New Regulations on Health Care Transactions in California

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The regulations have been proposed pursuant to California Health & Safety Code §§ 125507-125507.6, part of an omnibus health care law enacted in 2022 which created OHCA and gave it broad authority to set and enforce heath care cost targets for the State.  The law requires that OHCA receive 90 days’ advance notice of transactions intended to close on or after April 1, 2024, that affect health care services in California.  OHCA is required within the notice period to decide whether to conduct a cost and market impact review (“CMIR”) to determine whether a proposed transaction will reflect a market failure, increase market power of a party or create a risk of significant impact on market competition, the State’s ability to meet cost targets or costs for health care purchasers or consumers.  Any transaction subject to the notice requirements may not be closed until OHCA has determined not to conduct a CMIR or, alternatively, has completed a CMIR evaluating the transaction.

Reportable Transactions

The regulations apply to a wide range of health care entities, including payers, providers, and fully integrated health delivery systems as well as management services organizations (which are treated as “payers” for purposes of the regulations), pharmacy benefits managers and affiliates of entities that either control or are under the control of a health care entity. Physician organizations with fewer than 25 physicians are excluded from this definition unless they are determined to be a “high-cost outlier,” that is an organization whose costs for services are “substantially higher” than the statewide average costs for such services or will be a party to a reportable transaction with another health care entity.

 There are two criteria that trigger a filing requirement under the draft regulations—the size of the entity involved and the nature of the transaction. The standards for size of entity are: (a) an entity with annual revenues of at least $25 million or ownership of assets with a value exceeding $25 million, (b) an entity with annual revenues of at least $10 million or ownership of assets with a value exceeding $10 million which is involved a transaction with an entity that meets the $25 million threshold or (c) an entity located in, or serving at least 50% of the patients who reside in, a health professional shortage area.

A transaction in which the parties meet the size of entity test is subject to reporting if it has one or more of the following characteristics:

  • The proposed fair market value of the transaction exceeds $25 million and concerns the provision of health care services.
  • The transaction is likely to increase the annual revenue of any entity that is a party to the transaction by more than $10 million or 20% of annual revenue at normal or stabilized levels of utilization or operation.
  • The transaction involves the sale, transfer, lease, exchange, option, encumbrance, or other disposition of 20% or more of the assets of any health care entity in the transaction.
  • The transaction involves a change of control, responsibility, or governance of a submitting entity.
  • The terms of the transaction contemplate an entity negotiating or administering contracts with payers on behalf of one or more providers and the transaction involves an affiliation, partnership, joint venture, accountable care organization, parent corporation, management services organization, or other organization.
  • The transaction involves the formation of a new health care entity, affiliation, partnership, joint venture or parent corporation for the provision of health care services in California that is projected to have annual revenues of at least $25 million at normal or stabilized levels of utilization or operations or have control of assets related to the provision of health care services valued at $25 million or more.
  • The transaction involves a health care entity joining, merging, or affiliating with another health care entity, affiliation, partnership, joint venture, or parent corporation related to the provision of health care services where any health care entity has at least $10 million in annual revenue. For purposes of this subsection, a clinical affiliation does not include a collaboration on clinical trials or graduate medical education programs.
  • The transaction changes the form of ownership of a health care entity that is a party to the transaction, including but not limited to change from a physician owned to private equity-owned and publicly held to a privately held form of ownership.
  • A health care entity that is a party to the transaction has consummated any transaction regarding provision of health care services in California with another party to the transaction within ten years prior to the current transaction.

There is an exemption for transactions among affiliated entities—thus a corporate restructuring or creation of a holding company would not require compliance with the notice requirements.

Notice Filing Requirements

The notice of a material change transaction must be filed under penalty of perjury using a portal that OHCA will create for this purpose. The notice must contain extensive information concerning the parties, the health care services they provide, the geographical area in which the parties operate (both in California, and in other states), a description of the transaction, including the goals of the transaction, a summary of terms, a statement of why the transaction is necessary of desirable, the general public impact or benefits of the transaction, including quality and equity measures and impacts, a description of the expected competitive impacts of the transaction, and actions or activities contemplated to mitigate potential adverse impacts of the transaction on the public.  The notice must also include information concerning any other filings made to any state or federal agency, including the Federal Trade Commission or United States Department of Justice and any court proceedings related to the proposed transaction.   In addition to the notice, the parties must submit documentation, including copies of agreements and term sheets pertinent to the transaction, contact information for  responsible individuals, pro forma financials for a surviving or successor entity, organizational charts showing the current organization of the parties and the post-transaction organization, “certified” financial statements, organizational documents of the parties and proposed changes occasioned by the transaction documentation related to the mitigation of potential adverse impacts of the transaction on the public and any analytic support for and/or documents supporting the narrative responses to items in the notice.

All information submitted to OHCA in connection with a material change transaction will be treated as a public record unless the submitting party identifies documents or information as confidential and OHCA accepts the designation of confidentiality. The submitting party shall submit two copies of the required transaction notice, one of which is marked “Confidential,” and a second marked “Public” which contains redactions of confidential information contained in the notice and supporting documentation, which will then be made available by OHCA to the public.  While certain financial and compensation information will be deemed confidential if marked, for other information the submitting party must include a redaction log, a detailed statement of the reasons for confidential treatment and a statement of the specific time for which confidential treatment is necessary. OCHA will notify the submitting party if confidential treatment is granted and will maintain all documents and information for which such treatment is granted as confidential.

A party who has made a submission must notify OHCA within five business days of any amendment, alteration or cancellation of a transaction.  If changes in the transaction are deemed material by OCHA, it may require re-notice of the changes.  A submitting party may withdraw a notice for any reason, at any time prior to the issuance by OHCA of a final cost and market impact review report. In such a case, OHCA is entitled to collect the costs it has incurred in connection with its review of the notice up to the first business day after the withdrawal notice is filed.

Cost and Market Impact Review

Following a notice filing, OHCA will determine whether to conduct a CMIR by taking into account any one or more of the following factors: (1) the transaction will result in a negative impact on the availability or accessibility of health care services, including the health care entity’s ability to offer culturally competent care, (2) the transaction may result in a negative impact on costs for payers, purchasers or consumers, including the ability to meet any health care cost targets established by the Health Care Affordability Board, (3) the transaction may lessen competition or tend to create a monopoly in any geographic services areas impacted by the transaction, (4) the transaction directly affects a general acute care or specialty hospital, (5) the transaction may negatively impact the quality of care, (6) the transaction between a health care entity located in California and an out-of-state entity may increase the price of health care services or limit access to health care services in California.

Within 60 days of submission of a complete filing OHCA must inform the parties of its decision on whether to initiate a CMIR, subject to extension if the transaction is under review by state or federal regulatory agencies or the courts or there is a material change in the transaction.  A CMIR must be completed within 90 days of an OHCA determination, subject to extension if (a) additional time is required to complete the review, up to a maximum of 45 days, (b) OHCA is awaiting submission of additional documentation requested in connection with the review, or (c) OHCA determines to toll the review period during any period in which a federal or state agency or a court is conducting a review of the transaction.

The CMIR shall examine various factors relating to a health care entity’s business and market position, such as impacts on access to heath resources, effects on quality of care, competitive impacts, the future ability of the health care entity to meet cost targets set by the Health Care Affordability Board, the impacts associated with prior transactions involving the party and consumer concerns.

Upon completion of its review, OHCA will issue a preliminary report and the parties to the transaction and the public will have ten business days to submit written comments in response to the report. Within 30 days of the close of the comment period on the preliminary report, OHCA will issue a final report of its findings, subject to extension for good cause. At its discretion, OHCA may provide its final report and all documentation related to a material change transaction to the Attorney General for consideration of unfair methods of competition, anticompetitive behavior or anticompetitive effects.

Commentary

The regulations as drafted with affect a wide swath of transactions and impose significant delays on closing a transaction that will be the subject of a CMIR.  There is a question of whether the thresholds are too low given the size of the health care market in California ($405 billion in 2020) and will capture a great many transactions that will have little to no impact on competition or costs.  Further there are some imprecise definitional terms in the regulations that could be read to include transactions, such as conventional bank financing or refinancing by an entity, which would have no effect. It will be important to reassess the regulations following the August 15 workshop and OHCA’s reaction to comments before reaching judgments on the impact of the regulations, but it is apparent that OHCA intends to exercise far reaching supervision of future deals in the health care sector.   

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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