In recent years, private equity firms and retail giants like CVS and Walmart have acquired many physician practices and physician practice management organizations across the country. As healthcare has become increasingly dominated by national, for-profit corporations, many states have correspondingly increased their oversight of such transactions, citing concerns about patient choice, quality of care and increase in healthcare costs.
Most recently, New York[1]and California[2] have passed legislation that requires parties to a material transaction involving a physician practice or, notably, in New York, a management services organization, to provide prior notice of the transaction to regulatory authorities in the state. As described below, the materiality threshold for reporting is low – many previously unregulated transactions will require review. While neither state statute gives the reviewing body the authority to block the proposed transaction, the regulators are permitted to refer the transaction to the state’s attorney general for additional review. In addition, details of the transaction are in many cases subject to public review and comment.
Below are summary dropdowns comparing select, key provisions of the new California and New York statutes, as they relate to physician practice and physician management company transactions. Note that the California regulations cited below have not been formally adopted, so are subject to change. For example, in the first draft of the regulations, physician management services organizations were included in the purview of the regulations, but in the most recent draft, distributed on October 9, 2023, that provision was removed. Comments to the revised regulations were due back to regulators by October 17, 2023.
There is pending legislation in many other states (e.g., North Carolina, Pennsylvania, Maine and Oregon) that, if passed, would similarly impact certain physician practice transactions that have heretofore been exempt from any formalized state regulatory scrutiny. We anticipate that this trend will continue to grow, and prior notice and disclosure requirements will become increasingly common in the industry.
As such, it is important for acquirers to add compliance with these new state laws as a fundamental element of their transaction program strategy. As a threshold matter, careful consideration must be given to whether the relevant state review process is triggered by the transaction. These new laws are complex and nuanced, so effective legal counsel is essential. If compliance is required, proactive communication with the target about timing, submittal of information to the regulatory authority and strategy for response to regulator inquiries is necessary to set appropriate expectations and maintain goodwill with the target.
Changes will also need to be made to template transaction documentation to account for these new laws, including, for example, updating conditions to close, accounting for a delayed closing (if the investor previously pursued a simultaneous sign and close strategy) and reviewing indemnification provisions to account for any appropriate shifts in risk allocation.
[1] NY Pub. Health L. § 4550, et seq.
[2] Cal. Health & Saf. §127500 et seq.; Cal. Code Regs. tit. 22 § 97431(Draft)
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