Value-based Care Collides with Competition: Recent Developments on the East Coast

On this episode of Ropes & Gray’s Value-based Care Collides with Competition podcast series, health care attorneys Brett Friedman, Ben Wilson and Natalie LaRue discuss the recent developments and trends related to health care access, cost and quality on the East Coast. Efforts by these East Coast states mirror the efforts on the West Coast in states like Oregon, Washington, Nevada and California, and in some cases, pre-date them. They talk about the deal impacts of existing laws in Connecticut and Massachusetts, a newly passed law in New York that will take effect this summer, and proposed state laws in Maine and North Carolina*, focusing on what these laws could mean for health care transactions in these states, especially those involving private equity and venture-capital-funded entities.

On the Value-based Care Collides with Competition series, Ropes & Gray attorneys explore how aggressive federal and state enforcement of antitrust and other competition laws appears to be in tension with the nationwide shift to value-based care models.

The series examines how the adoption of new state competition, quality, access and cost laws is creating additional burdens on health care entities, including private equity-backed entities and management services organizations, that are considering new transactions—and how to mitigate the impact of these potential impediments. For more on this topic, please visit our resource center with dedicated resources on the changing regulatory landscape.

Transcript:

Natalie LaRue: Hello, and welcome to today’s podcast. My name is Natalie LaRue, 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.

Natalie LaRue: Ben and Brett, I understand that many states are adopting efforts to regulate health care access, cost, and quality. Have any states managed to enact legislation yet in 2023?

Brett Friedman: Yes. Thank you, Natalie. On May 3, as part of the final enacted New York state budget, which was supposed to have passed on April 1 but got delayed this year due to negotiations, there was a provision where New York now requires health care entities to provide 30-day pre-closing notice to the Department of Health (DOH) for certain types of “material transactions.” Importantly, there’s a de minimis exception for transactions where total in-state revenues do not increase by $25 million or more, but the law is written very broadly to capture most types of health care transactions that involve a defined health care entity, and transaction types would include things like mergers and acquisitions, asset transfers and sales, transfers of control, most types of affiliations, partnerships, JVs, and the acquisition, sale, or transactions involving management services organizations. Importantly, the New York law did not go as far as some other states or even as New York had initially proposed, which would require New York to approve these transactions. The law is a notice provision so that there’s a 30-day notice requirement so New York can collect data, but you’re not going to see, under the current version, an approval right now. The law has a notice period, but it’s going to take effect on or about August 1, 2023.

Natalie LaRue: That’s interesting, Brett. Could you provide an overview of any similar efforts that are in other East Coast states, as well?

Ben Wilson: Yes. It seems like the two coasts—the West Coast and East Coast—are following similar trajectories here. Since the beginning of 2023, states like Maine and North Carolina have introduced legislation that, if enacted, would increase those states’ power to review health care transactions. Similar to their West Coast counterparts, the two pieces of proposed legislation in Maine and North Carolina are aimed at capturing transactions with the potential to adversely affect health care costs, access, quality, health equity, or competition. In addition, states with existing laws, like Massachusetts, are dedicating more resources towards a more searching scrutiny of proposed transactions as well as post-approval monitoring and enforcement processes.

Natalie LaRue: Thanks, Ben. I’m interested to know more about New York’s recent enactment and these pending bills, but I want to start at the beginning. Could you walk us through the development and rollout of these state laws on the East Coast that target health care access, cost, and quality?

Brett Friedman: I’m happy to do that, Natalie. This is really a decade in the making. Connecticut and Massachusetts were the early adopters of laws and regulations that required state review of certain material health care transactions. They were very novel 10 years ago, but these pieces of legislation expanded the state reach of these two states into the review of transactions that really went beyond the traditional domain of not-for-profit hospitals that would have to go through a certificate of need or a public need review. These states generally demonstrated an unwillingness to interfere with large, national platform transactions, so the reaction at the time was quite muted, unlike the current efforts being made in the West Coast states and now, in New York.

We started to see movement again in the space in early 2020 on the West Coast, when Washington state established a new law that requires notice of material health care transactions, much like New York. The next year, Nevada came out with its own iteration of these laws that focused specifically on certain types of provider entities like physicians, physician practices, hospitals, and certain types of “health care carriers.” And then, Oregon, we think, in the broadest law to date, implemented something called the Health Care Market Oversight program, which requires health care entities to provide notice and obtain approval of material health care transactions.

Then, last year, California passed a similar law that established the Office of Health Care Access—it was the SB 184 bill—that’s scheduled to take effect in April 2024. Like Washington, like New York, that’s a law that requires notice but not necessarily approval.

All of that culminated now, in May 2023, when New York passed its own law, which has got a lot of attention because New York is such a significant health care marketplace. Then, we’re seeing other states now introduce their own legislation, namely in Maine and North Carolina. And we really don’t see this trend slowing down—in fact, we think states will keep taking lessons from one another, and this is going to be a trend that really extends across most markets, not just the East Coast and West Coast that we’ve seen to date.

Natalie LaRue: Thanks, Brett. Ben, could you walk us through what kinds of health care entities are subject to review in Connecticut and Massachusetts, to start?

Ben Wilson: You bet. Each state’s law will vary here. For example, the Massachusetts law broadly covers mergers, acquisitions, joint ventures, and clinical and contracting affiliations involving any payor, provider of health care services in the state, or provider network or contracting organization. Massachusetts has also significantly expanded the scope of its determination of need review to include cost and market access factors and transactions or substantial capital projects when those are undertaken by licensed health care facilities and clinics. In contrast, the Connecticut law really focuses on physician group consolidation, in particular with hospitals and health systems. It requires annual reporting to the attorney general as well as notice of material transactions to the attorney general. Like Massachusetts, Connecticut also has a searching certificate of need process. So, the states are similar in some respects but different in others.

Natalie LaRue: Great. Do Maine and North Carolina’s proposed laws have a similar scope to what you just outlined?

Ben Wilson: Maine’s proposal captures transactions involving health care facilities, physician organizations, provider networks, accountable care organizations, and any other organizations that contract with carriers for payment of health care services—that’s more similar to Massachusetts. Importantly, the proposal also specifically captures acquisitions of health care entities by private equity groups and hedge funds.

In contrast, North Carolina takes a targeted approach by focusing on hospitals and any entity affiliated with hospitals in its proposed legislation. Specifically, the North Carolina attorney general may review transactions among hospital entities that include any corporation or governmental entity licensed as a hospital, as well as any entities affiliated with those captured through ownership, governance, or membership, like holding companies, subsidiaries, and more. In addition, any acquiring entities are also captured, which the state defines as “people or entities gaining ownership or control of a hospital.”

Natalie LaRue: That’s really interesting, Ben. How does New York’s law measure up that was just passed, Brett?

Brett Friedman: Yes, happy to jump in on New York. New York’s really an outgrowth of these efforts, especially the historical efforts of Massachusetts and Connecticut and what we’re seeing on the West Coast. Importantly, New York, at this point, is aimed at capturing data on a broad set of health care transactions, and it includes some of what Ben had listed—physician practices, hospital acquisitions, transactions involving provider-sponsored organizations and health insurance plans—but New York’s law also calls out specifically management services organizations, which we think is intended to really speak to a lot of the transactional activity involved in the physician practice platform management space. New York’s law excludes transactions that are directly involving insurers as well as any other entities that undergo the CON (or certificate of need) process, and that’s important because those entities are already licensed—there’s already a robust review process that they undergo—and so, New York’s saying, “If you’re under CON, if you’re going to get insurance approval in connection with a change of ownership or a sale of an insurance company, those processes remain untouched,” including (and they called out specifically) pharmacy benefit managers, given another recent law passed in New York that specifically licenses PBMs. But, really, the law is intended to capture all of the other transactions in the health care space, including those that we’ve seen involving private equity or strategic acquisitions involving physician practice management platforms. Those transactions, historically, unlike CON entities like hospitals, home care, clinical outpatient facilities, and insurance companies, were not already subject to review.

Natalie LaRue: Are there any limitations on the types of transactions that are captured?

Brett Friedman: There are, and it’s important that you read carefully every state law to which these novel approval or notice requirements will apply. While they’re all similar, as we’ve been discussing, if you’ve seen one law, you’ve really seen one law, and there needs to be a detailed analysis to think about the type of transaction you’re entering into and whether that state’s specific language is going to trigger a notice or approval right.

Just to give a few examples, Connecticut’s law requires a review of M&A activity, the consolidation or affiliation with a physician group practice, hospital, medical foundation, or similar hospital-controlled entity or health care provider—very much focused on the hospital and provider side.

Similarly, Massachusetts includes a review of the same types of M&A activity, formations of any partnerships, JVs, ACOs, parent corporations, MSOs, or other entities created to administer contracts with carriers or third-party administrators.

Maine’s bill would mirror the review authority in Massachusetts, but further includes the ability to review any sale, purchase, lease, or affiliation that results in a transfer of control over a hospital’s board of directors, and specifically calls out private equity and hedge fund acquisitions as transactions that would be captured in the scope of Maine’s bill.

North Carolina’s proposed law would include similar types of M&A, JV activity, change-in-control transactions, but any other transactions that the attorney general believes may have an impact on competition. As Ben mentioned earlier, these laws are really focused on competition, access, health equity, as well as increases in cost.

New York’s law—the one that was just passed earlier this month—allows the state to review all types of M&A activity involving health care entities, which would include most forms of change-in-control transactions, but New York excludes—and this is an interesting component—clinical affiliations that are formed with the intent to facilitate collaboration between entities and any transactions already subject to the certificate of need or other insurance entity approval process. So, if a hospital, for example, is entering into a clinical affiliation, that is definitively excluded under the language of the New York State law. And so, it does, as I mentioned earlier, really require a detailed, state-by-state review, because the definitions are not cookie cutter, even if they’re intended to get at the same types of expansive transactions involving providers and investors.

Natalie LaRue: Great—thanks so much for that thorough breakdown. Do the state laws have relevant materiality thresholds?

Ben Wilson: Some do. In Massachusetts, for non-hospital providers, such as physician groups, reporting requirements and material change notice requirements apply to those with $25 million or more in annual net patient service revenue. Connecticut’s law, in contrast, does not include a specific dollar materiality threshold, and neither does Maine’s proposed bill. Although New York’s law does not have a materiality threshold per se, it does carve out “de minimis” transactions that result in a health care entity increasing its total gross in-state revenues by less than $25 million.

Natalie LaRue: For these materiality thresholds, at what level is the amount of patient revenue calculated, and what parties are included in that calculation?

Brett Friedman: That’s a great question, Natalie, because it’s really, frankly, confusing. Twenty-five million dollars, at least between Massachusetts and New York, seems to be this magical threshold. In Massachusetts, the calculation includes any transacting entity, so even if an acquisition target has less than $25 million in patient revenue, the transaction may nevertheless trigger the law’s application if the acquiring entity is making in excess of that threshold.

New York’s law has, as Ben mentioned, a “de minimis” carve-out definition from the materiality threshold, but how you interpret that materiality threshold is going to be, I think, one of the chief ambiguities of the New York law that’s going to require a lot of consideration in the course of thinking about how this law will apply. The reason why there’s so much ambiguity is that the law is written when the health care entity’s total gross in-state revenue increases by $25 million or more, and so, that’s unlike Massachusetts, which does not specify whether the definition captures both the acquiring entity and the acquisition target. Here, in New York, the law is speaking only to that of the target, and so, if you think about an example, it’s really easy to apply in a strategic acquisition, where one entity is acquiring that of another entity, the total in-state revenue increases more than $25 million by that acquiring entity—easy application. But transactions are not always that simple. Let’s say it’s a buyout of an MSO for an entity that is not previously operating in New York—they had zero previous revenue, so, is that really an increase? And so, it’s easy to understand in some contexts, like in the strategic transactions, but I think in the buyout context, especially around private equity, it’s going to be harder to think about the application, and there will have to be a lot of careful analysis over the specific facts of the acquisition, strategic transaction, or affiliation, given the broad list of types of transactions that count, to know whether you’re going to have to apply under the New York process, which is quite onerous. If the transaction does comply, there’s going to be a lot of information on the transaction that you’re going to give and a lot of analysis, including the health equity impact, that you’re going to have to provide in terms of publicity and notice of the transaction. So, you really want to focus on this materiality threshold and think around the ambiguity before you immediately go ahead and submit. This is, I think, going to be an area where we expect DOH will issue regulations or guidance to clarify how to interpret the language, so this is one area to flag as an important development.

Natalie LaRue: Very interesting points there, Brett. Thinking of how likely it is for these laws to be applied, what has enforcement looked like in the states that have existing laws currently, like Massachusetts and Connecticut?

Ben Wilson: In Massachusetts, the Health Policy Commission has reviewed over 150 transactions since its initial enactment, but of those, it’s only subjected nine so far to the more comprehensive analysis, the so-called “cost and market impact review.” Previously, the limiting factor had been capacity within the Health Policy Commission to undertake more CMIRs, and within the DON (Determination of Need) program, to undertake more independent cost analyses. For the same reason, the scope and extent of post-approval conditions and reporting have also been limited from a determination of need perspective. That’s now changed, as the Health Policy Commission, DON program, and Center for Health Information and Analysis within Massachusetts have significantly expanded their review and data analytic capacity. We’re expecting a bump in the number of reviews and the depth of those reviews, as well as an expansion of the post-approval conditions and reporting obligations. The Health Policy Commission in Massachusetts has also publicly expressed an interest in more thoroughly reviewing transactions involving private equity sponsors.

In Connecticut, transactions subject to the certificate of need process have long faced searching and public scrutiny. That said, with respect to the comparable market access law, Connecticut’s law, applicable to physician groups, has generally not captured national practice platform transactions and has, instead, focused on physician consolidation within the hospital systems.

Natalie LaRue: Interesting. So, what do we expect for enforcement in Maine and North Carolina, and, once in effect, New York?

Brett Friedman: I think, at this point, Natalie, it’s really too soon to tell. All the bills are written very broadly, and they’re intended to capture a wide array of transactions.

In Maine, for example, the AG’s going to monitor ongoing compliance with conditions and, if necessary, petition the state supreme court for specific performance, injunctive relief, or other equitable remedies if there’s an impact to competition that the AG doesn’t like.

Similarly, in North Carolina, the AG has discretion to review transactions it believes will have an impact on hospital competition, which is an incredibly broad standard.

In New York, there’s still a lot to be defined, but the law does contemplate that the Department of Health will forward the notice packages to the AG, which has historically had the ability to review transactions for anti-competitive purposes, and so, there’s an expectation or at least there’s an inference in the law that the AG will undertake more anti-competitive or anti-competition enforcement as a result of the information being collected through this notice process in New York. Importantly, too, if you fail to file notice of a transaction when DOH thinks it’s required, there is a stipulated penalties provision that triggers a per-dollar amount penalty for every day that you should have submitted the transaction, and, given that it’s a daily running of penalties, the financial impact could be quite significant, especially as measured against transaction size.

Overall, these laws give states the ability to take an aggressive stance and to choose to enforce their laws to capture national platform transactions, as we’ve seen Oregon has done through their public notice and through our experience, and these states could choose to exercise more restraint, like Massachusetts and Connecticut have historically done. So, I think, again, we’ll see, but the laws are written broadly enough to make enforcement a challenge going forward.

Natalie LaRue: Thanks, Brett. Given this potential for enforcement, it will be important to stay up to date on the latest changes in state regulation. Practically, what impact do you expect this type of state regulation to have on deals?

Ben Wilson: Very much agree it’s going to be important to stay up to date. I think the key message here is that state regulation of health care transactions is going to be a more important consideration going forward.

In terms of practical effects, that means that counsel and their clients should, first of all, recognize the potential for deal delays and additional cost. The state AG or applicable reviewing regulatory body might order a more searching examination and analysis that will require additional time and resources.

An example might be North Carolina’s proposal, where they outline a series of required fees, including an unlimited fee to cover the cost of the state AG’s use of external advisors during review in addition to a base fee of $50,000 just to cover the actual cost of review. That state’s proposal also outlines a series of penalties if a violation is found—nullifying or voiding the transaction as a matter of law is one possibility, fining each governing board member and the CFO of the transaction parties civil monetary penalties of up to $1 million per transaction, and prohibiting the state Department of Health from issuing a new or renewed license for the hospital involved. So, some very real teeth to the laws that are being proposed.

I think, overall, state regulation of health care transactions going forward is going to require a state-by-state look, potentially the submission of pre-closing notices, varying timelines for review—from 30 days up to, potentially, six months—and some strategic thought in terms of how to navigate that review, take a close look, as Brett had mentioned earlier, in terms of whether the review is really required, and some of the factors that are evolving in a number of states, even those like Massachusetts that have had the laws for some time.

Brett Friedman: I agree, Ben. Even if entities do report a transaction in compliance with the state statutes, some states are going to have ongoing reporting obligations following closing.

For example, in North Carolina, under their proposed law, the acquiring entities will be subject to a post-transaction monitoring for a period of at least three—but up to 10—years in order to determine the transaction’s effect, if any, on some of the factors you mentioned earlier, like access, price, and quality of health care in the state. Some states have required entities to enter into agreements with the state Department of Health or other regulating entity to conduct this post-transaction monitoring, which could include the submission of quarterly reports, and, similar to what you mentioned earlier, the entity being subject to regulation, you’re going to pay for the costs of that initial review and then up to 50% of the periods afterward.

Similarly, Maine has required the parties to submit reports, at one-, two-, and five-year post-closing intervals, to the attorney general, demonstrating their compliance with any conditions that had been imposed as a result of the transaction.

New York’s law evolved where New York had tried to, as part of the initial proposal of the bill, in the governor’s executive budget, try to do the same thing, where they would put what were called “undertakings” on the transaction that would require ongoing monitoring to ensure that not just as part of the review but as the entity and the transaction takes hold, “What’s the longer-term impact on cost, quality, access, and health equity?” And so, we’re seeing laws just not trigger the approval or the notice, but also look at the long-term impact at substantial reporting burden and obligation on the part of the transacting parties.

Natalie LaRue: Those are really great points and helpful things to watch out for—it seems like it’ll 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. The additional review is going to affect deal term confidentiality and require a greater degree of transparency, and the extent to which that’s true, as we’ve been discussing, in many respects, will vary state by state. Some state regulators will make public certain aspects of transaction information submitted in material change notices and solicit public feedback, potentially, on those aspects of the transactions—this may include the notice application describing the transaction, key deal terms, and requiring submission of deal documents, such as purchase agreements. Businesses that are subject to these regulations will have to become more comfortable sharing deal documents—portions of those deal documents may be able to be redacted, some portions may not be able to be redacted, and some additional operational facts and deal terms are going to be disclosed that wouldn’t historically have been, just a part of the usual HSR-type submissions.

As an example, New York’s law states the Department of Health will post a summary of the transaction, explanation of those likely affected by the transaction, and information about how it may overall affect the provision of services. That’s going to be posted publicly on the DOH website. That’s the practice currently in Massachusetts; the material change notice will get posted to the website. Maine’s and North Carolina’s proposals are still unclear as to how much information must be made public. The Massachusetts and California laws, for example, have provisions regarding provision of certain information under a promise of confidentiality to reviewing regulation.

I think the developing arguments based on trade secret and confidentiality protections are going to be important for those navigating the submission process and trying to ensure that sensitive and confidential deal terms or information are able to be protected, if they’re not, and they have to go in the initial submission of materials, to be prepared for what that means, that certain details are going to be or are not going to be made public.

Natalie LaRue: Thanks for those insights, Ben and Brett. I really appreciate your time today. But looking ahead, what are the most important takeaways that we should be keeping in mind?

Brett Friedman: Happy to take that one, Natalie. I think the most important takeaway is that these laws are out there, and they continue to proliferate. And while there are certain points of commonality between the laws and the transactions that they touch, there are keen nuances and differences so that, as you’re engaging in a multi-state transaction, it’s critically important to understand which laws exist, whether they apply to the transaction you’re entering into, and how you should think about structuring your transaction, and what the impact of these laws may be on the cost and timing of getting the transaction closed. In addition, the landscape is continuing to evolve, such as involving the proposed laws in Maine and North Carolina. And then, you have laws that have been passed but that have substantial ambiguity that could impact and affect how the laws are considered in terms of transaction timing and structure, like with some of the issues we talked about with New York and the definition. You do have states like Connecticut and Massachusetts, where the laws have been out there, but we’re seeing increased resources and enforcement given these national trends. And so, overall, we think it’s important to have a really good handle on what these laws are, the new ones, the evolution of existing laws, and how these older laws are being applied. It’s something that we’re doing as a firm—we’ve just launched a website that is tracking these developments across the states, and so, we would really encourage people to look at that, which will be a really good resource to track these developments and as they’re impacting our clients. Ben, anything to add on that?

Ben Wilson: I agree. I think that it’s important to keep an eye on it, track it state-by-state, watch for the burden increasing on deals as the number of states that have these laws increase and the interest in enforcement increases across the space. So, I completely agree with what you said, Brett.

Natalie LaRue: Thanks again, Ben and Brett. 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 resource center, where you can also find a full list of podcasts in this series. 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.