OVERVIEW: TRANSACTION NOTICE REQUIREMENT

As we described in our prior On the Subject, “California Publishes Draft Regulations on Filing Requirement for Healthcare Entity Transactions,” California Senate Bill 184 requires a healthcare entity (defined as a provider, payor or fully integrated delivery system) to provide at least 90 days’ notice to OHCA prior to the closing of a transaction in which it sells—or transfers control of a material amount of—its assets or operations.

After the healthcare entity (also called a “submitter”) provides notice, the agency has 60 days to either advise the healthcare entity of its determination to conduct a cost and market impact review (CMIR) or provide a written waiver from such review. OHCA will issue a preliminary report upon completion of the CMIR. Then, after allowing the parties and the public to provide input, OHCA will issue its final report. No transaction going through the CMIR process may close until 60 days after OHCA issues the final report. Certain healthcare transactions involving review by the California Attorney General, Department of Managed Health Care or Insurance Commission, along with county transactions , are exempt from the notice requirement.

REVISED DRAFT OF THE REGULATIONS
Our prior On the Subject summarizes the notice requirement established by the statute and the initial draft of the regulations dated July 27, 2023. Following a public hearing and public comment period, OHCA published a revised draft of the regulations on October 9, 2023, including the following material changes:

• Healthcare Entity Definition:
  
  • The initial draft of the regulations explicitly stated that management services organizations (MSOs) were subject to the notice requirement, but the revised draft removes them from the definition of a health care entity . However, the revised draft adds that an organization that acts as an agent of a provider in contracting with payors, negotiating for rates or developing networks would be subject to the notice requirement.
• Healthcare Entity Materiality:
  
  • The initial draft of the regulations required notice if the “transaction involves” healthcare entities meeting certain thresholds. The revised draft changes this language to require notice by a healthcare entity party to the transaction if the entity itself meets the following thresholds:
    
    • Annual revenue of at least $25 million, or owns or controls at least $25 million of California assets
    • Annual revenue of at least $10 million, or owns or controls at least $10 million of California assets, and is involved in a transaction with a healthcare entity with annual revenue of at least $25 million, or that owns or controls at least $25 million of California assets
    • Located in a designated mental health- or primary care health-professional shortage area
• Material Change:
  
  • The revised draft of the regulations changes some of the percentage thresholds for circumstances that constitute a material change. For example:
    
    • Previously, a transfer of 20% of a healthcare entity’s assets triggered the notice requirement. The revised draft states that a transfer of 25% of the total California assets of a healthcare entity would trigger the notice requirement.
    • Previously, a change of control of 10% of the voting power, operational control or management of a healthcare entity triggered the notice requirement. The revised draft increases this threshold to 25%. However, the revised draft also states that the vesting of supermajority rights, veto rights and similar provisions, even with less than a 25% change of control, would trigger the notice requirement.
  • The revised draft clarifies that transactions in the usual and regular course of business of the entity, meaning those that are typical in the day-to-day operations, are not subject to the notice requirement.
  • The revised draft adds that a transaction that is part of a series of related transactions, including the acquisition by the acquiring entity of multiple healthcare entities that provide the same or related services, is subject to the notice requirement. Additionally, the proposed transaction and the other related transactions would constitute a single transaction for the purposes of determining whether the transaction meets the revenue thresholds listed above.
• Expedited Review:
  
  • The revised draft newly establishes a pathway for entities to request expedited review of their materials by providing a detailed explanation of the conditions necessitating expedited review, documentation substantiating the necessity of expedited review, and the date by which the entity requests OHCA to complete its review.
  • OHCA retains the right to deny the request for expedited review based on whether the entity has sufficiently demonstrated the need for the transaction to immediately occur. OHCA will consider whether the entity has demonstrated that one or more of the parties to the transaction is in severe financial distress (i.e., a grave risk of immediate business failure and a substantial likelihood that a party will have to file for bankruptcy), and that the transaction is necessary to ensure the provision of critical healthcare services in the area.

KEY TAKEAWAYS

• Transaction Timeline: The notice requirement and CMIR process, as currently drafted, still has the potential to delay the closing of transactions by several months. Healthcare entities entering into material transactions in California should factor this into their overall transaction timeline. Stakeholders should also consider the costs of preparing the notice to OHCA and the additional costs if OHCA decides to conduct a CMIR (for which the costs are reimbursable from the parties to the transaction).
• Expedited Review: The revised draft of the regulations creates an important pathway for entities to request expedited review due to severe financial distress or potential bankruptcy, but OHCA retains the right to deny the expedited review.
• Multiple Submissions: Certain transactions may require more than one entity to submit notice to OHCA. Parties to a transaction that are required to submit notice should carefully coordinate to make sure that their submissions are consistent. If multiple parties to a transaction are required to provide notice, the “clock” for OHCA’s review does not start until all of the parties submit the required notice.
• MSOs: Under the revised draft of the regulations, an MSO is no longer explicitly considered a healthcare entity for the purposes of the transaction notice requirement. However, if an MSO acts as an agent of a healthcare entity in contracting with payors, negotiating for rates, or developing networks, it would be subject to the notice requirement.
• Comment Period: The revised draft of the regulations is subject to change, and stakeholders will have an additional opportunity to influence the development of the final regulations. OHCA is accepting written comments on the revised draft until 5 pm PST on October 17, 2023. After receiving public comments in October and holding an additional board meeting, OHCA plans to submit the final regulations as an emergency rulemaking package in November 2023.