As we previewed in our blog article in March on the establishment of California’s new Office of Health Care Affordability (OHCA), OHCA has issued proposed regulations available on the OHCA website, that provide anticipated details on OHCA’s advance review authority regarding certain transactions in the healthcare space.

As a reminder, under the healthcare omnibus bill SB 184 signed into law last year, starting April 1, 2024, “health care entities” will be required to provide OHCA at least 90 days’ prior written notice of an applicable “material change transaction.” In turn, OHCA will have 60 days to decide whether to either conduct a cost and market impact review and create a public report of its findings or grant a review waiver. Most notably, applicable transactions may not proceed without a waiver or completion of the review process.

Healthcare stakeholders have been awaiting regulations from OHCA to clarify open questions regarding the law, particularly the scope of transactions and entities under the purview of OHCA and its review process.

Proposed Regulations

At a high level, “health care entities” subject to this law (defined herein, collectively, as “Health Care Entities”) include payors (including Knox-Keene plans, licensed health insurers, and third party administrators), providers (including hospitals, outpatient clinics, physician groups with 25 or more physicians, clinical laboratories, and imaging centers) and fully integrated delivery systems. OHCA’s proposed regulations clarify that management services organizations (“MSOs”) and pharmacy benefit managers are also considered Health Care Entities within the meaning of the statute. Additionally, the proposed regulations specify that affiliates, subsidiaries or entities that control, govern or are subject to the control or governance of Health Care Entities are also deemed to be Health Care Entities under the law.

Beyond clarifying the categories of entities subject to this regulatory framework, the proposed regulations provide additional detail regarding what constitutes a “material change transaction” subject to OHCA’s prior review process. A Health Care Entity must file prior written notice and proceed through the review process if both of the two elements below are met in connection with the proposed transaction:

1. The transaction must involve one of the following parties:

   • A Health Care Entity with annual revenue of at least $25 million or that owns or controls California assets of at least $25 million;

   • A Health Care Entity with annual revenue of at least $10 million or that owns or controls California assets of at least $10 million and is involved in a transaction with any Health Care Entity satisfying subsection (a) above; or

   • A Health Care Entity located in or serving at least 50% of patients who reside in a health professional shortage area, as defined under Subchapter A of Chapter 1 of Title 42 of the Code of Federal Regulations.

2. The transaction must involve one of the following circumstances:

   • The proposed fair market value of the transaction is $25 million or more and the transaction concerns the provision of health care services;

   • The transaction is likely to increase annual revenue of any Health Care Entity that is a party to the transaction by at least $10 million or 20% of annual revenue at normal or stabilized levels of utilization or operation;

   • The transaction involves the sale, transfer, lease, exchange, option, encumbrance, or other disposition of 20% or more of the assets of any Health Care Entity in the transaction;

   • The transaction involves a transfer or change in control, responsibility, or governance of the submitter;

   • The terms of the transaction contemplate an entity negotiating or administering contracts with payors on behalf of one or more providers and the transaction involves an affiliation, partnership, joint venture, accountable care organization, parent corporation, management services organization, or other organization;

   • The transaction involves the formation of a new Health Care Entity, affiliation, partnership, joint venture, or parent corporation for the provision of health services in California that is projected to have at least $25 million in annual revenue at normal or stabilized levels of utilization or operation, or have control of assets related to the provision of health care services valued at $25 million or more;

   • The transaction involves a Health Care Entity joining, merging, or affiliating with another Health Care Entity, affiliation, partnership, joint venture, or parent corporation related to the provision of health care services where any Health Care Entity has at least $10 million in annual revenue. For purposes of this provision, a clinical affiliation does not include a collaboration on clinical trials or graduate medical education programs;

   • The transaction changes the form of ownership of a Health Care Entity that is a party to the transaction, including but not limited to a change from a physician-owned to private equity-owned and publicly held to a privately held form of ownership; or

   • A Health Care Entity that is a party to the transaction has consummated any transaction regarding provision of health care services in California with another party to the transaction within ten years prior to the current transaction.

The proposed regulations also extend the timeline that the review process could take for applicable transactions. Specifically, if the transaction is amended or altered, the submitter shall notify OHCA within five business days of such amendment or alteration, and OHCA may require the submitter to re-notice any material changes. If OHCA decides to conduct a cost and market impact review, OHCA is allotted up to 90 days to conduct such a review, with one 45-day extension option and rights to toll the time period if requested information has not been received. Pursuant to SB 184, a transaction shall not be implemented until 60 days after OHCA issues its final report.

Rulemaking Timeline

OHCA has invited the public to submit comments on the proposed regulations during the month of August, with a public workshop scheduled on August 15, 2023 to discuss the proposed regulations and comments. However, OHCA has stated its intention to submit an emergency rulemaking package with finalized regulations in October of this year.

OHCA board members are also scheduled to meet August 23, 2023, and it is possible (and perhaps likely) that the proposed regulations (and comments thereto) will be discussed during that forum.

Implications 

The timing of the proposed regulations certainly come as no surprise to those following SB 184’s passage and the establishment of OHCA, given that the statute left many open questions regarding the scope of the agency’s review process which needed to be clarified in advance of the review process’ formal commencement next year. It remains to be seen whether any revisions or tweaks to the regulations, particularly the revenue metrics, the requirement for the submitter to describe annual revenues and provide financial statements for the prior three years for all parties to the transaction, and circumstances triggering the review process will be seriously considered by OHCA or implemented in the final regulations. Nevertheless, if the existing text (or similar text) of the proposed regulations becomes finalized, OHCA will certainly stand to have the authority to review (and potentially delay or impede) a broad range of healthcare transactions in the state.

As this process plays out over the coming weeks and months, we will keep our readers posted regarding developments. As a related matter, we also look forward to reviewing and analyzing any developments from OHCA regarding its mandate to develop a statewide cost growth target methodology, from which cost growth targets for each year will be set.