On January 8, 2025, Governor Maura Healey signed House Bill 5159 into law, toughening the rules and increasing the risks for private equity (PE) companies, real estate investment trusts (REITs), and management services organizations (MSOs) doing business with Massachusetts healthcare providers. The new law stops short of banning these investors from taking an interest in healthcare providers, but it does expand their filing and reporting requirements. It increases levels of oversight under the state's Health Policy Commission (HPC) and Center for Health Information and Analysis (CHIA). It also expands the potential for liability under the Massachusetts False Claims Act (FCA) for investors where they simply fail to disclose known misconduct by an affiliated healthcare provider.
It is critical for PE companies, REITs, MSOs, and other non-clinical investors in the healthcare space to understand the new law, as it could impact the cost, complexity, and legality of their current or planned activities in Massachusetts. In this post, we provide an overview of the new law, examine its specific requirements, and explore potential strategies for investors to promote compliance while limiting any impact on their bottom line.
Why is this happening?
The new law follows a trend toward restricting the ability of non-clinical entities to participate in healthcare. Certain states have historically implemented laws and guidelines that limit the "corporate practice of medicine" (CPOM), i.e., a non-clinical entity's employment or control over licensed practitioners. These limitations are based on public policy concerns including that CPOM commercializes healthcare, creates shareholder obligations for a licensed practitioner that may not align with a patient's best interests, and otherwise interferes with clinical judgment. In recent years, a series of controversies has caused some states to reevaluate their existing CPOM laws and guidelines with an eye toward whether healthcare consumers are sufficiently protected. Chief amongst these was Steward Health Care's well-publicized bankruptcy, which led to the collapse of the PE-backed healthcare network and the sale or closure of several Massachusetts hospitals.
The significant healthcare access, quality, and cost issues that Steward Health Care's bankruptcy caused in Massachusetts directly preceded the passage of the new law. In signing it, Governor Healey stated that it should function to "close loopholes in our regulatory processes so that for-profit providers like Steward Health Care are subject to the same transparency rules as non-profit providers . . . I'm glad that our laws will no longer be exploited."
Who is covered?
The new law generally applies to (1) "significant equity investors," which include any PE company or group of investors "with a financial interest" in a healthcare provider or MSO; and (2) REITs "whose assets consist of real property held in connection with the use or operations" of a healthcare provider. With respect to significant equity investors, the phrase "financial interest" is (perhaps intentionally) left undefined and, as such, it may apply to a wide range of business arrangements. The new law notably appears to focus on regulating transactions involving institutional healthcare providers as it expressly excludes from coverage any "venture capital firms exclusively funding startups or other early-stage businesses."
What are the new reporting and oversight requirements?
Under the new law, PE companies, REITs, and MSOs may be subject to heightened reporting obligations to, and oversight by, HPC and CHIA. HPC monitors "material changes" (e.g., mergers, acquisitions, or changes of ownership) to healthcare providers to determine if they will impact the delivery and affordability of healthcare in Massachusetts. In doing so, it has the authority to order and conduct a Cost and Market Impact Review (CMIR), which is a detailed analysis of the potential cost and market implications of a material change. CHIA separately collects and analyzes data to develop findings that may be used to improve the Massachusetts healthcare system. HPC and CHIA are not enforcement agencies, but they generally have the authority to share their analyses with the Department of Public Health (DPH) and the Attorney General's Office (AGO), which may subsequently pursue their own investigations and enforcement actions in connection with a particular transaction.
Some key changes for PE companies, REITs, and MSOs to be aware of under the new law are as follows:
- Mandated Reporting of Certain Transactions. The definition of an HPC "material change" is expanded to include any "transactions involving a significant equity investor" that result in a change of ownership or control of a healthcare provider; any "significant acquisitions, sales or transfers of assets" including REIT sale lease-back arrangements; and a healthcare provider's conversion from a non-profit to a for-profit. As a result, numerous transactions involving PE companies, REITs, and MSOs that were previously outside of HPC's jurisdiction are now reportable under the new law and may be subjected to CMIRs. (Industry observers will be keen to see if HPC tends to order CMIRs more liberally for these types of transactions given the political and social climate in Massachusetts following Steward Health Care's bankruptcy.) A CMIR would be frustrating for a PE company, REIT, or MSO as it will generally delay and increase the cost of a particular transaction.
- Disclosure of Specific Business and Financial Information. Where a CMIR is ordered on a material change involving a significant equity investor, the new law provides that HPC may require disclosure of the significant equity investor's capital structure, general financial condition, ownership and management structure, and audited financial statements. PE companies, REITs, and MSOs should be aware that a copy of the CMIR final report, which may include such information, will be posted on HPC's public website and may be shared with other state agencies including DPH and AGO.
- Annual Public Hearing. The new law requires that HPC's annual public hearing on the cost of healthcare in Massachusetts must now specifically examine "any relevant impact of significant equity investors," REITs, and MSOs on "costs, prices and cost trends." The list of witnesses who are called to testify at these hearings must include a significant equity investor, REIT, or MSO "associated with" a healthcare provider. Any such entity that is called may be required to provide testimony on a variety of business and financial matters including prices charged to insurers and patients, staffing levels, clinical workflow, financial stability and ownership structure of healthcare providers, dividends paid to investors, compensation paid to managers and directors of healthcare providers, and health outcomes.
- Annual Financial Reporting and Penalties. The new law also expands the type of information that healthcare providers registered with HPC must report to CHIA annually to assist with CHIA's mission to determine ways in which the Massachusetts healthcare system may be improved. Submissions must include organizational charts showing ownership and governance; a comprehensive financial statement including data on "significant equity investors," REITs, and MSOs that are parent entities or corporate affiliates; and any real estate sale-leaseback arrangements with REITs. Healthcare providers that fail to submit this information may be penalized $25,000/week (beginning after the two-week period following their receipt of a reporting notice).
Notably, the version of the new law that was enacted differs from an initial bill introduced in the Massachusetts House of Representatives. That bill included requirements that went much further to regulate the influence of PE companies, REITs, and MSOs in the healthcare space. It intended to require certain PE companies to deposit a bond with DPH upon submission of notice of a material change to HPC, establish a maximum debt-to-EBITDA ratio for healthcare providers with PE investors, and restrict relationships between MSOs and physician practices. While this bill did not become law, it reflects the view of some members of the Massachusetts Legislature that more should be done to prevent another controversy like Steward Health Care's bankruptcy. It may similarly suggest that state agencies including HPC, CHIA, AGO, and DPH will be under pressure to closely monitor compliance with and enforce the new law.
What are the new liability considerations under the False Claims Act?
Healthcare investors are no stranger to FCA enforcement. Since PE investment in healthcare peaked in 2021, a handful of PE companies and their portfolio companies have entered into multi-million-dollar FCA settlements with the government and whistleblowers. See, e.g., U.S. ex rel. Ebu-Isaac v. Insys Therapeutics, Inc., No. 16-cv-7937-JLS (C.D. Cal.) ($9 million settlement involving a PE firm and portfolio pharmacies related to their alleged promotion of off-label use of fentanyl spray Subsys); U.S. ex rel. Mandalapu, et al. v. Alliance Family of Companies LLC, et al., No. 4:17-cv-00740 (S.D. Tex.) ($15.3 million settlement involving PE companies that invested in national ambulatory electroencephalogram testing company).
While many have understood the preexisting state FCA (and current federal FCA) as posing a threat to PE, the Commonwealth's expanded FCA eliminates any doubt that certain healthcare investors may face liability for FCA violations. As amended, the state's FCA imposes liability on anyone with an "ownership or investment interest" that "knows about" an FCA violation by their investment entity but fails to disclose that violation within 60 days. The statute defines "ownership or investment" broadly, creating liability for a company with: "(1) direct or indirect possession of equity in the capital, stock or profits totaling more than 10 per cent 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."
The amendment leaves unclear when a healthcare investor "knows about" or has "identif[ied]" an FCA violation and would therefore have an obligation to disclose that violation to the state. This creates uncertainty for companies seeking to comply with the new law while navigating the complexities and timelines of an internal investigation. The amendment also codifies the Attorney General's authority to issue civil investigative demands to healthcare investors.
What should my business do?
PE companies, REITs, and MSOs that are currently doing business in Massachusetts, or seek to do so in the future, can take the following steps to protect their rights and limit the impact of the new law on their business relationships and finances:
- Determine whether they are covered by the new law, based on the nature of their business and the structure of their relationship with a healthcare provider or MSO.
- Develop internal written policies that govern the relationships with Massachusetts healthcare providers and manage interactions with state agencies, e.g., by establishing a procedure for responding to CHIA information requests, civil investigative demands, or an order to appear at an HPC hearing.
- Develop standard contractual templates for engaging with Massachusetts healthcare providers in a manner that promotes compliance with applicable law; e.g., an MSO may utilize a management services agreement that helps mitigate any levels of risk under CPOM laws by establishing that a physician practice has sole responsibility for clinical services.
- Consult with FCA counsel proactively to obtain guidance regarding oversight of portfolio healthcare companies and reporting obligations, and immediately raise any concerns with counsel about a potentially reportable incident.
- Monitor for guidance on how state agencies enforce the new law in the coming months.
- When in doubt, obtain legal counsel with experience navigating Massachusetts healthcare transactions and reporting obligations involving HPC, CHIA, and other state agencies.
Originally published 05 February 2025
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