California Publishes Draft Regulations on Filing Requirement for Healthcare Entity Transactions

Overview of the Transaction Notice Requirement

California Senate Bill 184 (SB 184) passed on June 30, 2022, establishing the OHCA to contain healthcare spending in the state. Among the agency’s regulatory powers is the ability to review certain proposed healthcare transactions closing on or after April 1, 2024. Unlike the California Office of the Attorney General (AG), in its review of nonprofit health facility transactions in California, the OHCA does not have the ability to stop the transaction or impose conditions on the transaction. However, the OHCA can require the production of a market impact report that could significantly delay the transaction.

At a high level, SB 184 requires a “health care entity” (defined as a provider, payor or fully integrated delivery system) entering into a transaction involving the sale or transfer of control of a material amount of its assets or operations to provide at least 90 days’ prior written notice of the transaction to the OHCA. After the health care entity provides notice, the agency then has 60 days to either advise the health care entity of its determination to conduct a cost and market impact review (CMIR) or provide a written waiver from such review. OHCA will issue a preliminary report upon completion of the CMIR. Then, after allowing the parties and the public to provide input, the OHCA will issue its final report. No transaction going through the CMIR process may close until 60 days following the OHCA’s issuance of the final report.

The OHCA is required to conduct a CMIR if the transaction is “likely to have a risk of a significant impact on market competition, the state’s ability to meet cost targets, or costs for purchasers and consumers.” The report would look at factors such as changes in size of and market share in a particular service or geographic region, prices for services compared to other providers, and quality, equity, costs and access.

The CMIR process is intended to apply additional regulatory scrutiny to transactions that may have previously slipped under the government’s radar. As such, SB 184 explicitly exempts certain transactions from the material change transaction notice process because they are already subject to review by a California agency; such transactions include the following:

• Transactions involving “health care service plans” that are subject to review by the director of the Department of Managed Health Care for cost impact or market consolidation under the Knox-Keene Health Care Service Plan Act of 1975
• Transactions involving health insurers that are subject to review by the state insurance commissioner
• Agreements or transactions in which a county is purchasing, acquiring, or taking control, responsibility or governance of an entity to ensure continued access in that county
• Transactions involving nonprofit health facilities that are already subject to AG review.

Draft Regulations

The draft regulations clarify a number of issues that were not addressed in the original statute. The draft regulations expand the definition of a “health care entity,” establish materiality thresholds, describe the information that must be submitted in the transaction notice, provide additional details on the timeline of the CMIR process and describe the factors that the OHCA will consider in determining whether to conduct a CMIR. However, the following draft regulations are subject to change before the OHCA promulgates final regulations in October:

• Health care entity definition: The regulations state that the follow entities are also considered a health care entity that must provide notice of a material change:
  • Pharmacy benefit managers
  • Management services organizations that provide management services for a health care entity
  • Any affiliates, subsidiaries or other entities that control, govern or are financially responsible for the health care entity or that are subject to the control, governance or financial control of the health care entity.
• Health care entity materiality: A health care entity must submit notice of a material change if “the transaction involves” any of the following parties (but note that this part of the regulations may make more sense if it required a health care entity to provide notice if it is one of the following parties):
  • A health care entity with annual revenue of at least $25 million or that owns or controls at least $25 million of California assets
  • A health care entity with annual revenue of at least $10 million or that owns or controls at least $10 million of California assets and is involved in a transaction with a health care entity with annual revenue of at least $25 million or that owns or controls at least $25 million of California assets
  • A health care entity located in or serving at least 50% of patients who reside in a health professional shortage area.
• Material change: Each of the following types of changes constitute a “material change” for which a health care entity must provide notice if all other requirements are met:
  • The transaction has a proposed fair market value of at least $25 million
  • The transaction is likely to increase annual revenue of a health care entity by at least $10 million or 20%
  • The transaction involves the sale, transfer or disposition of 20% or more of the assets of any health care entity
  • The transaction involves a change of control of 10% or more of a health care entity, or a transfer of full or partial voting control
  • The transaction contemplates an entity negotiating or administering contracts with payors on behalf of one or more providers and involves an affiliation, partnership, joint venture, accountable care organization, parent corporation, management services organization or other organization
  • The transaction would form a new entity for provision of healthcare services in California that is projected to have at least $25 million in annual revenue or assets
  • The transaction involves a health care entity joining, merging or affiliating with another health care entity, affiliation, partnership, joint venture or parent corporation where the health care entity has at least $10 million in annual revenue
  • The transaction involves changing the form of ownership of a health care entity, including changes from a physician-owned to a private equity-owned entity or from a publicly held to a privately held entity
  • The transaction involves a health care entity that has consummated any transaction regarding provision of healthcare services in California with another party to the transaction in the 10 years prior to the transaction subject to the notice.
• Required submissions: A substantial amount of information must be submitted in narrative form, with supporting documentation, and all information submitted will be publicly available unless the parties request to keep certain documents confidential. This includes, among other requirements:
  • Descriptions of the entities party to the transaction, including name, address, geography served, entity type, corporate structure, applicable California licenses and annual revenue
  • Details about the transaction, including the goals of the transaction, a summary of the terms of the transaction, a statement of why the transaction is necessary or desirable, a description of the general public impact or benefits of the transaction, a description of the expected competitive impacts of the transaction, and a description of any actions or activities to mitigate any potential adverse impacts of the transaction on the public
  • A description of any transaction in the prior 10 years involving the health care entities in the proposed transaction that affected or involved the provision of health services
  • A description of any pending or planned material changes occurring between the submitting entity and any other entity in the 12 months following the date of the notice
  • Copies of the current agreement(s) and term sheet(s) governing the transaction
  • If applicable, pro forma post-transaction balance sheet(s) for any surviving or successor entity
  • Organization charts for all entities to the transaction, pre- and post-transaction
  • Certified financial statements for the prior three (3) years for all entities party to the transaction
  • If applicable, a copy of the Premerger Notification and Report Form, with attachments, submitted to the Federal Trade Commission (FTC) pursuant to the Hart-Scott-Rodino (HSR) Act.
• Timing: If the OHCA decides to conduct a CMIR, the OHCA will have 90 days to complete the preliminary report, but may extend this by an additional 45 days, or toll either of these time periods if it is waiting for additional information from the parties to the transaction. Within 10 business days of the issuance of the preliminary report, the parties and the public may submit written comments. The OHCA shall issue a final report within 30 days of the close of the comment period, unless the OHCA chooses to extend this time for good cause (e.g., if the OHCA requires additional time to review and evaluate the written comments).

• Determination of whether to conduct a CMIR: In determining whether to conduct a CMIR, the OHCA may base its decision on any one or more of the following factors:
  • If the transaction may result in a negative impact on the availability or accessibility of healthcare services, including the health care entity’s ability to offer culturally competent care
  • If the transaction may result in a negative impact on costs for payers, purchasers or consumers, including the ability to meet any healthcare cost targets established by the OHCA
  • If the transaction may lessen competition or tend to create a monopoly in any geographic service areas impacted by the transaction
  • If the transaction directly affects a general acute care or specialty hospital
  • If the transaction may negatively impact the quality of care
  • If the transaction between a health care entity located in California and an out-of-state entity may increase the price of healthcare services or limit access to healthcare services in California.

Takeaways

• Under the draft regulations, a management services organization will be considered a health care entity for purposes of the transaction notice requirement. The draft regulations reflect the OHCA’s understanding of and focus on private equity transactions and “friendly physician” arrangements in California.
• The notice requirement and CMIR process, as currently drafted, has the potential to delay the closing of transactions by several months. Health care entities entering into material transactions in California should factor this into their overall transaction timeline. Stakeholders should also consider the costs of preparing the notice to the OHCA and the additional costs if the OHCA decides to conduct a CMIR (for which the costs are reimbursable from the parties to the transaction).
• The notice requirement does not appear to have any exemptions for health care entities under severe financial distress or that are undergoing bankruptcies, and there does not appear to be an option for expedited review.
• The draft regulations are subject to change, and stakeholders will have opportunities in the month of August to influence the development of the final regulations. The OHCA is planning to host a public workshop for the draft regulations on August 15, 2023. Members of the public may attend in person or online. The OHCA is also accepting written comments on the draft regulations through August 31, 2023. For more information, please see the notice linked here.
• After the public workshop and receipt of public comments in August, the OHCA plans to submit the final regulations as an emergency rulemaking package in October 2023.