California Proposes Rules Clarifying Notice and Review Requirements for Health Care Transactions

August 14, 2023

On July 31, 2023, the California Office of Health Care Affordability (OHCA) issued proposed regulations requiring health care entities to notify OHCA about material transactions at least 90 days prior to closing. McGuireWoods previously published an alert on California’s advance notice and review requirements and the potential implications for health care transactions occurring in California on or after April 1, 2024.

California is one of many states to implement reporting requirements for health care transactions. Several other states such as New York, Oregon and Washington have similar laws and requirements. McGuireWoods continues to monitor these developments and analyze the impacts of such laws, most recently on June 5 and May 8, 2023.

Key Takeaways

  1. By expanding the definition of “health care entity” to include entities like management services organizations, broadening of the definition of “material transactions” and potentially extending review timelines, OHCA will play an extensive role in future transactions.
  2. Health care providers and entities operating in California that are planning or considering entering into a transaction now must consider the advance notice filing requirement, review process and additional timing components when planning a transaction. This will include preparing documents and compiling significant amounts of information to submit the notice filing in advance of the 60-day initial waiting period for OHCA to determine whether to conduct a cost and market impact review (CMIR), and a potential additional 90-day waiting period if OHCA chooses to undertake a CMIR.
  3. Health care providers and entities subject to the advance notice and review requirements must provide information about the entities undergoing the proposed transaction and submit copies of documents such as structure charts and transaction agreements. By default, OHCA will consider such information and documents as public records, but a submitter may mark certain documents as confidential or redact certain information, and OHCA will deem confidentially marked documents such as purchase agreements, financial documents and unredacted resumes as confidential.
  4. Parties making filings must consider the antitrust and other market implications of a transaction in advance of their submission and be able to credibly address the impact of the transaction on competition, cost of care, quality of care, health equity, innovation and access to care. Failing to adequately develop a strategy that takes account of these aspects of a transaction in an initial filing can increase the odds that OHCA will undertake a CMIR, which involves significant additional delay, expense, disruption and the risk that OHCA may refer the matter to the Office of the Attorney General for additional action.
  5. These proposed regulations provide additional details on the requirements and process, and they provide more details to the language of the statutes. Stakeholders may submit comments on the proposed regulations to [email protected] until 5 p.m. on Aug. 31, 2023. It is unclear if the public should expect further changes, but OHCA intends to submit the finalized regulations as an emergency rulemaking package in October 2023.

Highlights of the Proposed Regulations

1. The proposed regulations clarify the types of health care providers and entities that qualify as a “health care entity” that may be subject to OHCA review.

The enacted legislation generally stated that the health care entities subject to the transaction reporting requirements include payers, providers and fully integrated delivery systems. The proposed regulations specify additional provider and entity types that are considered “health care entities” under the statute, including management services organizations, pharmacy benefit managers, any other entity that controls a health care entity, and any physician organization with fewer than 25 physicians if the physician organization meets the financial thresholds to trigger the filing requirements in the proposed regulations.

2. The proposed regulations clarify what constitutes a “material change transaction” subject to the notice filing and review process requirements.

Specifically, a health care entity must undergo the notice and review process (unless exempted) if both (a) and (b) are met in connection with a transaction:

  1. The transaction involves a health care entity that meets annual revenue, asset, ownership or control thresholds, or it involves a health care entity that is located in or serving a large population of patients in a health professional shortage area.
  2. The transaction meets certain dollar, asset or revenue thresholds; involves changes in operational or governing control or ownership; includes payor contract negotiations on behalf of providers and an organization such as a management services organization or joint venture; or concerns health care entities that closed another transaction involving the same parties within the preceding 10 years.

3. The proposed regulations clarify the content and document requirements for notice filings and provide guidance on confidentiality and changes to filings.

As proposed, health care entities required to make filings must submit information about ownership, revenue, California licenses, provider types and qualifications, services, geographic and patient background, and governance structures. The transaction information required includes descriptions of entities involved in the transaction, closing dates, and anticipated impacts on competition and municipal contracts. OHCA will provide a relevant notice filing form on its website. In the event of a material change in a transaction such as an amendment or cancellation, a submitter must provide notice to OHCA within five business days of the change.

OHCA also will require submitters to submit copies of transaction agreements and term sheets, organizational charts and post-closing structure charts, certified financial statements for the preceding three years, operational and governance documents, and any Hart-Scott-Rodino Antitrust Improvement Act filings. By default, OHCA will treat all such submission documents and information as public records, but a submitter may designate documents or information as confidential by filing two versions of the notice filings (i.e., one marked confidential and one marked public with redactions). OHCA will deem as confidential any documents marked confidential such as purchase agreements, financial and compensation documents, and unredacted resumes. For other documents, submitters must provide a redaction log with the statement of the grounds for confidentiality (e.g., trade secret, public interest or confidential under law).

4. The proposed regulations clarify the review process for notice filings made to OHCA.

From a timing perspective, after the filing of a complete notice report, OHCA has 60 days to determine whether to conduct a CMIR, consistent with the statutes. If OHCA decides that a CMIR is necessary, based on the criteria set forth in the proposed regulations, OHCA then has up to 90 days after the final decision to conduct a CMIR, to complete its review.

The proposed regulations allow OHCA to toll the 90-day period while the parties submit information and to extend the period for 45 days. In pursuing a CMIR, OHCA will do a thorough investigation of several aspects of the transaction, including but not limited to the impact of the combination on the community, competition, access to care (and specifically culturally competent care), quality of care, cost of care, health equity and innovation. In other states that provide for CMIRs, the process typically has involved the analysis of complex economic data, the engagement of substantive experts, and the review of significant additional information from the parties and third-party stakeholders, with the parties covering certain costs of such a review. OHCA will issue a preliminary CMIR report, undertake a 10-day comment period and then have an additional 30 days to issue a final report.

Pursuant to the statute, a transaction may not go forward until 60 days after OHCA issues its final report, during which time OHCA may choose to refer the matter to the Office of the Attorney General “for further review of any unfair methods of competition, anticompetitive behavior, or anticompetitive effects.” If the Office of the Attorney General determines that the transaction should be blocked under the state antitrust or unfair competition laws, it may initiate litigation to block the transaction.

McGuireWoods has extensive experience assisting clients with similar state health care transaction reporting requirements. McGuireWoods’ integrated health care transactions teams — which bring together regulatory, corporate and antitrust expertise — have significant experience navigating state health care filings similar to OHCA’s CMIR regime. In addition, team lawyers closely track guidance and developments in this area for purposes of providing clients with informed strategic advice, from the point of considering the regulatory burden associated with acquiring individual targets in their pipeline through achieving approval by state regulators.