Massachusetts Expected To Pass Law With Broad Implications For Private Equity Health Care Investments

Introduction

Massachusetts is one of the latest states expected to pass a law with significant implications for private companies investing in health care businesses in the state. On July 18, 2024, the Massachusetts Senate passed S2871 (H4653), An Act Enhancing the Market Review Process¹ (the "Bill"), a redrafted version of a health care reform bill that was passed in the Massachusetts House in May 2024. The House and Senate are meeting in conference committee, and there is momentum in the legislature for a vote of acceptance to occur before the end of the Massachusetts legislative session on July 31, 2024, after which the Bill will go to Governor Maura Healey for signature. Barring the inclusion of additional language stating the Bill will be immediately effective, it will become law 90 days after signing.

Similar to the other state health care transaction laws sweeping the country (for more information on these laws, see Navigating Emerging State Regulation of Health Care Map), the Bill expands the Massachusetts Health Policy Commission's ("HPC") authority to review and propose modifications to "material change" transactions that the HPC finds would have a negative impact on health care costs. The Bill will also significantly increase reporting requirements and scrutiny by the Center for Health Information and Analysis ("CHIA") into investments in health care by private equity ("PE") firms, and will prohibit certain arrangements between management services organizations ("MSOs") and "health care practices," which will have implications for PE firms and others. Our key takeaways from the Bill, and a summary of relevant provisions, follow.

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Key Takeaways

• New Changes Target Private Equity. PE firms and PE-backed health care entities should be aware of increased oversight into PE transactions relating to health care entities. This follows a trend toward increased scrutiny of PE investment in health more broadly by state and federal agencies, including the Federal Trade Commission, Department of Justice, and Department of Health & Human Services.² In particular and as described below, the Bill expands the existing Notice of Material Change ("MCN") requirements to capture providers and provider organizations that are owned or controlled by PE firms, such that any transaction with PE firms and other investors must be reported. As many types of transactions with PE firms were previously not subject to the HPC MCN review process, PE firms should now expect to be scrutinized closely. Additionally, the Bill expands the authority of the Attorney General of Massachusetts ("AG") to assess and propose modifications to proposed transactions, which also brings investors under more extensive oversight. Taken together, these amendments suggest that more aggressive review of and enforcement against investors should be expected. Further, these changes appear to directly address the issues resulting from the Steward Health Care crisis, and track with current proposed federal legislation by Senators Warren and Markey aimed at addressing corporate and, more specifically, PE firms' involvement in health care.
• Expanded Transaction Oversight. The Bill expands the HPC's authority to review and recommend modifications to proposed transactions that it finds will have a significant material negative impact on health care consumers. Notably, although the HPC cannot approve or deny any transaction, failure to complete the proposed modifications can give rise to liability under Massachusetts laws governing consumer protection. That said, the Bill empowers, and we are likely to see, the HPC start to impose conditions on transactions, and it will be important to monitor regulations and guidance developed by the HPC should the Bill pass. At its Public Meeting earlier this month, the HPC discussed state policy opportunities including broadening existing state-level health care transparency and oversight processes to include PE firms and imposing conditions on transactions.³ As written, the language of the Bill introduces uncertainty regarding the time period for a transaction to close and will therefore need to be addressed in the context of definitive agreements between transacting parties to minimize the potential of the HPC imposing onerous conditions on the proposed transaction.
• Challenges to the Captive-MSO Model. The Bill also impacts the "friendly PC" model commonly used by health care entities. As described below, the Bill creates significant limitations on what MSOs can do in Massachusetts. While the Bill largely codified the existing approach taken by regulators in the Commonwealth to MSOs, it also went further to restrict the way MSOs, and others, interact with health care practices, such as by prohibiting MSOs from exercising ultimate control over the finances of the health care practice and prohibiting MSOs from restricting the ability of a person who owns stock in the health care practice to transfer, alienate or otherwise exercise discretion and control over their stock. The new requirements only apply to contracts entered into after the effective date and to businesses that practice through clinicians licensed in medicine, nursing, psychology and social work, but will potentially disrupt future arrangements going forward.
• Limits on Real Estate Agreements. The sale-leaseback deal between Steward and Medical Properties Trust ("MPT"), a real estate investment trust ("REIT"), in which Steward sold its Massachusetts properties to MPT and saddled its hospitals with exorbitant lease payments, has served as a cautionary tale that the legislature seeks to prevent from happening again.. While the House bill prohibited sale-leaseback agreements with REITs, the Bill now requires that the parties to the proposed transaction file an MCN with the HPC prior to effectuating the sale. Further, the Bill adds the definition of an "unsafe financial actor" to include REITs with a financial interest in a provider or provider organization closing, declaring bankruptcy, or otherwise discontinuing its operations within 15 years of the REIT's interest in the provider or provider organization.

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Summary of Material Changes

The Bill amends the Commonwealth's MCN requirements and increases reporting requirements by health care entities.

• Currently, Massachusetts law requires health care service providers and provider organizations to notify the HPC, CHIA, and the AG 60 days "before making any material change to its operations or governance structure." This requires entities to notify regulators of prospective transactions, although the current law does not single out any particular investor type and does not allow the HPC to propose modifications to a transaction.
• The Bill expands the MCN process to require notice (i) when a for-profit entity makes a significant new investment in or acquires, or gains ownership or direct or indirect control of, a provider or provider organization, (ii) for substantial acquisitions or sales of assets for an ownership share or for the purpose of a lease-back arrangement; and (iii) if a covered entity converts from nonprofit to for-profit status.⁴
• The Bill gives the HPC the authority to assess a penalty against a provider organization that fails to provide requested information of up to $10,000 per week for each week of delay, with a maximum annual penalty of $500,000.
• For proposed transactions involving for-profit investors, the Bill requires additional information to be submitted, including fully audited financial information of the investor and any other health care entity acquired by the investor for the preceding five fiscal years. The HPC may require post-transaction submissions from the health care entity for all transactions for a period of five years to assess the impacts of the transaction and compliance with any conditions or commitments agreed to in the notice and approval process.
• The Bill also allows the HPC to review additional factors relating to the proposed transaction in a cost and market impact review ("CMIR") and recommend modifications to those proposed transactions. The HPC may request information from any provider, provider organization, payer, investor or other party associated with the proposed transaction. A private party's failure to modify the proposed material change can give rise to liability associated with the material change application under Massachusetts laws governing consumer protection.
• The Bill empowers the AG to bring an injunction to block the transaction if the criteria assessed in the CMIR are met. The Bill also expands the AG's authority to collect information from private investment entities and issue civil investigatory demands on institutional providers and their parent organizations.⁵ This provision goes further than the existing law or the House bill passed in the spring.

The Bill imposes new restrictions for PE-backed provider organizations and reporting and financial requirements for PE firms.

• The Bill extends CHIA authority to collect more extensive information from provider organizations (for example, financial information about a parent entity's out-of-state operations, and financial information about corporate affiliates).⁶
• The Bill imposes new restrictions on PE-backed provider organizations—these entities (i) must meet a certain maximum adjusted debt to adjusted EBITDA ratio; and (ii) may not become highly leveraged or transact with an "unsafe financial actor."⁷
• During the term of the investment, the provider organization may not provide capital distributions, perform stock buybacks, stock redemptions or similar transactions, pay to a PE firm management fees or similar fees or costs; or "perform any other action or exceed any other metric the commission determines may cause a provider organization to become financially distressed."
• The Bill requires a PE firm to deposit a bond with the Department of Public Health upon submission of an MCN and cannot use provider or provider organization assets. The HPC determines the amount of the bond, which will equal the provider's or provider organization's estimated operating expenses for one year plus friction of administering the bond.
• The Bill also allows CHIA to assess penalties on entities that fail to provide requested information within two weeks following the receipt of the written notice of up to $25,000 per week for each week the requested information is delayed.⁸

The Bill expands corporate practice of medicine ("CPOM") requirements relating to clinical interference and ownership and places restrictions on the types of services that an MSO can provide under a management services agreement.

• The Bill applies to health care practices in any form, through which registered practicing clinicians offer health services.
• It also enhances the CPOM clinical interference provision, prohibiting MSOs from conducting certain common activities on behalf of health care practices, such as negotiating with third-party payers without prior informed consent. Further, the Bill prohibits MSOs from entering into agreements where any "health care practice" would be unable to exercise complete control and discretion over the finances or capital of the health care practice, including, but not limited to, restricting the ability to create, buy or sell stock; issue dividends or sell the health care practice; or restrict the ability of a person who owns stock in the health care practice to transfer, alienate or otherwise exercise unfettered discretion and control over their stock.
• The Bill places restrictions on the types of services that an MSO can provide under a management services agreement. Under the Bill, a health care practice must maintain ultimate decision-making authority over (i) personnel decisions; (ii) coding or billing decisions; (iii) the selection and use of property; (iv) the number of patients seen in a given period of time or the amount of time spent with each patient; (v) the appropriate diagnostic test for medical conditions; (vi) the use of patient medical records; (vii) referral decisions; and (viii) any other clinical function.
• Notably, the definition of "health care practice" under the Bill only captures a business that practices through clinicians licensed in medicine, nursing, psychology, and social work.

Among other changes, the Bill also imposes additional disclosure requirements for hospitals seeking licensure and licensing requirements for a new class of entities including, pharmacy benefit managers, urgent care centers, and office-based surgery. Further, while the House bill prohibits sale-leaseback agreements with REITs, this Bill requires a formal MCN before such arrangement can be effectuated.

Footnotes

1. https://malegislature.gov/Acts/193/S2871; https://malegislature.gov/Acts/193/H4653.

2., See Ropes & Gray LLP, FTC Hosts Workshop on Private Equity Investments in Health Care https://www.ropesgray.com/en/insights/alerts/2024/03/ftc-hosts-workshop-on-private-equity-investments-in-health-care.

3. See, Health Policy Commission, Private Equity Investments in Massachusetts Health Care and State Policy Opportunities (July 2024), https://www.mass.gov/doc/private-equity-investments-in-massachusetts-health-care-and-state-policy-opportunities/download.

4. See S2871 § 34, amending MGLA chapter 6D, § 13.

5. See S2871 §§ 69-61, 76, amending MGLA Chapter 12C, §§ 8, 17.

6. "Corporate affiliates" to include "significant equity investors, health care real estate investment trusts, and management services organizations." Health care real estate investment trusts are defined as: "a real estate investment trust, as defined by 28 U.S.C. § 856, whose assets consist of real property held in connection with the use or operations of a provider or provider organization." Management services organizations are defined as "any organization that is contracted by a provider or provider organization to perform management or administrative services relating to, supporting, or facilitating the provision of patient care."

7. "'Unsafe financial actor', or real estate investment trust that had a financial interest in a provider or provider organization closing, declaring bankruptcy or otherwise discontinuing its operations within 15 years of the private equity firm or real estate investment trust's financial interest in the provider or provider organization."

8. See S2871 §§ 58, 65, amending MGLA Chapter 12C, § 9, 11.

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