California Revises Proposed Regulations for the Pre-Closing Review of Health Care Transactions: Public Comment Period Ends October 17, 2023

California’s new Office of Health Care Affordability (OHCA) is set to begin advance regulatory review of certain health care transactions beginning January 1, 2024. As further explained in our previous post, subject to certain exceptions, third party payers and administrators, hospitals, hospital systems, fully integrated delivery systems, pharmacy benefit managers, physician organizations, and other providers (collectively, Health Care Entities) will soon be subject to potential prospective transaction review. OHCA initially published proposed regulations for the new transaction review process in early August (for more details, see our prior post and our podcast). Multiple stakeholders expressed concerns with the proposed regulations during the public comment period, which ended August 31, 2023. In response to these comments, OHCA has published revised proposed regulations (Revised Regulations) allowing for an abbreviated comment period that ends October 17, 2023. The Revised Regulations are available here.

How Have the Notice Requirements Changed under the Revised Regulations?

As discussed in our previous post, determining whether notice must be submitted requires a multi-step analysis. The overall approach remains the same under the Revised Regulations, but key changes have been proposed, including the types of entities and transactions that will be subject to notice requirements, as further described below.

Step 1: Are the entities involved subject to the notice requirement? 

The law applies to “Health Care Entities” which include certain health care providers and payers. The proposed regulations were particularly concerning to some stakeholders because it became clear that OHCA’s intent was for all management services organizations (MSOs) to be considered “payers” and therefore Health Care Entities. It was raised multiple times during the comment period that broad applicability of notice requirements to MSOs exceeded OHCA’s legislative authority. Under the Revised Regulations, the language intended to qualify all MSOs as payers is deleted. Notably, MSOs can still be subject to notice requirements, since the Revised Regulations also make it clear that parents, affiliates, subsidiaries, or other entities that perform the functions of a Health Care Entity are considered Health Care Entities if they either:

• control, govern, or are financially responsible for a Health Care Entity; or
• are 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).

The Revised Regulations also clarify that only Health Care Entities who are parties to the transaction are potentially required to submit a notice. So, for example, a parent company that owns health care facility entities would not be required to submit a notice unless it was a party to the transaction.

Step 2: Does the Health Care Entity involved meet threshold notice criteria?

As further described in our previous post, Health Care Entities are not subject to notice requirements unless one or more thresholds are met. The Revised Regulations do not change the annual revenue thresholds, but do change the health professional shortage area (HPSA) threshold to include only Health Care Entities located in a designated mental health or primary care health professional shortage area (eliminating the threshold applicable to those serving at least 50% of patients residing in a service area). The Revised Regulations also state 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 treated as a single transaction for purposes of determining revenue thresholds.

Step 3: Does an exception to the notice requirement apply?

The Revised Regulations change multiple definitions, and as a result the following situations (in addition to those set out by statute described in our previous post) do not require notice:

• transactions that are in the usual and regular course of business of the Health Care Entity (namely those that are typical in the day-to-day operations of the Health Care Entity);
• affiliations that involve collaboration for purposes of education and research programs such as clinical trials and graduate medical education, health professions training programs, and health sciences training programs; and
• transactions involving Health Care Entities that already directly or indirectly control, or are controlled by or are under common control with, all other parties to the transaction, such as a corporate restructuring.

Step 4: If the Health Care Entity is subject to notice requirements, does the transaction itself require notice?

The Revised Regulations change multiple revenue thresholds to focus on California derived revenue and in some cases narrow the scope of applicability. However, the related transaction review 10-year lookback was expanded to include affiliates of the parties (see #9 below), and to include a new category that was created for the same acquirer consummating similar transactions regardless of the parties involved (see #10 below). Under the Revised Regulations, notice is required for transactions that:

1. involve health care services and that have a fair market value of at least $25 million;
2. are more likely than not to increase annual California-derived revenue of any Health Care Entity party by either $10 million or more or 20% or more of California-derived annual revenue at normal or stabilized levels of utilization or operation;
3. 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;
4. 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; 
5. 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;
6. involve a transfer (directly or indirectly) of control, responsibility, or governance of the Health Care Entity in whole or in part (as defined by Revised Regulations);
7. 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;
8. 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;
9. are 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); and
10. 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).

Will the Notice and Review Process Be Less Burdensome?

As discussed in our previous post, filing notice will be a significant undertaking and this will still be the case under the Revised Regulations. While some of the details have changed, the parties will still be required to provide a substantial amount of information to OHCA in narrative form relating to the parties, the transaction, and the potential impact of the transaction along with copies of transaction documents, certified financial statements, and other supporting documentation. Notably, under the Revised Regulations, Health Care Entities will need to indicate whether any other parties to the transaction will also be submitting notice.

In addition to the factors discussed in our previous post, the Revised Regulations include the below factors for OHCA to consider when deciding whether to conduct a cost and market impact review (CMIR):

• if the transaction may lessen competition for workers or may negatively impact the labor market;
• if the transaction is part of a series of similar transactions furthering a trend towards consolidation; and
• if the transaction may entrench or extend a dominant market position of any Health Care Entity in the transaction including extending market power into related markets through vertical or cross-market mergers.

The Revised Regulations also expand the considerations for evaluating out of state entity transactions to include negative impact on quality and undermining financial stability or competitive effectiveness of a Health Care Entity in California.

Did the Revised Regulations Shorten the Timeline for Transactions Closing?

Generally no, transactions subject to notice requirements still may not proceed without first obtaining a waiver (which could take a minimum of 150 days) or until 60 days after a CMIR is completed and the final report is issued as detailed in our previous post. However, in response to multiple stakeholders providing examples of when this prolonged time line could be detrimental to health care access, OHCA has added an expedited review process. Under the Revised Regulations, expedited review may be requested at the time notice is submitted if one or both conditions below exist:

• one or more of the parties to the transaction is in severe financial distress (as defined by the Revised Regulations); or
• there could be a significant reduction in the provision of critical health care services within a geographic region or regions.

OHCA will grant or deny the request based on whether the submitter has adequately demonstrated the above conditions, and the transaction is immediately required to mitigate such conditions. Notably, there are no time frames provided for the expedited review process.

Next Steps

The proposed emergency rulemaking process will allow for public comment, but time is limited so stakeholders should review the Revised Regulations and consider whether there are open questions or issues created under the Revised Regulations that merit public comment and, if so, submit comments by the October 17, 2023 deadline.

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