California to Require Advance Notice and Review of Certain Healthcare Transactions

December 15, 2022

RELATED UPDATE: New York to Implement Mandatory Reporting of Healthcare Transactions; Other States Weigh Similar Legislation (May 8, 2023)

Pursuant to the recent passage of Senate Bill 184, California has started implementing its newly formed Office of Health Care Affordability (OHCA), an agency charged with monitoring and managing healthcare costs. To “increase public transparency” of healthcare provider “consolidation and market power,” OHCA will conduct cost and market impact reviews of certain healthcare transactions, examining the effects of a proposed deal on prices, costs, concentration, access and equity, and the potential benefits to patients and the community.

The cost and market impact review process requires parties to notify OHCA at least 90 days prior to closing a transaction. OHCA will begin accepting filings on Jan. 1, 2024, for transactions closing on or after April 1, 2024. As described below, the cost and marketing impact review requirement creates additional hurdles for entities entering into healthcare transactions in California and presents concerns about the confidentiality of information submitted by parties to the transactions and other entities responding to OHCA requests.

Housed within the Department of Health Care Access and Information, and conceived as a supplement to other California regulatory and enforcement bodies focused on healthcare, OHCA will collect data on total healthcare expenditures, analyze healthcare market spending trends and drivers, and create a state strategy to control healthcare costs, improve healthcare affordability for consumers and enforce cost targets. Several other states such as Massachusetts, Oregon and Rhode Island have agencies similar to OHCA for monitoring and analyzing healthcare costs to control overall expenses, but OHCA stands out with its broad reach in connection with transactions that may be subject to review and its potential impact on future healthcare-related deals. Below is additional information about the transactions subject to OHCA review and the potential outcomes.

Healthcare Providers and Entities With Transactions Subject to OHCA Review

Generally, OHCA’s cost and market impact review process applies to qualifying healthcare providers and entities, which include:

  • Physician practices (medical groups of 25 or more physicians, or fewer for high-cost outlier groups)
  • Hospitals and health systems
  • Clinics
  • Ambulatory surgical centers
  • Clinical laboratories
  • Imaging centers
  • Pharmacy benefit managers
  • Health plans

As currently proposed, OHCA’s review process is not applicable to durable medical equipment providers, pharmacies, home health agencies and dental practices. Healthcare providers or entities subject to OHCA’s review process must submit advance notice when (1) entering into a sale, transfer, lease, exchange or other disposal; or (ii) transferring control, responsibility or governance of a material amount of assets or operations of the healthcare entities to one or more entities.

OHCA may exempt certain healthcare providers and entities from the notice requirement and review process based on provider or entity type, annual gross revenues, annual net revenues, location, or patient volume. Exempted providers and entities aren’t subject to the review process unless being acquired by a provider/entity that is subject to the review process. Other transactions exempt from the new requirements include certain transactions that are currently subject to review by the Department of Managed Healthcare, the insurance commissioner or the California attorney general (e.g., nonprofit hospital transactions), and agreements where a California county acquires a healthcare provider to ensure continued access to services.

OHCA Review Process

Transactions closing on or after April 1, 2024, will be subject to OHCA’s advance notice requirements. Subsequent to the notice, within 60 days of receipt, OHCA’s eight-member board will determine whether it will conduct a cost and market impact review. Transactions may not proceed without either the completion of a cost and market impact review or receipt of a review waiver. If OHCA conducts a review, it will produce a preliminary report and allow for comment from the public and the parties.

The cost and market impact review includes an assessment of:

  • Changes in size or market share for the services or geographic area
  • Prices for the services among different providers
  • Factors with respect to public interest such as quality, equity and access
  • Potential benefits of the transaction, including access, quality and efficiency

During the impact review process and related investigation, OHCA may subpoena healthcare providers and relevant market participants such as investors and sponsors for data and documents during its investigation. The confidential information of the parties and third parties may be included in OHCA’s reports. After the review, a healthcare provider or entity subject to OHCA review and the general public may comment on OHCA’s preliminary findings before OHCA issues its final report. After OHCA publishes its final report, the transaction cannot close for 60 days. During this time, OHCA may refer the transaction to the attorney general for review, and the attorney general may pursue litigation to block the transaction pursuant to antitrust laws or allow it to proceed with conditions, such as implementation of a monitor, ongoing reporting requirements, and restrictions on managed care contracting and rate setting.

Information the parties submit about a potential transaction may be subject to disclosure to the California state attorney general without the information source’s consent.

Key Takeaways

  • Healthcare providers and entities subject to OHCA’s advance notice requirements should ensure that any proposed transaction takes into account the 90-day notice and approval requirement.
  • Healthcare providers and entities in California and in other states should be vigilant about developments with respect to antitrust filings and transaction notice requirements. The Hart-Scott-Rodino Act has long required pre-close notification and review of certain transactions by the Federal Trade Commission and Department of Justice, but an increasing number of states are establishing their own review agencies to conduct pre-close reviews or requiring pre-close review by attorneys general or existing healthcare regulators. Often, state law-based filing requirements apply to much smaller transactions than the Hart-Scott-Rodino Act does.
  • Healthcare providers and entities should monitor developments with respect to regulations associated with OHCA’s processes. In particular, they should consider the impact of the review process and any disclosure of findings or reports. Future regulations likely will establish more details regarding OHCA’s cost and market impact review, investigation, notice processes and filing fees and review costs.

McGuireWoods’ integrated healthcare transactions teams — which bring together regulatory, corporate and antitrust expertise — have significant experience navigating state healthcare filings similar to OHCA’s cost and market impact review regime. In addition, team lawyers closely track guidance and developments in this area for purposes of providing clients with informed strategic advice, at the point of considering the regulatory burden associated with acquiring individual targets in their pipeline through achieving approval by state regulators.