Massachusetts Enacts Largest Health Care Transactions and Financial Oversight Legislation In a Decade, Private Investors and Provider Activities in Focus

Key Takeaways:

• New and expanded categories of investors and transactions (including Private Equity) are now subject to review by state authorities.
• Broader financial and data disclosures pre- and post-transaction are now required.
• Substantially increased penalties for failure to disclose required information to state authorities.
• There is a new prohibition on acute-care hospitals leasing their main campuses from real estate investment trusts.
• There is a new restriction on the repossession of leased medical equipment from certain health care facilities.
• Certain urgent care services and office-based surgery are now subject to state licensure.
• Massachusetts False Claims Act liability is expanded to include health care stakeholders with an “ownership or investment interest” in a person or entity that violates the law.

Health care sector stakeholders take notice: On January 8, 2025, Massachusetts Governor Healey signed sweeping new health care legislation with transactional, financial, and ongoing operational compliance ramifications for providers and investors. The new law includes heightened oversight capabilities for a variety of state government agencies, including the Health Policy Commission (the “HPC”), the Department of Public Health (“DPH”), and the Center for Health Information and Analysis (“CHIA”), as well as the Attorney General’s Office (“AGO”).

The law, H. 5159 ("the Act"), is the most significant expansion of regulatory oversight of health care transactions, provider finances, and licensing in Massachusetts in over ten years. The Act follows the financial woes of private equity-backed and other for-profit hospitals in Massachusetts and nationwide. It is part of a growing national movement among state regulators to apply greater scrutiny in the health care sector, with a particular focus on private equity sponsors and similar investors.

This article summarizes the main aspects of the Act, though there are many to consider. Health care providers, investors, and other stakeholders will need to prepare for new government regulations and increased oversight and scrutiny that will affect everything from organizational structure and business operations to financial reporting, licensure, and transaction and investment decisions.

Verrill is following how these developments will affect Massachusetts health care markets and transactions and will supplement this article with additional information about this significant ground shift in the legal landscape.

Broad Components of the Act

Expanded Oversight

The Act broadens the scope of health care stakeholders subject to HPC, CHIA, and AGO oversight to include a variety of entities affiliated with “Providers” and “Provider Organizations” (as defined in state law):

• Private Equity Companies
• Other “Significant Equity Investors”
• Health Care Real Estate Investment Trusts (“REITs”)
• Management Services Organizations (“MSOs”)
• Pharmaceutical Manufacturing Companies
• Pharmacy Benefit Managers (“PBMs”)

Expanded Transaction Review

The Act also expands the types of health care transactions subject to “Notice of Material Change” review by the HPC.

In addition to the reportable “Material Changes” currently outlined in state statute and HPC regulations, which include mergers, acquisitions, joint ventures, partnerships, corporate and clinical affiliations, and other arrangements, the Act adds the following:

1. Significant expansions in a Provider or Provider Organization’s capacity;
2. Transactions involving a Significant Equity Investor which result in a change of ownership or control of a Provider or Provider Organization;
3. Significant acquisitions, sales, or transfers of assets including, but not limited to, real estate sale lease-back arrangements;
4. Conversion of a Provider or Provider Organization from a non-profit entity to a for-profit entity

Lower M&A Market Share Threshold Subject to Review

The Act lowers the reviewable market share threshold for mergers and acquisitions of Provider Organizations. M&A activities that result in a Provider Organization having only a “dominant” market share in a given service or region will now qualify as a “Material Change” subject to HPC review (“near majority” market share is no longer required). Consequently, this rule is expected to expand the number of M&A transactions qualifying for HPC review.

Significant Equity Investor Disclosures

For Material Changes involving Significant Equity Investors, the HPC may require that such parties submit information about their capital structure, general financial condition, ownership and management structure, and audited financial statements.

Post-transaction Disclosures

The HPC may require Providers and Provider Organizations to submit data and information necessary for the HPC to assess the post-transaction impacts of a Material Change for five (5) years after completion.

Cost and Market Impact Review (“CMIR”)

The Act expands the number of factors the HPC may consider in conducting a CMIR as part of the Notice of Material Change review process.

Enhanced Financial Transparency of Hospitals and Provider Organizations

The Act addresses annual reporting gaps that previously allowed hospitals and Provider Organizations to hide business structures, financial activities, and troubles from regulators.

• Hospitals—With respect to hospitals (acute and non-acute), CHIA will now collect audited financial statements of the parent organization’s out-of-state operations, Significant Equity Investors, health care REITs, and MSOs. CHIA will also collect data on margins (including margins by payer type), investments, and information on any relationships with Significant Equity Investors, health care REITs, and MSOs.

• Provider Organizations—Provider Organizations must submit annual reports to CHIA that now include an even wider range of information, including, but not limited to:
  • Comprehensive financial statements, including information on parent entities (and their out-of-state operations) and corporate affiliates, such as Significant Equity Investors, health care REITs, and MSOs;
  • Details regarding annual costs, annual receipts, realized capital gains and losses, accumulated surplus, and accumulated reserves; and
  • Other assets and liabilities that may affect financial condition, including, without limitation, real estate leaseback arrangements with health care REITs.

Catch-all Reports & Quarterly Reporting for Private Equity

The Act also grants further financial investigatory powers to CHIA regarding Provider Organizations:

• Can require in writing, at any time, such additional information as it deems reasonable and necessary to determine the organizational structure, business practices, clinical services, market share, or financial condition of a registered Provider Organization, now including total adjusted debt and total adjusted earnings;

• Can require a registered Provider Organization with private equity investment to provide quarterly reports of required information; and

• Can require disclosure of relevant information from any Significant Equity Investor associated with a registered Provider Organization.

Increased Monetary Penalties

The Act significantly sharpens fines for entities that fail to provide required financial reports on time. CHIA may impose a fine of up to $25,000 per week for each week of delay for late financial reporting, with no annual limit.

HPC Annual Cost Trends Hearing Testimony

The Act expands the scope of the HPC's Annual Cost Trends Hearings to include matters of costs, prices, and cost trends of Providers, Provider Organizations, Pharmaceutical Companies, PBMs, and private and public health payers.

The impact of Significant Equity Investors, health care REITs, and MSOs on these matters will also be considered, and such entities will now be required to provide testimony concerning:

• Health outcomes;
• Prices charged to insurers and patients;
• Staffing levels;
• Clinical workflow;
• Financial stability and ownership structure of an associated Provider or Provider Organization;
• Dividends paid out to investors; and
• Compensation (including, but not limited to, base salaries, incentives, bonuses, stock options, deferred compensation, benefits, and contingent payments to officers, managers, and directors of Provider Organizations in the Commonwealth acquired, owned, or managed, in whole or in part, by the Significant Equity Investors, health care REITs, or MSOs.)

Similarly, Pharmaceutical Manufacturers and PBMs must provide testimony as to the factors underlying prescription drug costs and price increases and the impact of aggregate manufacturer rebates, discounts, and other price concessions on net pricing (without needing to provide testimony that would undermine the financial, competitive, or proprietary nature of the information).

Increased Attorney General Investigatory Powers

In addition to its current investigatory powers over Providers, Provider Organizations, and payers, the Attorney General’s Office (“AGO”) will be able to review and analyze all information submitted to CHIA regarding Significant Equity Investors, health care REITs, and MSOs.

The AGO may also require such entities to produce documents, answer interrogatories, and provide testimony under oath regarding health care costs and cost trends, factors that contribute to cost growth within the Massachusetts health care system, and the relationship between Provider costs and payer premium rates.

Increased HPC and CHIA Funding

The state will secure additional funding for HPC and CHIA by requiring more entities to pay monetary assessments. The additional entities subject to these assessments are:

• Pharmaceutical Manufacturing Companies
• PBMs; and
• “Non-Hospital Provider Organizations” (including physician practices with at least $500 Million Dollars in gross patient service revenue, clinical labs, imaging facilities, and urgent care networks)

Changes to Determination of Need and Facility Licensure

The Act also makes several key changes to state law concerning the Determination of Need review process, health care facility licensure, and facility closure processes, including, but not limited to, the following:

• Determination of Need (“DoN”)—DPH shall now consider the following factors when evaluating proposed DoN projects and may impose reasonable terms and conditions on DoN approval:
  • The state health resource plan (from the HPC’s new Office of Health Resource Planning);
  • Comments and data from CHIA, the HPC (including CMIRs), and any other state agency.
  • The impacts of a proposed project on patients, including considerations of health equity, the workforce of surrounding health care providers, and other Massachusetts residents; and
  • The state’s cost containment goals;
• Hospital Essential Services Closures—DPH will be permitted to seek an impact analysis from the HPC when considering the proposed closure of a hospital or the discontinuance of any “essential health service” at a hospital.
• Hospital Licensure, REIT Restrictions—DPH cannot issue or renew an acute-care hospital license if the hospital’s main campus is leased from a health care REIT; however, acute-care hospitals with leases from health care REITs as of April 1, 2024 are exempt from this restriction.
• Hospital Licensure, Reporting Compliance—DPH cannot issue or renew an acute-care hospital license if it does not comply with its reporting obligations to CHIA.
• Office-based Surgical Centers—DPH must license “office-based surgical centers” (a new licensure category defined in the Act) and develop regulations and practice standards in consultation with the Board of Registration in Medicine.
• Urgent Care Centers—DPH must license “urgent care centers” (a new licensure category defined in the Act) and develop regulations and practice standards. These urgent care centers do not include licensed hospitals (and corporate affiliates), clinics, limited-service clinics, or community health centers receiving federal grants.

Massachusetts False Claims Act (“FCA”)—Expanded Liability

The Act amends the state FCA by extending potential liability to any person (or entity) having an “ownership or investment interest” in any other person (or entity) who violates the state FCA, knows about the violation, and fails to disclose it to the state within 60 days. Violations carry a civil penalty between $5,500 and $11,000 per violation, plus treble and consequential damages.

Consequently, the Act reduces shareholder liability protection by empowering the AGO to “pierce the corporate veil” and pursue investors, like Private Equity Companies and other Significant Equity Investors, for failing to report FCA violations, even if they did not cause the underlying violation. Such investors will need to closely monitor their portfolio companies' compliance activities.

Medical Equipment Repossession—Restrictions

The Act amends state law by prohibiting the repossession of leased medical equipment from certain health care facilities (e.g., hospitals and ambulatory surgery centers) unless certain conditions are met. A contract between such facility and a lessor of medical equipment cannot authorize the repossession of medical equipment or supplies unless the lessor provides notice of financial delinquency to DPH at least 60 days before repossession of any medical equipment or supplies necessary for the provision of patient care. An arrangement between a facility and a lessor of medical equipment that does not comply with this rule will be void.

What Does This All Mean?

The Act is new to the Massachusetts health care scene, and it will take time to see how health care sector stakeholders will navigate the path forward. In the short term, agencies can be expected to update their regulations and issue guidance to interpret and implement the Act, while providers, investors, and other market participants should adjust their business operations as needed to achieve compliance.

In the long term, the Act can be expected to have strategic and legal implications for the Massachusetts health care industry. The expanded list of “Material Changes” means that a greater number of health care transactions will be subject to government agency review, which may carry certain practical consequences for deal and post-deal planning, such as potential impacts on the scope, terms, and execution of definitive agreements and on closing timelines. Also, increased agency oversight of the business activities and finances of a broader range of health care stakeholders can potentially impact investor risk analysis. Provider entities, investors, and other market participants will need to take effective steps to mitigate risk and achieve compliance with these new rules, such as through greater due diligence and preparation of business transactions, as well as through more administrative discipline and prioritization of resources dedicated to maintaining financial solvency and meeting legal obligations.

Verrill's industry-recognized health care attorneys represent institutional providers and business entities of all sizes in transactional, strategic counseling, and regulatory matters, including those involving market oversight agencies and other state health care regulators. For more information, please contact Andrew Ferrer, your Verrill relationship partner, or another member of Verrill’s Health Care & Life Sciences team.[2]