jaquez: That’s very interesting. Can you expand a bit first on the new HPC guidance?
Ben Wilson: Yes. Earlier this year, the HPC released a new frequently asked questions (FAQ) guidance relating to the types of providers, transactions, and revenues that trigger a Notice of Material Change (MCN) filing. Under the statute, any Provider or Provider Organization with $25 million or more in Net Patient Service Revenue in the preceding fiscal year that proposes a Material Change must submit a material change notice. The HPC’s new guidance clarifies the types of transactions that constitute material changes and the categories of entities that qualify as Provider Organizations, and therefore, subject to material change notice filing requirements. The guidance states that (1) management services organizations (MSOs) that represent a Provider in payor contracting are considered Provider Organizations subject to material change notice filings, (2) common investment structures involving indirect control (such as board appointment rights), purchases of nonclinical assets, and management services arrangements involving payor contracting may also constitute reportable material change transactions, and (3) net patient service revenue calculations must aggregate revenue across entire provider platforms, including all providers represented by MSOs in payor contracting, even if not owned by the MSO.
The HPC also released new guidance in September regarding the fact that employment of Health Care Professionals can require the filing of a material change notice if net patient service revenue thresholds are met—many always thought this to be the case, but it’s now been made explicit by the HPC. Providers and Provider Organizations will need to file a notice at the point that it is clear they expect to hire a sufficient number of professionals from the same provider organization within any given 12-month period, and if they anticipate receiving at least $10 million in additional annual net patient service revenue in connection with those hires.
We have a breadth of experience analyzing proposed transactions and working directly with the HPC to determine whether a proposed transaction is subject to review. For example, based on our understanding of the state transaction laws and prior experience with the regulators, we’ve advised buyers when notice was not triggered by their proposed transaction, sometimes despite pushback from opposing counsel. Transactions can close successfully without any notice or follow-up from the agency when that’s the case. Providers delivering services using MSO models and other common investment structures in Massachusetts should confer with counsel to determine whether proposed transactions and arrangements may now, under the new guidance, newly trigger MCN filing requirements.
Sharon Jaquez: Thanks for those updates, Ben. The new guidance is very informative and provides clarity on a point that I know has been widely interpreted. You also mentioned that Massachusetts was considering legislation earlier this year—can you provide an overview of that?
Ben Wilson: Certainly. As mentioned, the proposed Massachusetts bill ultimately failed to pass in July as the House and Senate were unable to agree on a compromise bill before the July 31, 2024 deadline. Though the proposed legislation is dead for now, Massachusetts legislators have indicated that there is a push for this bill to be revisited during informal sessions before the end of the year or next year—we’re closely monitoring that. As context, there were two versions of this particular bill: the Massachusetts House version and the Senate version. For purposes of this podcast, we’ll really hone in on the Senate bill, which was more expansive. That bill would have subjected private investment in health care entities to the Health Policy Commission’s notice and oversight requirements, as well as other oversight requirements. Specifically, the bill targeted private equity and other alternative investment vehicles and, more broadly, empowered the Health Policy Commission to propose modifications to certain material change transactions.
Sharon Jaquez: That’s interesting, Ben. Can you provide a bit more color on the HPC’s proposed ability to impose modifications on transactions?
Ben Wilson: Yes. The bill would have expanded the HPC’s authority to review and propose modifications to “material change” transactions that the HPC determined would have a negative impact on health care costs. Although the HPC would not have had the power to approve or deny transactions as such, failure to notify the HPC of a proposed material change would have given rise to liability under Massachusetts laws governing consumer protection. If passed, this provision likely would have caused great uncertainty regarding the time period for a transaction to close.
Sharon Jaquez: Thanks, Ben. I understand that the proposed legislation would have also significantly increased reporting requirements and scrutiny into investments in health care by private equity sponsors and imposed limitations on captive-MSOs. Can you tell us more about that?
Ben Wilson: Sure. The bill proposed to extend the Center for Health Information and Analysis authority to collect more extensive information about provider organizations’ ownership—for example, financial information about a parent entity’s out-of-state operations, as well as financial information about corporate affiliates—and it also would have been able to issue unlimited penalties for failure to comply. During the term of the investment, the provider organization would not be allowed to perform certain actions, such as make capital distributions, perform stock buybacks, or “perform any other action or exceed any other metric the commission determines may cause a provider organization to become financially distressed.”
Finally, the bill would have impacted the captive-MSO model commonly used by health care entities by creating significant limitations on MSOs in Massachusetts. The bill enhanced the Massachusetts Corporate Practice of Medicine laws with respect to clinical interference provisions, prohibiting MSOs from conducting certain common activities on behalf of health care practices, such as negotiating with third-party payors.
Sharon Jaquez: Thank you. It seems clear that the failed legislation and new guidance aims to place additional scrutiny on private equity investors, given the discussion of MSOs and limited capital distributions. Could you speak to why there may be this focus on private equity investments in health care in Massachusetts?
Ben Wilson: There’s been a growing focus on private equity and for-profit investments in health care in Massachusetts now for years. But in the wake of the Steward Health Care bankruptcy, there’s an even bigger push in Massachusetts for lawmakers to crack down on private equity-backed investment in health care. Governor Healey as well as Senators Elizabeth Warren and Ed Markey have been outspoken about their distrust of private equity ownership of health care entities, specifically referencing the Steward Health Care system bankruptcy. The HPC has also publicly expressed an interest in more thoroughly reviewing transactions involving private equity sponsors—we have not seen such movement thus far in 2024, but there have been many presentations by the Health Policy Commission, including to its board, focusing specifically on the role of private equity in health care. At a high level, it’s worth noting that this focus on PE is not limited to Massachusetts—another podcast in our series will discuss scrutiny on PE and management services organizations more in depth on a national level.
Sharon Jaquez: Thanks, Ben. Can you elaborate a bit more on the Steward case? I’m interested in the history of the hospital system and what led to its financial distress and, ultimately, bankruptcy.
Ben Wilson: Sure. It’s a fascinating, if unfortunate, case study. Steward Health Care started in the 1980s as Caritas Christi Health Care, a non-profit Roman Catholic health care system in the New England region of the United States, covering Massachusetts, New Hampshire, and Rhode Island. In 2010, private equity firm Cerberus Capital Management acquired the Caritas Christi system for approximately $830 million. Cerberus created a new corporation, named it Steward, and the Massachusetts Attorney General at the time, Martha Coakley, approved the transaction. In 2016, Steward sold its property rights to a real estate investment trust, Medical Properties Trust (MPT) for approximately $1.25 billion, and leased those properties back to the hospitals. Cerberus used part of the money to pay its investors back their initial capital investments. In 2017, Steward purchased IASIS Healthcare, expanding their network to 36 hospitals across ten states and causing Steward to become the largest for-profit hospital system in the U.S. In June 2020, Cerberus sold its 90% controlling interest in Steward to a group of physicians led by Steward CEO Ralph de la Torre, and MPT, at that time, held the remaining 10% ownership. Fast forward to January 2024, MPT took some steps to claw back rent from Steward, and it was announced that Steward owed about $50 million in unpaid rent. In February of this year, Governor Maura Healey demanded an action plan for Steward to sell its assets as soon as possible. And in early May 2024, Steward filed for Chapter 11 bankruptcy. The Massachusetts hospital acquisitions, at least for the surviving hospitals, were finalized earlier this month, in October.
Sharon Jaquez: Thank you, Ben—what a history. Have there been any other efforts in Massachusetts outside of the health care transaction law we just discussed, to target private equity?
Brett Friedman: I’m happy to jump in there, Sharon. Interestingly, Senator Markey and Senator Warren have introduced two federal bills that target private equity investments in health care: one is called the Health Care Ownership Transparency Act, and the other is aptly named the Health Over Wealth Act. The Health Care Ownership Transparency Act would require HHS to establish a Task Force to address and limit the role of private equity and consolidation in health care, and—which would be very significant—impose a moratorium on certain M&A pending task force review. It would also impose annual disclosure requirements regarding private equity interests and related financial information on health care corporations participating in Medicare. Relatedly, the Health Over Wealth Act would impose licensure requirements for PE firms before they invest in health care entities. It would create limitations on the use of real estate investment trusts—like we saw in Steward—and notice and approval requirements for closure or discontinuation of services by hospitals. It would also empower the HHS Secretary to impose a moratorium on PE firms from purchasing voting securities of a “covered firm,” as that is defined in the law, and may prohibit other M&A that would result in PE gaining control of voting securities of a covered firm until the HHS Task Force has sufficient time to review the transaction for potential abuses.
Sharon Jaquez: That’s helpful—thank you, Brett. You mentioned earlier that Connecticut had also introduced anti-PE legislation. Could you provide a brief refresh of Connecticut’s law, and an overview of any developments in the state?
Ben Wilson: Currently, Connecticut’s law requires 30-days pre-closing notice of certain material transactions to the state AG and/or submitting a certificate of need, depending on the transaction, 30-days post-closing to the Health System Planning Unit of the Office of Health Strategy. Connecticut’s bill was implemented in October of 2014. Along the lines of our discussion regarding anti-PE sentiment in Massachusetts, Connecticut interestingly also introduced new anti-PE legislation, which would represent a separate regime from the current Connecticut health care transaction review process. It didn’t pass during this year’s legislative session, but it’ll be interesting to see what happens with this bill next year.
Sharon Jaquez: Thanks. Could you expand on what proposed legislation would look like?
Brett Friedman: Sure. Connecticut’s bill (HB 5319) would require the executive director of the Connecticut Office of Health Strategy to develop a plan concerning private equity firms acquiring or holding an ownership interest in health care facilities in the state. The plan was required to include an assessment of whether a certificate of need should be required for the acquisition of ownership in a health care facility by a private equity firm, or an assessment of the feasibility of any other limitations on a private equity firm acquiring or holding an ownership interest in a health care facility. The bill would have also imposed information disclosure requirements on PE firms that hold ownership interests in a health care facility.
Ben Wilson: That’s right. Connecticut is part of this greater, somewhat nationwide anti-PE movement that I mentioned earlier. The Connecticut Attorney General also was part of a multistate coalition of 11 Attorneys General that submitted a comment letter in response to the FTC’s Request for Information regarding consolidation in health care by private equity. The coalition also included AGs from other East Coast states, like New Jersey, Delaware, Rhode Island, Pennsylvania, and D.C. In the letter, the AGs advocated for increased oversight and enforcement of private equity health care transactions, and they described concerns regarding the impact of PE transactions on health care.
The letter included three recommendations for government action by the DOJ, FTC, and HHS. First, the AGs urge the federal government to explore mechanisms to increase transparency regarding PE ownership and control. The AGs also urge the FTC and HHS to finalize and enforce rules prohibiting contractual provisions that limit competition in health care in all federal and joint federal-state health care programs that providers participate. Lastly, the AGs recommend coordination and “creative enforcement” among state and federal agencies to identify regulations and laws to address conduct by PE in health care beyond traditional competition laws.
Sharon Jaquez: That’s helpful—thank you. Now that we’ve covered New York, Massachusetts, and Connecticut, I know Ben mentioned there was pending legislation in Pennsylvania as well. Could you speak to a little more on that?
Brett Friedman: Pennsylvania, like the three other states, is considering three bills that would introduce health care transaction review processes in the state. The first bill, which is Senate Bill 548, would require hospitals, hospices, nursing homes, and other provider organizations to provide notice a minimum of 90 days before entering into a transaction, or agreements that result in a material change—and that notice would go to the state Attorney General.
Similar bills: a bill on the House (no. 2012), would require at least 120 days written notice to the AG prior to the effective date of a health care transaction between two or more health care facilities, health care facility systems, or provider organizations that result in a material change. And last, but not least, Pennsylvania is considering a third bill, that’s a bill on the Senate (2344), which would require 90-day pre-closing notice to the AG prior to entering into transactions involving health systems and provider organizations. These bills, they’re a combination—not all three would be enacted—and we’re continuing to monitor updates here as Pennsylvania’s legislature reconvenes in the near future.
Sharon Jaquez: Thanks for that update. I think after discussing updates in New York, Massachusetts, Connecticut, and Pennsylvania, that rounds out the updates on the East Coast. Given this potential for increased enforcement, it will be important to stay up to date on the latest changes in state and federal regulation of transactions. Practically, what impact do you expect these latest developments to have on deals?
Brett Friedman: That’s a really good question, Sharon, and it’s a question we get a lot. What we typically advise here is that those entities, especially in the PE space, who are considering health care transactions should think about the impact that these state laws have on timing, and whether they are triggered. Dealmakers may consider structuring acquisitions or reorganizing existing assets in impacted states to decouple entities from the organizational structure and avoid multiple review and approval processes. Also, it’s important to keep in mind that there’s disparate timing of state approvals—some are 30 days, some are 60, some are 90—and that may impact financing commitments, terms, and associated costs with the transaction. Buyers may need to negotiate financing terms to accommodate state approval processes and think about potential delays in closing. State processes and approval requirements will introduce additional complexity at minimum, and may impose conditions to close, you have to build in purchase agreement termination rights, and want to think about associated termination fees in acquisition agreements to the extent that you hit a snag with one of these laws.
The key message here is that state regulation of health care transactions is going to be a more important consideration in all health care transactions going forward. It’s going to require a state-to-state analysis, submission of pre-closing notices in impacted states, and varying timelines for review—at the shortest end, 30 days prior to close, up to potentially, six months, and even longer if you have a back-and-forth process with regulators on information requests. All of that is going to require strategic thought in terms of how to negotiate that review, take a close look at the terms of the transactions and what’s really important to avoid submission requirements, and look at some other factors that are evolving in a number of states, even those states like Massachusetts that have had these laws on the books for some time.
Sharon Jaquez: Those are really great points and helpful considerations—it will be important to keep these potential delays and costs in mind to get a more realistic sense of deal timelines and budgets. In addition to these, though, the regulations could also make it more difficult to keep deal terms confidential. How have clients been dealing with that so far?
Ben Wilson: That’s right. As we discussed on last year’s podcast, the additional review is going to affect deal term confidentiality and require at least a somewhat greater degree of transparency, the extent to which that’s true, as we’ve been discussing, in many respects, varies state by state.
In light of the additional scrutiny on private equity investors in the health care industry, there are steps that those investors can take to comply with the laws, but still maintain the confidentiality of trade secrets—for example, you could consider risk management related to corporate formalities, maintaining distancing in corporate structures, etc. I think it will also be important to be prepared to make disclosures that you traditionally have not had to make, but that will be in your interest to make going forward. Those might be around quality of care—for example, disclosing the results of quality audits to ensure portfolio companies are meeting benchmarks—as well as information regarding enforcement, monitoring industry trends related to sponsor investments. It may be in the future that you have a strategy around what disclosures you make specifically with an eye towards what will be required under these laws.
Sharon Jaquez: Thanks for those insights. Looking ahead, what are the most important takeaways we should be keeping in mind?
Brett Friedman: At its core, the increase in regulatory oversight is in direct response to state and federal concerns over health care accessibility, quality, costs, and equity that have resulted from private equity investment in the health care industry, and really, investment overall. It continues to be critically important to understand which laws exist, whether they apply to a transaction you’re entering into, and what the impact of these laws may be on the structure, cost, and timing of the transaction, up to including the ability to close. The landscape is continuing to evolve and it’s important to have a really good handle on what these laws are, the new ones coming down the pike, the evolution of existing laws—like in Massachusetts that have been on the books for a long time and are now changing—and how these older laws are being applied in new and interesting ways. It’s something that we’re spending a lot of time with as a firm—and, in fact, we’ve developed a really cool, interactive up-to-date website that has a map and that’s tracking these developments across the states. We would really encourage that anyone interested in pursuing, thinking about, or studying health care transactions look at that website, which we think is a really good resource to track these developments and as they’re impacting our clients and the deals that we’re participating in.
Ben Wilson: Another thing that listeners may want to do—many of these agencies, as they’re developing policies and guidance, have really well-developed websites, and they’re holding open hearings in a way that are making both the meeting materials available online and it’s easy to watch either via YouTube video or otherwise, so it would be good for folks and their government relations personnel to keep an eye on those websites. For example, the Health Policy Commission will be meeting later this year, on December 12, and will be holding its Annual Health Care Costs Trends Hearing on November 14. In Connecticut, the Office of Health Strategy is also holding a meeting to discuss a proposed transfer of ownership of a health care facility on November 6. So, as you have deals coming up, keep an eye on the websites of the relevant regulators, because they can give you a sense of what their latest considerations are and some sense of what the process will be like at the moment.
Sharon Jaquez: Thanks again, both, for joining me today. If those listening would like more information on this topic or our health care group, please don’t hesitate to contact us or visit our website. As Brett mentioned, our website’s interactive map provides detail about the various pending and enacted state health care transaction laws nationwide. You can also subscribe and listen to other Ropes & Gray podcasts wherever you regularly listen to your podcasts, including on Apple and Spotify. Thanks again for listening.