On December 18, 2023, the Office of Administrative Law (“OAL”) approved the California Office of Healthcare Affordability’s (“OHCA’s”) Cost and Market Impact Review regulations (linked here, the “Final Regulations”). The Final Regulations implement California’s new health care transaction oversight law (the “California Healthcare Transactions Law”),1 which requires “health care entities” to notify OHCA of “material change transactions.” OHCA will begin accepting notices on January 1, 2024, for transactions expected to close on or after April 1, 2024.
As discussed in our previous Alert, over the past several months, OHCA engaged in an emergency rulemaking process that solicited public feedback2 and sought to resolve open questions regarding its implementation of the California Healthcare Transactions Law. After publishing several rounds of draft regulations and revising such drafts based on public comments, on December 8, 2023, OHCA submitted proposed rules (linked here, the “Proposed Regulations”) for review by OAL. The Final Regulations reflect several changes from the Proposed Regulations (described below), based on feedback that OHCA received from OAL. The Final Regulations will remain in effect for five years. During this five-year period, OHCA will proceed with the regular, non-emergency rulemaking process in order to finalize permanent regulations that would go into effect at the end of 2028.
We highlight key provisions of the Final Regulations in the discussion below.
Who Must File
The California Healthcare Transactions Law provides that a “health care entity” that enters into a “material change transaction” anticipated to close on or after April 1, 2024 must submit a notice to OHCA 90 days prior to closing.3 The Final Regulations provide further clarification regarding the entities subject to such notice requirements. Specifically, the Final Regulations clarify that a party to a health care transaction will be subject to filing requirements if (i) the entity in question is a “health care entity,” (ii) the “health care entity” meets specified materiality thresholds, (iii) the contemplated transaction meets specified materiality thresholds, and (iv) the transaction is not specifically exempted from review. We describe such criteria in detail below.
The Final Regulations further provide that if a transaction involves multiple health care entities that meet the below criteria, each qualifying health care entity will be required to independently file a notice with OHCA regarding the same transaction.
(i) Health Care Entity Definition
The term “health care entity” is defined by statute to include payers, providers and fully integrated delivery systems. The Final Regulations additionally expand the definition of “health care entity” to include pharmacy benefit managers, and any parents, affiliates, or subsidiaries that act in California on behalf of a payer and either:
- Control, govern or are financially responsible for the health care entity; or are subject to the control, governance, or financial control of the health care entity, or
- In the case of a subsidiary, a subsidiary acting on behalf of another subsidiary.4
In prior iterations of the regulations, OHCA explicitly included management services organizations (“MSOs”) in the definition of “health care entity,” but ultimately removed MSOs from the definition in the Proposed Regulations after several commentators objected. The Proposed Regulations, however, included new language that arguably still captured MSOs under the definition of “health care entity.”5 6 This language was removed in the Final Regulations. In a December 19, 2023 OHCA Board Meeting, OHCA Assistant Deputy Director Sheila Tatayon confirmed that MSOs are not considered “health care entities” under the law, but noted that MSOs may be captured to the extent they are involved in transactions with health care providers that would otherwise trigger notice obligations. MSOs should monitor any further clarifying guidance issued by OHCA.
We also note that the definitions of “health care entity” and “health care services” in the Final Regulations demonstrate a primary focus on the provision of medical and behavioral health care (e.g., by hospitals, physician organizations, health insurers, health care service plans, and pharmacy benefit managers). OHCA helpfully stated in guidance7 that the California Healthcare Transactions Law does not include dental care as health care, which is consistent with a plain statutory reading of such law.
(ii) Materiality Thresholds for Health Care Entities
The Final Regulations provide that a “health care entity” party to a “material change transaction,” as described below, may be subject to notice requirements if the health care entity meets any of the following thresholds:
- Has annual revenue of at least $25 million or controls at least $25 million in California assets;
- Has annual revenue of at least $10 million or controls at least $10 million in California assets and is party to a transaction with any health care entity with at least $25 million in revenue or California assets; or
- Is located in a designated mental health or primary care health professional shortage area in California.8
We note that the Final Regulations define “revenue” to mean average annual California-derived revenue for health care services by the submitter and its affiliates over the three past fiscal years.9 OHCA has indicated in guidance that it limited the definition of “revenue” to only include California revenue, as it understands that some health care entities have a national footprint, and OHCA is focused on impacts within the state.10 OHCA, however, has also indicated in guidance its intention to review transactions between a health care entity in California and an out-of-state entity because OHCA believes that deals that take place out-of-state may still negatively impact in-state services (e.g., if premiums are raised in-state or in-state assets are committed to fund a transaction).11 As such, OHCA’s review process may capture out-of-state transactions if at least one party to the transaction meets the relevant materiality thresholds for revenue attributable to California as set forth above. It is unclear, however, if OHCA intends to take an expansive view of its law to capture national platforms (with California subsidiaries that meet the revenue thresholds) acquiring out-of-state entities that would otherwise have no effect in California.12
(iii) Materiality Thresholds for Transactions
The Final Regulations provide that a “material change transaction” includes any merger, acquisition, affiliation or agreement impacting the provision of health care services in California that involves a transfer of assets or transfer of control of any health care entity, and meets any of the below criteria:
- The fair market value of the transaction is $25 million or more;
- The transaction will likely increase annual California-derived revenue of a health care entity party to the transaction by at least $10 million or 20% of annual California-derived revenue;
- The transaction will result in an entity contracting with payers on behalf of consolidated providers and is likely to increase annual California-derived revenue of any providers in the transaction by at least $10 million or 20% of annual California-derived revenue;
- The transaction involves the sale, transfer or other disposition of 25% or more of the total California assets of the submitter(s);
- The transaction involves a transfer of 25% or more voting power or governance of the submitter;
- The transaction involves the formation of a new entity for the provision of health care services in California, projected to have at least $25 million in California-derived annual revenue, or the transfer of control of California assets related to the provision of health care services valued at $25 million or more;
- The transaction is part of a series of related transactions for the same or related health care services occurring over the past 10 years involving the same or affiliated health care entities; or
- The transaction involves the acquisition of a health care entity by another entity and the acquiring entity has consummated similar transactions in the last 10 years with entities that provide related health care services.
Moving forward, when structuring transactions in California, health care entities will need to carefully evaluate whether filing obligations are triggered, particularly based on the value of the transaction and/or percentage change of control of the transaction.
Certain types of transactions are explicitly exempted from review by OHCA, even if they meet the above criteria. The Final Regulations provide, first of all, that transactions in the “usual and regular” course of business (meaning those that are typical in the day-to-day operations of the health care entity) and corporate restructurings are excluded from the definition of “material change transaction.”13 Additionally, the statute provides that OHCA filing requirements do not apply to agreements or transactions involving the following:
- 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 (Chapter 2.2 (commencing with Section 1340) of Division 2).
- Health insurers that are subject to review by the Insurance Commissioner under Article 14 (commencing with Section 1091) of Chapter 1 of Part 2, of Division 1 of the Insurance Code.
- A county purchasing, acquiring, or taking control, responsibility, or governance of an entity to ensure continued access in that county.
- Nonprofit corporations that are subject to review by the Attorney General under Article 2 (commencing with Section 5914) of Chapter 9 of Part 2, Division 2 of Title 1 of the Corporations Code.14
If an entity meets the above criteria, it must notify OHCA 90 days prior to closing (provided that closing occurs on or after April 1, 2024).15
If OHCA does not subject a transaction to a Cost and Market Impact Review (“CMIR”), the review process could be as short as 45 days from OHCA’s receipt of a complete notice. However, if OHCA decides to conduct a CMIR, the review process may exceed eight months and result in lengthy delays to closing. Absent the parties’ mutual agreement to toll the time periods described herein, OHCA may also do so for any of the following reasons:
- OHCA has requested but is still waiting for information from the parties;
- The transaction is concurrently under review by any other state, federal regulatory agency or court; or
- The scope of the transaction has materially changed.16
As such, the timeline for review in practice may exceed the time periods described herein, especially if there are multiple federal and state agencies reviewing a particular transaction.
(i) Preliminary Review
Upon receipt of a completed notice, OHCA will conduct a preliminary review and may either (i) provide a written waiver from a CMIR within 45 days; or (ii) provide notice of its decision to initiate a CMIR within 60 days.17 If all health care entities to a transaction that have submitted notices to OHCA receive written waivers, the transaction may close.
The Final Regulations also provide for an expedited review process, which allows certain health care entities experiencing financial distress or a potential significant reduction in services to request review on an expedited timeline in conjunction with their initial notice.18 The Final Regulations do not specify a particular timeline for this process, so although the guidance indicates that parties to the transaction may request that OHCA complete its review by a specified date of their choice,19 OHCA has broad discretion to accept or deny such request and to determine the appropriate timelines for “expedited review.”
If OHCA decides to conduct a CMIR,20 the overall process could take several months before the transaction may close. First, OHCA has 90 days from the date of its initial determination to complete its review and issue a preliminary report. OHCA, however, has discretion to extend such period for an additional 30 days if it determines that it needs additional time to review.21
Upon completion of a CMIR and issuance of a preliminary report, parties to the transaction and the public will have 10 business days to submit written comments.22 Within 15 days following the close of the comment period, OHCA will issue a final report, unless OHCA decides to extend such time period for good cause.23 Upon issuance of a final report, a transaction may not close for an additional 60 days thereafter.24
Filing Components & Confidentiality
Entities submitting a filing to OHCA should be prepared for the contents of their filing to be made publicly available. OHCA has emphasized in guidance that a central mandate of the California Healthcare Transactions Law is to increase transparency and provide information to the public.25 While submitters may request that certain contents of their filing be treated as confidential, OHCA, as described below, has broad discretion to grant or deny such requests.
(i) Filing Components
Submitters are required to file a notice with OHCA that will be publicly posted on OHCA’s website. This notice requires detailed information about the transaction including a description of the parties involved, health care services currently provided by the parties and the anticipated impact of the transaction on such services, among other items.
Additionally, submitters must produce a large volume of supporting documentation related to the transaction, including some that may contain sensitive information.26 Required documentation includes copies of transaction agreements, documents related to the valuation of the transaction, contact information, balance sheets, organizational charts, zip codes serviced, certified financial statements, organizational documents, documentation related to the mitigation of adverse transaction impacts, and a copy of the Hart-Scott-Rodino (“HSR”) filing (if applicable).27 These documents are all public record, subject to the narrow confidentiality carveouts explained below.
The Final Regulations provide that the submitter may request confidential treatment of information or documents submitted by filing two versions of any document for which confidentiality is requested: (i) a full unredacted version that will be maintained as confidential pending a determination of confidentiality by OHCA; and (ii) a redacted version that will be publicly disclosed. Such request for confidentiality must include a written justification that provides (i) the grounds on which confidentiality is claimed, (ii) the specific timeframe for which confidential treatment is necessary, and (iii) confirmation that the information has been confidentially maintained by the entity.
Grounds for confidential treatment include whether (a) the information is proprietary or of a confidential business nature and whether release would be damaging or prejudicial to the business concern; (b) if any federal or state agency deems the filing confidential and for what period of time; (c) the information is confidential by statute or law; and (d) the information is such that the public interest is served by keeping it confidential. OHCA has discretion to grant or deny any such requests – there is no current appeal process for a denial.
A limited subset of attachments is deemed automatically confidential. This list includes marked-confidential versions of stock purchase agreements, compensation documents, contract rates, valuation documents, and unredacted resumes.28 Copies of HSR filings that are confidential under federal law are notably not on this list.
Accordingly, health care entities contemplating transactions subject to review should remain cognizant of these disclosure and confidentiality requirements and consider changes to diligence and deal processes, particularly in light of the volume of documents required for submission and the potential public disclosure of any sensitive documents.
OHCA will begin accepting notices on January 1, 2024 on its new e-Filing portal for transactions expected to occur on or after April 1, 2024. We recommend that all stakeholders closely review the Final Regulations and other similar emerging legislation nationwide to understand their impact on future health care transactions.
- Cal. Health & Saf. Code § 127500-127507.6.
- Ropes & Gray LLP submitted a public comment on August 31, 2023.
- 22 CCR 97435; Cal. Health & Saf. Code § 127507(c)(2).
- Cal. Health & Saf. Code § 127500.2; 22 CCR 97431(g)(3).
- OHCA Finding of Emergency and Notice of Proposed Emergency Regulations (Nov. 28, 2023) (“Finding of Emergency”).
- The definition of “health care entity” includes “any parents, affiliates, subsidiaries, or other entities that act as an agent in California on behalf of a payer, provider, fully integrated delivery system, or pharmacy benefit manager…such as an organization that acts as an agent of a provider(s) in contracting with payers, negotiating for rates, or developing networks…” 22 CCR 97431(g). Furthermore, OHCA guidance specifically provided that MSOs may be subject to review in situations in which physician groups or other providers transfer control and/or authorize an MSO to contract with payers on their behalf.
- Finding of Emergency.
- 22 CCR 97435(b).
- 22 CCR 97435(d).
- Finding of Emergency.
- Finding of Emergency.
- Ropes & Gray expressed our concern regarding Oregon Health Authority’s Health Care Market Oversight Program’s similar expansive application of its law to out-of-state transactions in a comment dated October 24, 2022.
- 22 CCR 97431(j).
- Cal. Health & Saf. Code § 127507(d). We note that, while this statutory language only narrowly carves out certain agreements or transactions subject to review by the California Department of Managed Health Care, the Insurance Commissioner, and the Attorney General, guidance issued by OHCA indicates that all transactions subject to review by these regulators are exempt from review. See June 2023 OHCA Board Meeting Presentation 37; August 2023 OHCA Board Meeting Presentation 14. The regulations do not resolve such discrepancies.
- 22 CCR 97435; Cal. Health & Saf. Code § 127507(c)(2).
- 22 CCR 97440(b)(2).
- 22 CCR 97440; Cal. Health & Saf. Code § 127507.2(a)(3)(A).
- 22 CCR 97439. The Oregon Health Authority’s Health Care Market Oversight program offers a similar emergency exemption for public health emergencies or insolvency. An applicant for emergency exemption must submit an application explaining the basis for their request, including a statement of facts and circumstances, explanation of the transaction and reasons why the transaction is in the public interest. OAR 409-070-0022(1).
- Finding of Emergency.
- If OHCA decides to conduct a CMIR, the submitter(s) may request a review of such decision within 10 business days. OHCA shall respond to the request for determination within five business days or may extend an additional five days if needed. 22 CCR 97441(d).
- 22 CCR 97442(e).
- 22 CCR 97442(c); Cal. Health & Saf. Code § 127507.2(a)(5).
- 22 CCR 97442(d).
- Cal. Health & Saf. Code § 127507.2(a)(3)(A).
- Finding of Emergency.
- 22 CCR 97439(b).
- 22 CCR 97438.
- 22 CCR 97438.
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