Starting next week, on April 1st, health care entities in California closing “material change transactions” will be required to notify California’s new Office of Health Care Affordability (“OHCA”) and potentially undergo an extensive review process prior to closing. The new review process will impact a broad range of providers, payers, delivery systems, and pharmacy benefit managers with either a current California footprint or a plan to expand into the California market. While health care service plans in California are already subject to an extensive transaction approval process by the Department of Managed Health Care, other health care entities in California have not been required to file notices of transactions historically, and so the notice requirement will have a significant impact on how health care entities need to structure and close deals in California, and the timing on which closing is permitted to occur.
Background
In 2022, California passed legislation (SB 184) establishing OHCA within the Department of Health Care Access and Innovation and requiring OHCA to “monitor cost trends, including conducting research and studies on the health care market, including, but not limited to, the impact of consolidation, market power, [and] venture capital activity . . . on competition, prices, access, quality, and equity.”[1] To that end, OHCA was charged with “examining mergers, acquisitions, corporate affiliations, or other transactions that entail a material change to ownership, operations, or governance structure involving health care service plans, health insurers, hospitals or hospital systems, physician organizations, providers, pharmacy benefit managers, and other health care entities.”[2]
Pursuant to this authority, OHCA promulgated emergency regulations effective December 18, 2023 setting forth requirements for the submission of a notice prior to a “material change transaction” by a “health care entity.” Under the regulations, after receiving the notice, OHCA may then conduct a Cost and Market Impact Review (“CMIR”) of the material change transaction. While the legislation and emergency regulations do not give OHCA the ability to prevent a material change transaction, the CMIR process is likely to be extensive and could significantly burden and delay parties that are trying to close a transaction that falls under the regulation’s scope.
What Is a Material Change Transaction?
To trigger a “material change transaction” notice, there must first be a “transaction,” which is defined to include a merger, acquisition, affiliation, or agreement impacting the provision of health care services in California that involves a transfer of assets or the control, responsibility, or governance of the assets or operations of any health care entity to one or more entities.
A material change transaction is a particular type of “transaction” that fits into one of eight broadly defined categories, including where the fair market value of the transaction is $25 million or more, the transaction is likely to increase the annual California revenue of a health care entity that is party to the transaction by either $10 million or 20 percent, or the transaction involves a change of control of the entity submitting the notice. A transaction can also meet this threshold if it is part of a series of related transactions over the last ten years which together would meet the threshold.
A “material change transaction” excludes transactions in the “usual and regular course of business” or “day-to-day operations” of the health care entity and corporate restructurings. However, the regulations do not clearly explain what OHCA would consider to be “usual and regular course of business.” Also excluded under the authorizing statute are transactions involving health plans filed with Department of Managed Health Care, insurers filed with the Department of Insurance, or nonprofits filed the Attorney General, and transactions where a county is purchasing an entity.[3]
Who Submits the Notice to OHCA?
Health care entities that are parties to a material change transaction are required to submit the notice to OHCA. A “health care entity” is defined broadly to include providers, payers, fully integrated delivery systems and pharmacy benefit managers, but there are some limitations on which health care entities must submit the notice. In order to be required to file notice of a transaction, the submitting “health care entity” must have annual California derived revenue of at least $25 million or control at least $25 million in California assets. Alternatively, a health care entity with $10 million in annual California derived revenue or $10 million in California assets is required to file the notice if the transaction involves a health care entity meeting the $25 million thresholds. For purposes of calculating whether these thresholds are met, a company does not solely include its own California derived revenue, but also California derived revenue from “affiliates” that collaborate for the provision of health care services, therefore implicating a broader range of entities. Further, a health care entity located in a designated primary care health professional shortage area in California must file the notice regardless of revenue.
What Is the Notice Requirement?
For “material change transactions” that close on or after April 1, 2024, the health care entity must submit the notice to OHCA at least 90 days before the close of the transaction. The information included in the notice is extensive, and includes, but is not limited to, the transaction agreement, certified financial statements, a summary describing the goals of the transaction, a summary of the public benefit/impact and competitive impacts of the transaction, and a description of similar transactions completed in the past.
Further, an entity may request an expedited review when submitting the notice, which involves submission of additional documentation. An expedited review will only be granted in very limited situations, if the entity demonstrates that (i) one of the parties will experience severe financial distress absent expedited review or (ii) a substantial likelihood of a significant reduction in the provision of critical health care services within a geographic region.
Submitting entities should exercise great care to make sure all information is included in the initial review. OHCA’s time to review the submission is tolled when it requests additional information from the submitting health care entity. For that reason, health care entities may want to initiate conversations with OHCA prior to submission of the notice, such as through their dedicated email address for prefiling questions (CMIR@hcai.ca.gov).
What Does OHCA’s Review Look Like?
Upon receiving the notice, OHCA decides whether it will conduct a CMIR. The factors OHCA considers in determining whether to conduct a CMIR include whether or not the transaction would:
- Have a negative impact on availability/accessibility of services or quality of services;
- Have a negative impact on costs for payers, purchasers, consumers;
- Lessen competition; or
- Be part of series of transactions that trend towards consolidation.
Should OHCA determine it will not conduct a CMIR, it must notify the submitter within 45 days of the submission of a complete notice. Should OHCA determine it will conduct a CMIR, it must notify the submitter within 60 days of the submission of a complete notice. The timelines restart if the agreement materially changes, and the timeline is tolled if OHCA requests additional information.
What Does the CMIR Entail?
If OHCA decides that it will conduct a CMIR, OHCA is required to complete the CMIR within 90 days of that decision, although it can extend that period unilaterally by 30 days. The timeframe can also be tolled if additional information is needed, or if another regulatory body’s review of the transaction may impact OHCA’s review. The CMIR should address the reasons for conducting the CMIR and examine factors relating to the health care entity’s business and relative market position, including:
- The effect on the availability or accessibility of health care services;
- The effect on the quality of health care services provided;
- The effect of lessening competition;
- The effect on competition for workers and the impact on labor markets;
- Whether the parties to the transaction have been parties to any other transactions in the past ten years; and
- Consumer concerns.
When the CMIR is complete, OHCA will issue a preliminary report and parties have 10 business days to submit written comments in response. OHCA will issue the final CMIR within 15 days of the close of the comment period. It is not until 60 days after the final CMIR is issued that an agreement or transaction that goes through this CMIR process can be finalized.[4]
For further guidance on the material change transaction notice requirement and how your organization can prepare for compliance, Crowell & Moring’s team is here to help your organization understand the regulation and how it impacts a proposed transaction.
For further information, please contact:
Gary Baldwin, Partner, Crowell
gbaldwin@crowell.com
[1] Cal. Health & Safety Code §127507(a).
[2] Id.
[3] Id. §127507(d).
[4] Id. §127507.2(a)(3)(A).
