California is taking steps to broaden its regulatory oversight of health care related transactions, joining a growing list of states that have recently either attempted to or have been successful in enacting similar legislation for this purpose. On July 27, 2023, the Office of Health Care Affordability (“OHCA” or the “Office”), a regulatory body which was recently established by California State Senate Bill 184,¹ published proposed rules outlining the process for a prospective review of certain transactions involving health care entities (the “Proposed Regulations”).² The final rules are expected to be finalized in October 2023 following a public workshop and written comment period. While the Proposed Regulations clarify which health care entities and transactions will be subject to the review process, many questions remain as to how the process will work in practice and the impact it will have on transactions moving forward.

Effective January 1, 2024, qualifying health care entities must provide OHCA with at least 90 days’ prior written notice of material change transactions that will be entered into on or after April 1, 2024. Transactions that will trigger the notification requirement include, among others, transactions that exceed certain fair market value thresholds; transactions that are likely to increase the annual revenue of a participating party by at least $10 million or 20% of annual revenue; and transactions involving a change in control, a disposition of 20% or more of the assets of a party, and other significant changes to the operations or financial condition of the parties.

Notices are required to contain a description and general information about the transaction and all entities and services involved, the anticipated closing date, a description of the anticipated post-transaction impacts on health care services, and other information specified in the Proposed Regulations. OHCA also expects entities to submit a number of documents along with the information noted above, some of which may contain sensitive information, including copies of current agreements and term sheets, financial reports, organizational charts, corporate documents, copies of any submissions required by the Federal Trade Commission, and documentation related to the mitigation of any potential adverse impacts of the transaction on the public. Under the Proposed Regulations, the notice and supporting documentation will be treated as public records unless otherwise designated confidential and properly redacted.

Within 60 days of receiving a complete notice, OHCA will decide whether to conduct a full cost and market impact review (“CMIR”) of the transaction, based on the perceived likelihood that the transaction will significantly impact market competition, the availability or quality of health care services, and the costs to purchasers and consumers. In the event OHCA decides to conduct a CMIR, it must complete the review within 90 days from the date it determines the CMIR is necessary. However, OHCA may extend the timeframe an additional 45 days in its discretion.

In response to the promulgation of the Proposed Regulations, stakeholders have raised a number of initial questions and concerns, such as the lengthy time frames involved in the review process; the lack of expedited review options (despite the allowance for expedited review under applicable statutory language); the permitted review of transactions involving entities that are undergoing bankruptcy; and the potential disclosure of confidential documents and materials submitted to OHCA as part of the process. While the full effect of the prospective review process on health care transactions remains to be seen, health care entities can begin preparing for the issuance of the final rules and the implementation of the review process by:

• Analyzing and understanding the Proposed Regulations and noting any differences in the final rules once issued;
• Being attentive to the manner in which OHCA operationalizes the review process and conducts its initial reviews;
• To the extent such entities are actively negotiating or contemplating transactions that are expected to close after April 1, 2024, and that would otherwise trigger the notification requirement, planning for extended timelines and increased costs and resources to account for the gathering and submission of the required notice and OHCA’s subsequent review; and
• Consulting with legal counsel on how to properly protect the confidentiality of sensitive information that may be submitted with the required notice.

We will be monitoring further developments pertaining to the Proposed Regulations as well as other state and federal efforts to heighten scrutiny of health care transactions.

END NOTES

¹ Senate Bill 184, available at https://leginfo.legislature.ca.gov/faces/billTextClient.xhtml?bill_id=202120220SB184.

² Proposed Rules, available at https://hcai.ca.gov/wp-content/uploads/2023/07/CMIR-Regulations-for-Workshop.pdf.