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OHCA’s Advance Notice and Review Requirements for Health Care Transactions Take Effect

California now joins the growing national movement as the eleventh state to impose state oversight and review of health care transactions. Facing the pressure to respond to the perceived increase in health care costs in California, the state legislature created the Office of Health Care Affordability (“OHCA” or the “Office”) within the Department of Health Care Access and Information (“HCAI”) and charged it with slowing health care spending growth, promoting high-value system performance, and assessing market consolidation. To that end, OHCA was also granted the power to review health care transactions. OHCA’s final transaction review regulations (the “Final Regulations”) went into effect January 1, 2024 for transactions closing after April 1, 2024.

The new regulations provide OHCA broad oversight of health care transactions with the aim of shedding light on a multitude of factors that have the potential to increase health care costs, including lack of competition within specified regions and market consolidation.

In summary, beginning January 1, 2024, OHCA will require health care entities that meet certain thresholds or characteristics to provide advance notice of transactions that involve a material change circumstance, as defined below. For transactions closing on or after April 1, 2024, the advance notice must be provided at least 90 days before the closing date of a transaction.  The transaction will then be subject to OHCA review, which may, at the State’s discretion, require a cost and market impact review (“CMIR”), comprehensive submission of entity and transaction information, and subsequent public report and comment periods. Based on the lead times, and the number of rounds of review, the review timeline from notice to approval has the potential to take up to eight months or longer, significantly delaying transactions.

Who Must Provide Advance Notice?

The new regulations require health care entities that meet certain thresholds or characteristics, that are party to a transaction involving a material change, to submit advanced notice to OHCA of the transaction. The parties may then be subject to a CMIR, which requires detailed submissions of information related to the parties and the transaction. All information provided to OHCA in the review process will be treated as public records unless the information is submitted and approved by OHCA as confidential.

The three questions a party that may be subject to the notice and review process are the following:

  1. Is the party to the transaction a “health care entity”?

  2. Does the party meet the “entity threshold”?

  3. Is the party involved in a “material change transaction”?

Diagram 1: Who must provide advance notice?

The Notice and Review Process

If the answer to all these questions is yes, the party must submit notice of the transaction through OHCA’s website with the required information and documents at least 90 days before the proposed transaction closing date. OHCA will inform the party within 60 days if a Cost and Market Impact Review (CMIR) is required). If so, OHCA will have an additional 90 days to perform the CMIR, with the ability in its own discretion to extend the review time up to 30 additional days. After the review, OHCA will publicly provide its preliminary CMIR report examining the impact of the transaction on the health care market, initiating 10 days for public comment in response to the findings.   Upon the close of the comment period, OHCA will then have 15 days to review the comments and issue its final report.

Finally, a transaction may not close 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, anti-competitive behavior, or anti-competitive 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.

By the end of the review, if the process has gone smoothly without any extension, tolling, or resubmission for amended transaction details, OHCA can have subjected the parties of the transaction to eight months of review. Permitted extensions, at OHCA’s discretion, can draw out this process an additional one to two months. OHCA may also make additional requests for information, which may toll the timeline further.

Diagram 2: The Notice and Review Timeline

There is an avenue for an expedited review in cases of severe financial distress or regional health care need. For OHCA to approve the expedited review, the submitter must show that the transaction is required to address the severe financial distress of one or more of the parties. Severe financial distress requires the submitter to demonstrate that it is at grave risk of immediate business failure, such as declaring bankruptcy, and that the transaction is necessary to ensure the continued health care access in the relevant market.  The risk of bankruptcy alone is not enough to justify the expedited review. If expedited review is granted, there are no defined timelines and OHCA, in its own discretion, determines the new date of completion. Stakeholders are concerned that the expedited review process will still not proceed fast enough, and whether in some cases health care entities would be better off declaring bankruptcy than entering a transaction.

In Conclusion

The creation of OHCA and implementation of its advanced notice requirement for health care transactions mark a significant milestone in California's efforts to address rising health care costs and promote transparency within the industry.

These regulations reflect the state's commitment to curbing market consolidation and ensuring that health care transactions are scrutinized for their potential impact on costs, quality, and competition. California joins the ranks of Connecticut, Illinois, Indiana, Massachusetts, Minnesota, Nevada, New York, Oregon, Rhode Island, and Washington in placing heavier scrutiny on transactions that were previously outside of governmental review. The sheer size of the California market may have a larger impact on health care transactions and marks a substantial step in the growing national trend of accountability and state oversight of health care transactions. The passage of these laws and regulations have also paved the wave for the introduction of other California bills on health care and health facilities, such as AB 3129 which targets health care consolidation involving private equity and hedge funds. 

Concerns remain about the administrative burden, potential months of delay in closing, and the confidentiality of submitted information. The requirements imposed by OHCA risk deterring health care players from the California market due to the prospect of having to undergo CMIR and the additional scrutiny and public disclosure that entails. These considerations as well as the uncertainty of what this review will look like in reality could create a chilling effect on health care transactions in California and negatively impact California’s health care market at large.

Now that the scramble to close deals before the April 1, 2024 deadline is over, market players are waiting to see how this new process will play out. While OHCA cannot approve or reject health care transactions or demand change, OHCA’s review will inevitably create substantial delays for the foreseeable future. Additionally, the disclosures required by the parties will provide significantly more information to the Office of the Attorney General, which does have the power to terminate transactions. The review process, as set forth in the finalized regulations, gives OHCA tremendous new powers, and it remains to be seen how they will use them, and how market players will react.

For more information, please contact Kimber Robinson or Tahvia Jenkins.

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