Overview
On November 28, 2023, California’s Office of Health Care Affordability (OHCA) published a notification of proposed emergency regulatory action indicating that OHCA is planning to submit the proposed regulations to the Office of Administrative Law (OAL) in five business days, on or around December 5, 2023.
These proposed regulations concern the 90-day pre-closing notice requirement and cost and market impact review (CMIR) process for California transactions closing on or after April 1, 2024. We described and analyzed these issues in our prior On the Subject articles, “California Publishes Draft Regulations on Filing Requirement for Healthcare Entity Transactions” and “OHCA Updates Draft Regulations on California Healthcare Transaction Notice Requirement.”
In Depth
PROPOSED CHANGES
There have been two prior comment periods during the drafting process for the regulations at hand. For a detailed analysis of changes in the regulations over time, read our prior On the Subject articles mentioned above. In the proposed final regulation text, OHCA has made fewer changes compared to the last round of revisions. The most significant changes found in the proposed emergency regulations include the following:
- A material change transaction previously included transactions involving the sale or disposition of 25% or more of the total California assets of any healthcare entity in the transaction. This was changed to the sale or disposition of 25% or more of the assets of the “submitter,” i.e., the healthcare entity or entities required to submit the notice to OHCA, which could include the buyer, seller or both, depending on the specific circumstances of the transaction.
- The definition of a material change transaction no longer includes the following (but note that a transaction may still be considered a material change if it falls under the other categories in the regulations):
- A transaction involving a healthcare entity joining, merging or affiliating with another healthcare entity, affiliation, partnership, joint venture or parent corporation related to the provision of healthcare services where any healthcare entity has at least $10 million in annual California-derived revenue.
- A transaction that changes the form of ownership of a healthcare entity that is a party to the transaction, including but not limited to a change from physician-owned to private equity-owned or from publicly held to privately held forms of ownership.
- For determining whether the healthcare entities meet the revenue thresholds, the regulations clarify that such revenue is determined on a cash basis, rather than an accrual basis.
- Two of the timelines for OHCA’s review (the timeline for OHCA’s release of the final CMIR report following the public comment period and OHCA’s ability to extend the 90-day period for preparing the preliminary CMIR report) have decreased by 15 days each. However, OHCA still retains the ability to toll such review periods for various reasons, such as when it is awaiting further information or when other governmental agencies are reviewing the transactions.
- The prior draft regulations indicated that OHCA will determine whether it will conduct a CMIR within 60 days of receipt of the notice. The new language indicates that OHCA will inform the submitter of its decision not to conduct a CMIR within 45 days of receipt of the notice but will still inform the submitter of its decision to conduct a CMIR within 60 days of receipt of the notice. Thus, if the submitter has not heard back from OHCA within 45 days, there may be a strong likelihood that OHCA has determined to conduct the CMIR.
COMMENT SUBMISSION
Following the submission of the proposed emergency regulatory action to OAL, stakeholders will have five calendar days to submit comments on the proposed emergency regulations.
Assuming that OAL receives the proposed emergency regulatory action on December 5, 2023, comments will be due on December 10, 2023. Comments should be submitted simultaneously to OHCA and OAL, according to the instructions provided in the notification of proposed emergency regulatory action.
Stakeholders may submit comments on the text of the proposed emergency regulations and/or OHCA’s finding of emergency, which contains OHCA’s justification for utilizing the emergency rulemaking process. OAL will have 10 calendar days following OHCA’s submission to make a decision on the proposed emergency regulatory action and is likely to do so on or around December 15, 2023. If the regulations are approved, OAL will file the regulations with the California Secretary of State, and they will be effective for five years. Of note, during the period in which the emergency regulations are effective, OHCA will proceed with a regular rulemaking action, including an additional public comment period.
NEXT STEPS
Stakeholders who wish to submit additional comments should prepare such comments for submission on or before December 10, 2023. This date is subject to change, depending on when OHCA actually submits the proposed emergency regulatory action to OAL. The public may monitor the OAL website to determine the precise date OAL receives the emergency regulations.
As we described in our prior articles, determining whether a notice is required is a highly technical but important analysis, as the CMIR process has the potential to delay closing by several months. California healthcare entities entering into transactions closing on or after April 1, 2024, should factor these potential delays into the overall transaction timeline and should consider the additional costs associated with preparing the notice and reimbursing OHCA for its costs of review.
