Value-based Care Collides with Competition: Deal Impacts for MSOs/DSOs

June 29, 2023
17:09 minutes

On this episode of Ropes & Gray’s Value-based Care Collides with Competition podcast series, health care attorneys Christina Bergeron, Devin Cohen and Ivette Sanchez discuss the impact of current and proposed state laws regulating health care access, cost and quality on transactions involving management services organizations (MSOs) and dental support organizations (DSOs).

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.


Ivette Sanchez: Hello and thank you for joining us today. My name is Ivette Sanchez, and I am an associate in Ropes & Gray’s health care practice group based in the New York office. I’m joined today by two partners in Ropes & Gray’s health care practice group, Christina Bergeron and Devin Cohen, both based in Boston. Christina and Devin, would you mind providing a brief overview of your practice for our listeners?

Christina Bergeron: Thanks, Ivette—of course. As Ivette said, I’m a partner in our health care group in Boston. I focus mainly on transactional and health care regulatory work. I have a lot of clients with MSO/DSO PC models, and I am very excited to discuss with you today how these laws potentially impact such models.

Devin Cohen: I’m also a partner in our health care group, representing a wide range of providers, payors, management service organizations, vendors and industry investors in value-based care collaborations, alternative payment methodologies, and vertical integration transactions that require navigating federal and state insurance requirements.

Ivette Sanchez: Thank you for the introduction. I am excited to discuss this important topic with you today. As you are aware, many state governments have enacted laws granting state officials the power to review—and potentially burden—many types of health care transactions under the notion that those transactions may significantly and/or adversely affect health care access, cost, and quality. I want to start with your recent experience of how various states are applying these laws to transactions involving management services organizations or dental support organizations, or as commonly referred to, as MSOs and DSOs.

Christina Bergeron: Thanks Ivette. To be clear, we are discussing enacted laws in eight states: California, Connecticut, Massachusetts, Minnesota, Nevada, New York, Oregon, and Washington. Of these states, only the following apply to dental as written: Massachusetts, Nevada, and Oregon—although, we’re watching commentary to see if other states will apply to the dental industry. Importantly of note, although California’s law’s enacted, it applies to deals starting in April of 2024, and the New York law starts applying to deals as of this summer (summer of 2023).

Devin Cohen: Each state’s law is very different, and the application to MSOs and DSOs varies by states. As Christina said, the following states seem to be limited currently to physician models, as opposed to dental: New York, Connecticut, California, Pennsylvania (which is now pending), and Minnesota. Additionally, under some state laws, MSOs and DSOs may take the position they are not covered by the definition of “provider” or “provider organization.” As we will discuss, given that one of the focuses of these laws is market power and the potential impact to health care costs, one key consideration is the MSOs’ involvement in negotiating payor contracts.

Ivette Sanchez: Can you walk us through the recent developments in New York that expressly include MSOs in the scope of their transaction notification law?

Devin Cohen: Sure, Ivette. As we discussed in the East Coast podcast, New York State recently passed legislation expressly requiring MSOs—but not DSOs—to provide pre-closing notice to the State Department of Health of certain transactions that meet revenue thresholds within New York, and that’s specifically defined as an increase of in-state revenues of $25 million or more. The legislative intent of the initially proposed law noted a lack of oversight of transactions involving entities backed by investors that support private professional practice entities. One thing to note: the statute expressly applies to MSOs supporting physician practices. Accordingly, the law does not capture DSOs that support dental practices or MSOs that support veterinary, physical therapy, behavioral analysis, or other professional practices. We will continue to watch lawmaking in New York to see if the regulators expand on this point.

Ivette Sanchez: What kind of transactions involving MSO entities would specifically require notice under the new New York law?

Devin Cohen: As enacted, any mergers, acquisitions, affiliations, and/or formations of management services organizations would require notice to the State Department of Health. We expect New York to read the statue broadly and take the position that the statute would capture PE acquisitions and sales of physician MSOs in addition to MSO mergers and MSO add-on acquisitions. However, there is an exception in the law for “de minimis transactions” that do not increase an entity’s total gross in-state revenues by $25 million or more. As we noted in the private equity podcast, the wording of this exception is ambiguous. It is possible that the exception may prove helpful for the acquisition or sale of an MSO (where the revenue wouldn’t change) or in the add-on context (where MSOs acquire smaller MSOs with less than $25 million of revenue).

Ivette Sanchez: Christina, New York’s decision to expressly include MSOs in the statutory definition of entities subject to its transaction notification law is a significant development. How does the New York law compare to other enacted state laws?

Christina Bergeron: Thanks, Ivette. Massachusetts, Washington, and Oregon also call out “management” of health care entities in their laws—Oregon most directly. Oregon released sub-regulatory guidance stating that MSOs and DSOs are “health care entities” subject to review since they are “closely related” to entities that provide health care. Further, Oregon has reviewed a DSO deal in the past and has highlighted concerns in the industry about the impact of DSOs on the quality of care that patients receive and job satisfaction among providers who work at practices affiliated/managed by DSOs. Conversely, Oregon also highlighted the significant level of support DSOs provide practices, which can result in providers having more time for patient care and patients having greater access to care. In sum, it’s clear that in a post-transactional review, Oregon does plan to assess the validity of these perceived aspects of the DSO model.

Ivette Sanchez: Interesting. Understood on Massachusetts and Washington, but to focus specifically on Oregon, what types of MSO or DSO deals are captured by this Oregon law?

Christina Bergeron: It’s a great question. We expect Oregon to consider the acquisition or sale of DSOs and MSOs that operate in Oregon to trigger review if the revenue thresholds the state have set are met, which include at least one party having an average revenue of $25 million or more and another party having revenue of at least $10 million in the preceding three fiscal years.

The law would also apply to add-on acquisitions in Oregon unless the target practice had less than $10 million in revenue.

We don’t believe the law should apply to MSO/DSOs operating in Oregon purchasing entities outside of Oregon if it doesn’t in any way impact the cost of care in Oregon. To us, it seems contrary to the legislative intent of safeguarding health care in Oregon and lowering costs for Oregon residents to have these certain out-of-state transactions apply. And such interpretation would also raise concerns of restrictions on interstate commerce. We’ve raised questions regarding standards for out-of-state entities in public comments in rulemaking, but additional clarity would be useful.

I think the point and bottom line is that acquisitions in Oregon involving either an MSO or DSO need to be closely evaluated given how aggressive Oregon has been on enforcing this law.

I will also note that there is an option for exemption from the notice requirement in certain “emergency situations that threaten immediate care services and the transaction is urgently needed to protect the interest of consumers.” We have not seen Oregon analyze this exception yet but calling it out just in case it could be useful for certain transactions.

Ivette Sanchez: Thank you for that overview, Christina. Moving to the other states—you mentioned that Massachusetts and Washington have laws that review “provider organization” transactions. Can you walk us through how those laws are applied to MSO and DSO deals?

Christina Bergeron: That’s right, Ivette. Massachusetts passed its law in 2013, and it provides that health care service providers and “provider organizations”—which include management companies that assist with payor negotiations (they don’t have to be the party to the payor contract, they just have to assist with the negotiation)—notify the state sixty (60) days prior to making any “material change” to either operations or governance structure. Those providers and provider organizations with $25 million or more in “Net Patient Service Revenue”—which is essentially defined as revenue that comes in through third-party payors—in the preceding fiscal year must provide notice. The law defines “provider” as anyone qualified to provide health care services, which includes dental. So, there are two tests here to needing to file. The first test is: Do the parties meet the revenue threshold in Massachusetts (as I just described)? If you meet that test, the second test is: Has there been a “material change” where the transaction increases Net Patient Service Revenue over a certain amount or gives a provider a near-majority market share.

Similar to other states we’ve been looking at, there is a revenue threshold that typically applies—some states don’t have one, but a lot of states do. And as such, add-on acquisitions by an MSO or DSO need to be closely evaluated to see if they would trigger such thresholds. Similarly, in states like Massachusetts, where the law is really triggered where it’s two providers or two provider organizations on the sides of the transaction, a private equity investment into a company shouldn’t trigger the Massachusetts law—but that analysis needs to be carefully done state by state.

Washington’s law is newer—it passed in 2020—and it similarly gives the state AG’s office review authority over “material change” transactions involving “provider organizations,” among others. Similar to Massachusetts, the definition of “provider organization” does pick up management companies that assist with payor negotiations—except Washington added for seven or more providers. Notice is required for transactions between two in-state entities in Washington, or between an in-state entity and an out-of-state entity, if the out-of-state entity generates $10 million or more in health care services revenue from patients residing in Washington.

In sum, the key factors of applicability in both Washington and Massachusetts are determined by whether: (i) the deal is between two providers or provider organizations; (ii) the provider organization “represents” providers in payor contracting; and (iii) revenue-size thresholds. As you can see from our discussion, this is a pretty nuanced analysis. In Massachusetts and Washington, as I said earlier, we think certain private equity investments would be exempt from the notice requirement given that they likely wouldn’t meet the definition of “provider organization,” but in certain states, they would be picked up, including potentially Oregon. And so, really working with counsel to conduct that analysis, if there is a transaction, is critical.

Ivette Sanchez: Thanks, Christina. You’ve outlined important distinctions for Washington and Massachusetts. Devin, what are you seeing with other states that have enacted or have pending laws? Are they more like New York and Oregon, or Massachusetts and Washington?

Devin Cohen: Good question, Ivette. California has passed a similar law requiring approval of transactions starting in April 2024 involving health care entities. California’s law applies to “provider” entities, which include “physician organizations,” but it is unclear at this time how the statute picks up MSOs in the scope of entities covered by the law. There is also an exception for certain medical group practices comprised of less than 25 physicians, which may be helpful in carving out add-on acquisitions of smaller practices.

There’s also Illinois, who’s considering legislation that would require pre-closing notice to the state AG’s office. It contains a “provider organization” definition similar to Massachusetts and Washington (although the Illinois definition requires 20 health care providers). Of course, this raises similar questions about what it means for an entity to “represent” providers in the payor contracting process, but there are also questions regarding the definitions and scope of health care providers and physician organizations. The good news, for some, is that investments by private equity companies in MSOs in Illinois would not trigger the notification law.

Pennsylvania introduced a bill that requires a for-profit health system operating one or more hospitals, hospice agencies, or nursing homes to notify the state AG’s office prior to certain transactions, including a contracting affiliation with a “provider organization.” There’s a similar definition of “provider organization” as the other state laws that we have talked about, and the hook, “contracting affiliation,” is defined as a relationship that permits these entities to negotiate jointly, or on one another’s behalf, with payors. If enacted, this law would be relevant for only MSOs engaging in such affiliations with hospitals, hospice agencies or nursing homes in Pennsylvania—meaning, most private equity-backed MSO transactions would not trigger those laws.

Finally, Minnesota recently enacted a law that requires health care entities to notify the state AG’s office and the Commissioner of Health at least sixty (60) days prior to completion of material transactions. Although Minnesota’s law does not expressly include MSOs, it does capture entities that exercise “control” over physician professional entities and group practices, where control can be found through the ownership of voting securities or contractual relationships. Those contracts would need to provide the MSO the power to direct or cause the direction of the management and policies of a physician practice—so, a particular MSO services agreement would need to be analyzed accordingly for that control. The good news is that DSOs supporting dentists and MSOs supporting physical therapists, veterinarians and other non-medical providers would fall outside of this law.

Ivette Sanchez: Really interesting developments. From everything we’ve discussed, it seems MSOs and DSOs could certainly trigger state government enforcement for a range of transactions in these states. How would you advise these entities to proceed in the relevant states?

Christina Bergeron: I think clients should understand that especially with respect to Oregon, Washington and even Massachusetts, they seem to be paying very close attention to the market and enforcement of this law seems to be a priority (i.e., when in certain, very public deals, we’ve taken the position internally that the law doesn’t apply in certain states that I’ve named—we’ve had some reach out and have actually heard from them that they’d like to understand the reasoning). And it’s key to understand when you are doing a transaction in one of these states that does have one of these laws, that you understand the applicability of the law to ensure you’re either providing proper notice and/or obtaining approval when required.

Companies can absolutely expect enforcement, and even, like I said, proactive monitoring and outreach, for certain publicly announced deals that involve MSOs and DSOs. And we are absolutely monitoring to see if other states with pending laws will follow a similar approach. Do you have anything to add?

Devin Cohen: Yes, and I agree with you, Christina. Parties should continue to keep up with what’s going on in the legislatures and the regulatory updates and guidance from the various states, and also, just take note of transactions that are public and that are approved. I know Oregon has a lot of stuff that’s out there in the public that could be helpful as you think about transactions in the future. As we talked about earlier on this podcast, there are just a lot of open questions to be resolved with respect to the application of these laws—both enacted and pending—to MSOs and DSOs. In some cases, state governments should just take a position one way or the other, and if they do want to capture MSO or DSO transactions, that clear guidance could be provided.

Ivette Sanchez: Great points, Christina and Devin. Thank you both again for lending your time to this conversation. If those listening would like more information on this topic or our health care group, don’t hesitate to contact us or visit our resource center where we house a list of every podcast in this series. Other Ropes & Gray podcasts are available to listen and subscribe to wherever you regularly find your podcasts, including Apple and Spotify. Thanks again for listening.

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