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, a broad range of health care entities (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 podcast). As further discussed in our previous post, these proposed regulations were revised in October and made available on the OHCA website, with a comment period that ended on October 17, 2023. In response to October’s public comments, OHCA has further revised the proposed regulations (Revised Regulations), which are available here. This time however, OHCA has also provided notice of proposed emergency regulatory action, indicating that this version of the regulations will be submitted to the California Office of Administrative Law (OAL) for approval. Once submitted, the public will have five days to provide comments to the OAL. If the OAL approves the regulations, it will file them with the California Secretary of State and the regulations will become effective as emergency regulations for five years as of the filing date. During this period, OHCA will proceed with regular rulemaking action addressing prospective health care transaction review.
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. Despite the numerous concerns raised in October, a limited number of additional changes have been proposed as 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. Under the Revised Regulations, “Health Care Entities” are still defined to include parents, affiliates, and subsidiaries in a manner that can capture some management services organizations. The definition is revised to include 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, and:
- 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, such as an organization that acts as an agent of a provider(s) in contracting with payers, negotiating for rates, or developing networks; or
- in the case of a subsidiary, a subsidiary acting on behalf of another subsidiary.
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 make a small change to the Health Professional Shortage Area (HPSA) threshold so that it is limited to areas in California. The revision does not require, however, that the entity’s location in a HPSA be relevant to the transaction.
Step 3: Does an exception to the notice requirement apply?
The Revised Regulations do not materially change the exceptions to notice requirements from what is described in our previous post.
Step 4: If the Health Care Entity is subject to notice requirements, does the transaction itself require notice?
The prior version of the proposed regulations required notice for 10 types of material transactions as described in our previous post. The Revised Regulations remove two types of transactions that would have required notice:
- A Health Care Entity joining, merging, or affiliating with another Health Care Entity where either entity has at least $10 million in annual California-derived revenue; and
- A transaction that would change the form of ownership of a Health Care Entity that is a party to the transaction, such as a change from a physician-owned to a private-equity owned entity or a change from a publicly to privately held form of ownership.
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. The Revised Regulations do not include any significant changes to the filing requirements or the cost and market impact review (CMIR) factors from the version of the regulations proposed in October.
Did the Revised Regulations Shorten the Timeline for Transactions Closing?
Yes, as further discussed below the Revised Regulations slightly shorten several time frames which would condense the overall CMIR process timeline by 45 days.
Under the prior proposed regulations, notice submitters would be notified of whether a CMIR would be initiated within 60 days of OHCA receiving a complete notice. Under the Revised Regulations, submitters will be notified of OHCA’s decision within 45 days of receiving a completed notice if a CMIR will not be conducted, and within 60 days if a CMIR will be conducted.
If the OHCA decides to conduct a CMIR, the prior proposed regulations allowed OHCA one 45-day extension period if additional time was needed to complete the review process. Under the Revised Regulations, that extension period is shortened to 30 days.
Once the OHCA completes a CMIR, it will make its preliminary report available to the public and allow 10 business days for the submitters and the public to comment. Under the prior proposed regulations OHCA had 30 days from the end of the comment period to issue its final report. Under the Revised Regulations, OHCA will have 15 days from the end of the comment period to issue a final report. Parties must still wait 60 days from the issuance of the final report to complete the transaction.
Notably, the circumstances that can extend the review time line (e.g., more information requested, other agency/court review) as discussed in our previous post remain, and there are still no time frames provided for the expedited review process.
OHCA is required to provide at least five days’ notice (provided November 28, 2023) before submitting an emergency regulation package to the OAL. Once the regulations are made available to the public by the OAL, the comment period will be five days in duration. Stakeholders should review the Revised Regulations and consider whether there are issues created that merit public comment and, if so, be prepared to submit comments to the OAL and OHCA in early December. Based on comments made at the Health Care Affordability Advisory Committee meeting on November 30, 2023, it is anticipated that the comment period will end on December 11, 2023.