California AB 1415 Aims to Expand OHCA’s Healthcare Transaction Review Authority

Since Governor Newsom’s veto of AB 3129 during the prior legislative session, California legislators have introduced two bills containing provisions similar to those included in AB 3129. The first, SB 351, is intended to reinforce California’s corporate practice of medicine and corporate practice of dentistry restrictions. The second bill, AB 1415, seeks to expand the scope of OHCA’s healthcare transaction review process to include transactions involving MSOs, health systems, and nonoperational providers. AB 1415 also would impose a reporting obligation on private equity groups, hedge funds, and their respective downstream affiliates entering into certain healthcare transactions in California.

BACKGROUND

OHCA’s healthcare transaction review process came into effect on April 1, 2024, requiring certain “health care entities” to report certain material transactions to OHCA at least 90 days’ prior to the closing of the transaction. For more information, see our previous articles here and here. Not all healthcare transactions are reportable to OHCA; there are a few statutory exemptions for transactions reviewable by other agencies, as well as certain revenue, asset, and change-of-control percentage thresholds that further limit the scope of OHCA’s review authority. While OHCA does not have the ability to approve a transaction or impose conditions on the transactions, it has the ability to conduct a cost and market impact review that can significantly delay the closing of a transaction.

PROPOSED ADDITIONAL TRANSACTION NOTICE REQUIREMENT

OHCA currently only requires select “health care entities” to provide notice of certain material transactions. AB 1415 would expand the notice requirement to apply to private equity groups and hedge funds (or their respective downstream affiliates), and to new business entities created for the purpose of entering into agreements or transactions with a health care entity.

PROPOSED REVISIONS TO DEFINITION OF “HEALTH CARE ENTITY”

If passed, AB 1415 would expand the definition of “health care entity” as follows:

• AB 1415 would add MSOs to the definition of health care entity. MSOs are defined as entities that provide administrative services or support for a provider, not including the direct provision of healthcare services. Administrative services include utilization management, billing and collections, customer service, provider rate negotiation, and network development.
• AB 1415 would add health systems as a type of provider and therefore a type of health care entity. Health systems include the following entities:
  • Hospital systems.
  • A combination of one or more hospitals and one or more physician organizations.
  • A combination of one or more hospitals, one or more physician organizations, or one or more healthcare service plans or health insurers.
• AB 1415 would change the definition of provider from an exhaustive list (“any of the following that delivers or furnishes health care services”) to a more open-ended set of providers (“a private or public health care provider, including all of the following”).
• AB 1415 would change the definition of provider to include nonoperational entities, entities with pending or suspended licenses, and entities that do not provide healthcare services, if they otherwise own, operate, or control another entity that is a provider.

KEY TAKEAWAYS

• Comparisons with AB 3129. In his explanation for the veto of AB 3129, Governor Newsom stated that AB 3129 was duplicative of OHCA’s transaction review process and that OHCA should be the agency tasked with reviewing healthcare transactions. California legislators seem to have taken that message to heart in introducing AB 1415 to expand OHCA’s review authority. While AB 1415 seems to be inspired by AB 3129, there are several key differences between AB 1415 and AB 3129:
  • AB 3129 would have allowed the California attorney general to approve, deny, or impose conditions on transactions. AB 1415 does not include any approval right for OHCA or the California attorney general.
  • AB 3129 had lower transaction reporting thresholds and applied to smaller groups of providers, even implicating groups with only two non-physician providers. AB 1415 would not change the definition of “provider organization,” which includes medical groups consisting of at least 25 physicians.
  • AB 3129 specifically would have applied to transactions involving dentists, optometrists, pharmacists, and nonphysician mental health professionals. AB 1415 remains ambiguous as to whether these types of providers would be included in the definition of “provider.”
• MSOs. While OHCA’s initial draft regulations included MSOs as health care entities, they were removed from subsequent drafts. Current OHCA statutes and regulations do not include MSOs as a type of entity subject to the reporting requirement. If AB 1415 is signed into law, the inclusion of MSOs as a healthcare entity may result in additional transactions becoming reportable to OHCA. The definition of MSO is currently very broad and may inadvertently capture entities that do not have the ability to substantially influence healthcare operations, such as outsourced billing or collection vendors or customer service staffing companies.
• Private Equity Group and Hedge Fund Reporting Requirement. Under the existing OHCA statutes and regulations, certain transactions involving private equity or hedge funds are already reportable to OHCA if the counterparty in the transaction is a health care entity. The “submitter” in a transaction has the obligation to report a significant amount of information to OHCA. The proposed amendments set forth in AB 1415 would specifically require the private equity group or hedge fund to submit notice to OHCA, which would involve the submission of a substantial amount of information regarding the private equity group or hedge fund, including financial statements, organizational charts, and information regarding past healthcare transactions consummated by the private equity group or hedge fund.
• Nonoperational Entities. Under current law, entities that do not currently have healthcare operations or licensure are not considered health care entities. AB 1415 would require certain nonoperational providers and entities that do not provide healthcare services to report transactions if they own or operate another provider, which may substantially increase the types of entities subject to OHCA’s reporting requirements.
• Future Amendments. Future amendments to AB 1415 may help to clarify ambiguities introduced by the bill:
  • It is unclear why the bill would add a “health system” to the definition of “provider” when the components of the definition of health system – hospitals, physician organizations, healthcare service plans, and health insurers – are already considered health care entities and are subject to OHCA’s requirements.
  • It is unclear what types of entities would be considered providers, as the bill’s definition of “provider” is somewhat circular and includes “private or public health care providers.”