California: Proposed Regulations Impacting the M&A Market in California
Monday, August 28, 2023

Below we outline what you need to know from the recently proposed regulations if you are a health care entity evaluating a transaction in California that is expected to close on or after April 1, 2024.

Since the establishment of the Office of Health Care Affordability (OHCA), health care entities contemplating mergers, acquisitions, and other transactions in California have been anxiously waiting for OHCA to issue regulations clarifying its authority to review and investigate certain California health care deals. SB 184, which was passed by the California legislature on June 20, 2022, requires health care entities to provide a 90 day written notice to OHCA of any proposed merger, acquisition, corporate affiliation, or other transaction that will result in a material change to the ownership, operations, or governance structure of a health care entity. A summary of the bill is linked here.

The new law applies to transactions involving payors, providers, fully integrated delivery systems, pharmacy benefit managers, management service organizations, and any affiliates, subsidiaries, or other entities that control, govern, or are financially responsible for the health care entity.

Entities subject to the statute must submit a Material Change Notice (MCN) for transactions closing on or after April 1, 2024. During a public workshop held by the Department of Health Care Access and Information (HCAI) on August 15, 2023, OHCA stated that it expects entities to begin submitting MCNs as early as January 1, 2024 if a transaction is set to close on or after April 1, 2024. If OHCA determines that the transaction could threaten market competition or health care affordability, then OHCA will conduct a cost and market impact review (CMIR), which could delay the closing date or threaten the transaction as a whole.

OHCA published draft emergency regulations on July 28, 2023 which clarify the MCN and CMIR processes. HCAI accepted oral comments to the proposed regulations during its public workshop and is accepting written comments submitted by 5:00 PM on August 31, 2023. Final rules are expected in November 2023.

What are the MCN filing thresholds? A Two-Step Inquiry.

There is a two-step inquiry that must occur when determining whether a transaction requires an MCN. The first step is to evaluate who must file the MCN. The draft regulations provide that the following parties must file an MCN:

  1. A health care entity with annual revenue of at least $25 million or that owns or controls California assets of at least $25 million;
  2. A health care entity with annual revenue of: (i) at least $10 million or that owns or controls California assets of at least $10 million; and (ii) is involved in a transaction with any health care entity with annual revenue or controlling assets of at least $25 million; or
  3. A health care entity located in or serving at least fifty percent of patients who reside in a health professional shortage area.

If any party to the transaction satisfies one of the requirements above, then the parties must determine whether the circumstances of the transaction qualify as a “material change.” The draft regulations provide that an MCN must be filed if the transaction includes any of the following:

  1. The proposed fair market value of the transaction is $25 million or more, and the transaction concerns the provisions of health care services;
  2. The transaction is likely to increase annual revenue of any health care entity that is a party to the transaction by at least $10 million or twenty percent of annual revenue at normal or stabilized levels of utilization or operation;
  3. The transaction involves the sale, transfer, lease, exchange, option, encumbrance, or other disposition of twenty percent or more of the assets of any health care entity that is a party to the transaction;
  4. The transaction involves a transfer or change in control, responsibility, or governance of the submitting entity;
  5. The terms of the transaction contemplate an entity negotiating or administering contracts with payers on behalf of one or more providers and the transaction involves an affiliation, partnership, joint venture, accountable care organization, parent corporation, management services organization, or other organization;
  6. The transaction involves the formation of a new health care entity, affiliation, partnership, joint venture, or parent corporation for the provision of health services in California that is projected to have at least $25 million in annual revenue at normal or stabilized levels of utilization or operation, or have control of assets related to the provision of health care services valued at $25 million or more;
  7. The transaction involves 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 revenue;
  8. The transaction changes the form of ownership of a health care entity that is a party to the transaction; or
  9. A health care entity that is a party to the transaction has consummated any transaction regarding provision of health care services in California with another party to the transaction within ten years prior to the current transaction.

The draft regulations further clarify the meaning of a change in control, responsibility or governance, and exempt certain types of corporate restructuring from the scope of a material change.

The MCN and CMIR Process

Parties must file an MCN on OHCA’s website, through an OHCA portal. The draft regulations include a description of the information that must be included in the MCN, which includes financial information about the parties involved in the transaction, the purpose and intended goals of the transaction, the impact of the transaction on the public, and a description of actions the parties have taken to mitigate potentially adverse impacts of the transaction on the public. The proposed regulations also provide a process for the parties to request confidential treatment of documents provided as part of the MCN. Once a complete MCN is filed, OHCA will have 60 days to decide whether to conduct a CMIR, or waive the CMIR process. 

If OHCA conducts a CMIR, OHCA will have ninety days to issue its preliminary CMIR Report of Findings. This review period may be tolled if OHCA requires additional information to complete its review. In issuing its preliminary CMIR report, OHCA will consider certain factors relating to the health care entities’ business and relative market position, including the effect of the transaction on access and availability of health care services in the community, the competitive impacts of the transaction, and other factors that OHCA determines are in the public interest. A transaction may close sixty days after OHCA issues a Final Report of Findings.

What Remains Unclear

The draft regulations provide some clarity on the types of transactions that will be subject to the MCN and CMIR review process, including parties’ rights to contest or appeal certain OHCA findings. While the draft regulations include some timing obligations for this review process, it is unclear how long the OHCA review process will take for a given transaction, and the business impact of this review process. Depending on the intensity of review, transactions requiring an MCN and CMIR could potentially face almost a year delay in closing. Moreover, it is not clear how OHCA will interpret the impact of certain types of transactions in a community, whether CMIR reports will require substantial changes to the structure of certain transactions, or how often OHCA will refer transactions to the Attorney General for further review. 

What to Do Now?

Assuming the Proposed Regulations are finalized without significant changes, and become effective for transactions starting in 2024, parties contemplating covered transactions should consider timing implications, as well as prepare for the additional scrutiny which is not currently applied to health care transactions in California. 

Foley is here to help you address the short and long-term impacts in the wake of regulatory changes. We have the resources to help you navigate these and other important legal considerations related to business operations and industry-specific issues. 

 

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