Revised Proposed Regulations for California Health Care Transactions

Last year, California’s Office of Health Care Affordability (OHCA) was created with the passage of a new law¹ designed to address the increasing costs of health care services in the state. OHCA is responsible for collecting and analyzing data related to health care costs and has the power to review mergers and acquisitions in the health care industry in order to monitor the potential impact on health care costs.

Notice and Review Requirements

Pursuant to the proposed regulations,² the following notice and review requirements go into effect on January 1, 2024 and will apply to transactions that close on or after April 1, 2024:

• Health Care Entities (as such term is defined under the law and its proposed regulations) are required to provide written notice to OHCA if they plan to (1) sell, transfer, lease, exchange, option, encumber, convey, or otherwise dispose of a material amount of its assets to one or more entities, or (2) transfer control, responsibility, or governance of a material amount of the assets or operations of the health care entity to one or more entities. Notice must be given at least ninety (90) days “prior to entering into the agreement or transaction.”
  
• OHCA has sixty (60) days upon receipt of the notice to either (1) conduct a cost and market impact review of the proposed transaction or (2) waive the review. If OHCA determines that the proposed transaction poses a risk of a significant impact on market competition, OHCA must conduct a cost and market impact review. A covered transaction cannot be implemented until sixty (60) days after OHCA issues a final report, unless the cost and market impact review is waived.

Revisions to Proposed Regulations

On October 12, 2023, important clarifications to the proposed regulations were released. Below are the key changes impacting the regulations’ notice requirements:

1. Clarification of “Health Care Entity”
   The revised proposed regulations (RPR) remove management service organizations (MSO) from the definition of “Health Care Entities.” However, MSOs may still be subject to notice requirements, since the RPR states that parents, affiliates, subsidiaries, or other entities that perform the functions of a Health Care Entity will be considered Health Care Entities if they are found to be:
   • Under the control or govern of a Health Care Entity, or are financially responsible for one;
   • Subject to the control, governance, or financial control of a Health Care Entity (including an organization that acts as an agent of a provider in contracting with payers, negotiating for rates, or developing networks); or
   • A party to a transaction which is subject to the notice requirement.
     
2. Clarification of “Transactions”
   Under the RPR, the threshold for a transaction to meet the notice requirement has been clarified. Specifically, the transaction must: 
   • involve health care services that have a fair market value of at least $25 million³;
   • more likely than not increase annual California-derived revenue of any Health Care Entity party by either $10 million+ or by 20%+ of California-derived annual revenue at normal or stabilized levels of utilization or operation;
   • involve 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 at least $25 million in annual California-derived revenue at normal or stabilized levels of utilization or operation, or transfer control of California assets related to the provision of health care services valued at $25 million or more;
   • involve 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 California-derived revenue;
   • involve the sale, transfer, lease, exchange, option, encumbrance, or other disposition of 25% or more of the total California assets of any Health Care Entity in the transaction;
   • involve a transfer (directly or indirectly) of control, responsibility, or governance of the Health Care Entity in whole or in part (as defined by RPR);
   • result in an entity contracting with payers on behalf of consolidated/combined providers and is more likely than not to increase the annual California-derived revenue of any providers in the transaction by either $10 million or more or 20% or more of annual California-derived revenue at normal or stabilized levels of utilization or operation;
   • change 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;
   • be part of a series of related transactions for the same or related health care services occurring over the past 10 years involving the same Health Care Entities or entities affiliated with Health Care Entities (which will be analyzed as a single transaction); or
   • involve acquisition of a Health Care Entity by another Health Care Entity where the acquirer has consummated similar transactions within the past 10 years, with a Health Care Entity that provides the same or related health care services (which will be analyzed as a single transaction).

Next Steps for Health Care Entities

Health Care Entities meeting the above threshold requirements and without an applicable exception (as provided under the law and proposed regulations) will be required to submit a notice to OHCA for the above transactions. It follows that careful consideration of these requirements will become a critical step when evaluating proposed health care transactions going forward due to potential increases in transaction costs, transaction time lines, and agency and public scrutiny. If you have questions about the new CA law or other healthcare law issues, please contact Michael Brown at [email protected] or 949-636-8128.

Michael Brown is a Partner with our California-based team, bringing over three decades of senior in-house counsel experience in the area of business, employment, healthcare, compliance, and privacy. Michael has served as in-house counsel to healthcare giants such as Tenet HealthSystems (hospitals), Apria Healthcare (Home medical equipment, respiratory and infusion therapy); Clarient, a GE Healthcare company (clinical laboratories); and Edwards Lifesciences (medical device) where he also was a member of the AdvaMed Diagnostic and Compliance Committee that revised the AdvaMed Code of Conduct for the medical device industry.

---

¹ On June 30, 2022, California Governor Gavin Newsom signed into law the Health Care Quality and Affordability Act, which, among other things, created the Office of Health Care Affordability within the CA Department of Health Care Access and Information.

² Proposed regulations were released on July 27, 2023

³ It is important to note that the RPR did change the health professional shortage area (HPSA) threshold to include only Health Care Entities located within a designated mental health or primary care health professional shortage area, which eliminates this transaction threshold requirement for those serving at least 50% of patients residing in a HPSA.

Also, the RPR clarifies that a series of transactions involving the same parties or the same purchaser acquiring different providers of a particular type of health care services may be considered as a single transaction for purposes of determining revenue thresholds.