Massachusetts H.5159 Seeks to Reshape Private Equity in Healthcare

ANALYSIS

H.5159 creates additional obligations for private equity investments in the healthcare services industry in Massachusetts. Interested parties seeking to transact within Massachusetts’ healthcare landscape should closely monitor developments related to this law as the updated definition of “material change” will subject certain private equity investments in healthcare to the notice requirements as well as the potential for a CMIR process.

This legislation is part of a growing trend, and private equity investors should take note of increasing momentum to reshape healthcare private equity in Massachusetts and across the United States. Visit McDermott’s Health Transactions Resource Center to monitor developments. Other developments in the law, including changes to hospital licensing and Determination of Need requirements and the development of licensure for urgent care centers and in-office surgery centers, will be the subject of future communications.

BACKGROUND

On May 16, 2024, the Massachusetts House of Representatives passed House Bill 4653 (H.4653). Two months later, the Massachusetts Senate engrossed an amendment to the bill, S.2881, which would more fully transform the private equity investment landscape in Massachusetts’ healthcare industry.

The House of Representatives rejected the Senate’s amendment and appointed a conference committee to reconcile differences between the two versions of the bill. The negotiators were unable to reach a consensus by the legislative session deadline of July 31, 2024.

On December 30, 2024, the conference committee reviewed the bill again, which served as the basis for the most recent version: H.5159. On the same day, both the Massachusetts House of Representatives and the Massachusetts Senate enacted H.5159 and promptly presented the bill to Governor Healey, who signed it into law on January 8, 2025.

NOTABLE DIFFERENCES BETWEEN H.5159 AND H.4653

H.5159 eliminated the following key aspects of H.4653:

• The requirement that private equity firms deposit a bond with the Massachusetts Department of Public Health (DPH) upon submission of a notice of material change, including when seeking to acquire a provider organization.
• The provision regarding a maximum debt-to-EBITDA ratio set by the Massachusetts HPC for provider organizations with private equity investors.
• The boundaries established related to the relationship between a physician practice and an MSO.
• The codified restriction on healthcare practice ownership, and the prohibition of healthcare entities and MSOs from exercising control over clinical decisions.

DEFINITION OF MATERIAL CHANGES EXPANDED

In Massachusetts, certain providers and provider organizations are required to give at least 60 days’ notice to the HPC before the date of a proposed material change, including mergers, acquisitions, affiliations, and certain joint ventures. Notably, H.5159 expanded the definition of “material change” to include transactions involving a significant equity investor that results in a change of ownership or control of a provider or provider organization and significant acquisitions, sales, or transfers of assets, including (but not limited to) real estate sale leaseback arrangements. There are other new transaction types that will now be included within the HPC’s material change notice process, including “significant expansions” in the provider or provider organization’s capacity and the conversion of a nonprofit provider or provider organization to a for-profit entity.

If, within 30 days of receipt of a completed notice, the HPC finds that the material change is likely to have a significant impact on either Massachusetts’ ability to meet the healthcare cost growth benchmark or the competitive market, the HPC may conduct a CMIR. This process requires the parties involved in a given transaction to submit documents and information to the HPC for review and extends the timeframe for the transaction significantly. While all nonpublic information and documents the HPC receives are confidential, the copy of the filed material change notice and the completed CMIR report are available publicly on the HPC’s website. The HPC does not have the authority to prohibit a transaction or require conditions on its approval, but it may refer its CMIR report to the attorney general, DPH, or other state agencies for further action.

H.5159 authorizes the HPC to adopt regulations for conducting CMIRs and for administering the new statute generally. This includes permitting the HPC to set filing thresholds so long as these thresholds are adjusted annually based on any inflation index established by the US Department of Health and Human Services or similarly reliable national index. Although H.5159 does not explicitly alter current regulations, the HPC will need to update its regulations to comply with H.5159’s new processes and definitions. It is unclear, however, when this update will occur.

For any material change involving a significant equity investor, the HPC may require information regarding the significant equity investor’s capital structure, general financial condition, ownership and management structure, and audited financial statements. Further, the HPC may also require the submission of data and information necessary to assess the post-transaction impacts of a material change for up to five years following the completion of the material change. This post-closing reporting requirement applies to any material change, including those involving private equity transactions.

WITNESS REQUIREMENT AT ANNUAL PUBLIC HEARING

H.5159 provides that the HPC will hold annual public hearings no later than October 1 of each year to examine factors that contribute to cost growth within Massachusetts’ healthcare system, including any relevant impact of significant equity investors, healthcare REITs, and MSOs on such costs. The attorney general may intervene in such hearings.

The HPC will identify, for the public hearing, a representative sample of witnesses, including significant equity investors, REITs, and MSOs. Witnesses will be required to provide testimony regarding the impact of their respective businesses on healthcare costs, prices, and trends under oath and be subject to examination and cross-examination by the HPC, the executive director of the CHIA, and the attorney general.

Witnesses who are significant equity investors, healthcare REITs, or MSOs associated with a provider or provider organization may also be required to provide testimony concerning:

• Health outcomes
• Prices charged to insurers and patients
• Staffing levels
• Clinical workflow
• Financial stability and the ownership structure of an associated provider or provider organization
• Dividends paid out to investors
• Compensation, including (but not limited to) base salaries, incentives, bonuses, stock options, deferred compensations, 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 said significant equity investors, healthcare REITs, or MSOs.

ANNUAL FINANCIAL REPORTING REQUIREMENTS

H.5159 requires a provider organization (defined below under KEY DEFINITIONS) that is registered by the HPC to submit an annual report to help CHIA monitor the financial conditions, organizational structures, business practices, clinical services, and market share of each registered provider organization. Notably, the report must include (but will not be limited to):

• Organizational charts showing the ownership, governance, and operational structure of the provider organization, including any clinical affiliations and community advisory boards.
• A comprehensive financial statement, including information on parent entities; their out-of-state operations; and corporate affiliates, such as significant equity investors, healthcare REITs, and MSOs as applicable; and details regarding annual costs, annual receipts, realized capital gains and losses, accumulated surplus, and accumulated reserves.
• Information regarding other assets and liabilities that may affect the financial condition of the provider organization or the provider organization’s facilities, including (but not limited to) real estate sale leaseback arrangements with healthcare REITs.

PENALTIES FOR FAILURE TO COMPLY WITH FINANCIAL REPORTING REQUIREMENTS

H.5159 permits CHIA to inform an entity that misses a reporting deadline that failing to respond within two weeks of receiving the notice may lead to penalties. H.5159 also provides that CHIA may impose penalties up to $25,000 per week for each week of delay after the two-week period following the reporting entity’s receipt of the written notice. (Under current law, fines are up to $1,000 per week with a maximum annual penalty of $50,000.) There is no annual limit to the penalty imposed under H.5159.

ATTORNEY GENERAL AUTHORIZED TO COMPEL PRODUCTION OF DOCUMENTS, ANSWERS, AND TESTIMONY

H.5159 authorizes the attorney general to review and analyze any information submitted to CHIA by a provider, provider organization, significant equity investor, REIT, MSO, or payer. The attorney general may require that such entities produce documents, answer interrogatories, and provide testimony under oath related to healthcare costs and cost trends, factors that contribute to cost growth within the Commonwealth’s healthcare system, and the relationship between provider costs and payer premium rates.

While all nonpublic information and documents are generally kept confidential, the attorney general may disclose such information or documents during (1) the annual HPC public hearing, (2) a rate hearing before the state’s Division of Insurance, or (3) in a case brought by the attorney general if the attorney general believes that such disclosure will promote the healthcare cost containment goals of the Commonwealth and that the disclosure would be in the public interest after taking into account any privacy, trade secret, or anticompetitive considerations.

FCA LIABILITY EXPANDED

H.5159 expands state FCA liability to any person who has an ownership or investment interest (i.e., a private equity investor) in any person who violates the state FCA, knows about the violation, and fails to disclose the violation within 60 days. Violators will be liable for a civil penalty between $5,500 and $11,000 per violation, plus treble damages, including consequential damages.

NOTIFICATION REQUIRED BEFORE REPOSSESSING MEDICAL EQUIPMENT

Pursuant to H.5159, no contract between a facility and a lessor of medical equipment will authorize the repossession of medical equipment or supplies unless the lessor provides a notice of financial delinquency to DPH no less than 60 days before repossession of any medical equipment or supplies necessary for the provision of patient care.

KEY DEFINITIONS

• Healthcare REIT: A real estate investment trust, as defined by 26 U.S.C. Section 856, whose assets consist of real property held in connection with the use or operations of a provider or provider organization.
• MSO: A corporation that provides management or administrative services to a provider or provider organization for compensation.
• Material change: Material changes shall include (but are not limited to) (1) significant expansions in a provider or provider organization’s capacity; (2) a corporate merger, acquisition, or affiliation of a provider or provider organization and a carrier; (3) mergers or acquisitions of hospitals or hospital systems; (4) acquisitions of insolvent provider organizations; (5) transactions involving a significant equity investor that result in a change of ownership or control of a provider or provider organization; (6) significant acquisitions, sales, or transfers of assets, including (but not limited to) real estate sale leaseback arrangements; (7) conversions of a provider or provider organization from a nonprofit entity to a for-profit entity; and (8) mergers or acquisitions of provider organizations that will result in a provider organization having a dominant market share in a given service or region.
• Ownership or investment interest: Any (1) direct or indirect possession of equity in the capital, stock, or profits totaling more than 10% of an entity; (2) interest held by an investor or group of investors who engages in the raising or returning of capital and who invests, develops, or disposes of specified assets; or (3) interest held by a pool of funds by investors, including a pool of funds managed or controlled by private limited partnerships, if those investors or the management of that pool or private limited partnership employ investment strategies of any kind to earn a return on that pool of funds.
• Private equity company: Any company that collects capital investments from individuals or entities and purchases, as a parent company or through another entity that the company completely or partially owns or controls, a direct or indirect ownership share of a provider, provider organization, or MSO; provided, however, that “private equity company” shall not include venture capital firms exclusively funding startups or other early-stage businesses.
• Provider: Any person, corporation, partnership, governmental unit, state institution, or other entity qualified under the laws of the Commonwealth to perform or provide healthcare services.
• Provider organization: Any corporation, partnership, business trust, association, or organized group of persons that is in the business of healthcare delivery or management, whether incorporated or not, and represents one or more healthcare providers in contracting with carriers for the payments of healthcare services (provided that “provider organization” shall include (but not be limited to) physician organizations, physician hospital organizations, independent practice associations, provider networks, accountable care organizations, and any other organization that contracts with carriers for payment for healthcare services).
• Significant equity investor: (1) Any private equity company with a financial interest in a provider, provider organization, or MSO, or (2) an investor, group of investors, or other entity with a direct or indirect possession of equity in the capital, stock, or profits totaling more than 10% of a provider, provider organization, or MSO (provided that “significant equity investor” shall not include venture capital firms exclusively funding startups or other early-stage businesses).