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Cost and Market Impact Review of Future Healthcare Transactions

This is the third in a series of client alerts and a webinar on the new Office of Health Care Affordability. More information on the webinar is available here.

California healthcare entities should be aware that mergers, acquisitions, affiliations or similar transactions after April 1, 2024, may face significant delays and additional transaction costs under newly enacted legislation.

On June 30, 2022, Governor Newsom signed Senate Bill 184 (“SB 184”). SB 184 authorizes a new Office of Health Care Affordability (“OHCA”) within the Department of Health Care Access and Information and grants OHCA the authority to review transactions that “entail a material change to ownership, operations, or governance structure.” The goal is to monitor healthcare cost trends and “the impact of consolidation, market power, venture capital activity, profit margins, and other market failures on competition, prices, access, quality, and equity.” Any qualified transaction will require notification to OHCA and potentially be subject to a cost and market impact review by OHCA. This adds an additional regulatory step that could significantly delay the closing of a transaction.

Notice of Transaction to OHCA

SB 184 requires a healthcare entity to provide written notice to OHCA at least 90 days prior to entering into an agreement or transaction that entails a “material change”, which is defined to be either of the following:

(1) sell, transfer, lease, exchange, option, encumber, convey, or otherwise dispose of a material amount of its assets to one or more entities; or

(2) transfer control, responsibility, or governance of a material amount of the assets or operations of the healthcare entity to one or more entities.

The notice requirement applies to any agreement or transaction that will occur on or after April 1, 2024, and it is unclear what “occur” means with respect to signing vs. closing of a transaction. The broad scope of specified transactions could be read to capture common operational activities of a healthcare entity, such as obtaining collateralized loans (i.e. encumber a material amount of assets) or entering into management services arrangements (i.e. transfer responsibility of operations). Note that the notice obligation appears to fall on the seller.

Excluded from the notification requirement are (i) various transactions that are already subject to review by the Department of Managed Health Care, the Insurance Commissioner, or the Attorney General, and (ii) county transactions to ensure continued access in that county.

OHCA Determination of Whether to Conduct Further Review: Within 60 days of receipt of a notice of a material change transaction, OHCA will determine if it will conduct a “cost and market impact review” or provide a written waiver from such review.

OHCA Cost and Market Impact Review

An agreement or transaction for which a cost and market impact review is required cannot be implemented until 60 days after OHCA issues a final report.

OHCA’s cost and market impact review will examine factors relating to a healthcare entity’s business and its relative market position, including:

  • Changes in size and market share in a given service or geographic region

  • Prices for services compared to other providers for the same services

  • Changes in equity

  • Higher quality

  • Increased access to care

  • More efficient health care services

  • Any other factors the OHCA determines to be in the public interest.

For purposes of its review, OHCA can subpoena relevant market participants to submit data and documents. In addition, OHCA may refer its findings and documents to the Attorney General. To facilitate public comment, OHCA will issue a preliminary report for public comment prior to finalizing the report.

OHCA will promulgate regulations in the future to further define what proposed material changes warrant a notification and to establish appropriate fees, presumably related to the cost and market impact review.

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We anticipate that qualified healthcare transactions that are signed or scheduled to close after April 1, 2024 may face significant delays and additional transaction costs. The new requirements include providing written notice to OHCA, responding to data requests and inquiries from OHCA, plus any ramifications from a potentially adverse finding. Stakeholders may wish to consider the consummation of substantial transactions prior to April 1, 2024 to avoid this new regulatory process.

For more information on SB 184 and its impact on healthcare entities, please contact Felicia Sze, Jenny Wang, or Samuel Chang.

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