As we anticipated in our previous blog article, the Office of Health Care Affordability (OHCA) made revisions to its proposed regulations following the public workshop hosted by the California Department of Health Care Access and Information (HCAI) in August. On October 9, 2023, HCAI and OHCA published a revised draft of the regulations. Our August blog article outlined the substance of the original draft regulations; this article summarizes the critical takeaways regarding the revisions.
Noteworthy Takeaways and Revisions
OHCA made modest revisions to the regulations, some of which seemingly sought to address concerns raised by commenters in the public workshop. The aim of the regulations remains substantially the same, which is to require certain “health care entities” (“HCEs”), which are defined primarily to include providers and payors, to submit a detailed notice in advance of certain transactions and await a decision by OHCA to conduct a cost and market impact review (“CMIR”). The following highlights important changes and unaltered portions of the rules:
- Scope of Regulated Parties and Transactions
Multiple commenters at the public workshop criticized the broad scope of the regulations, especially for including management services organizations (“MSOs”) in the definition of an HCE. The revised draft regulations removed the mention of MSOs from the definition, but it is still possible for an MSO to fall within the scope of the regulations if the MSO independently meets the revised definition of an HCE.
OHCA also revised the definition of a “material change transaction,” perhaps in response to concerns raised by some commenters that the original definition would have seemed to implicate routine or ordinary course transactions. Now, the revised regulations use the definition under Section 127500.2 of the California Health and Safety Code, and explicitly carve out the following from the definition:
- “transactions in the usual and regular course of business” and
- situations in which the HCE already directly or indirectly controls or shares common control with all other parties to the transaction.
Under the regulations, HCEs subject to the notice requirements must meet at least one revenue or service area threshold. OHCA made a few tweaks to the proposed thresholds, including to limit the health professional shortage area threshold to only HCEs located in a designated mental health or primary care health professional shortage area rather than those HCEs serving patients residing in a health professional shortage area.
Notably, however, OHCA retained most of the transactional circumstances requiring a filing, including transactions for which the fair market value is $25 million or more.
- Distressed Hospitals and Other Distressed Assets
OHCA appears to have been responsive to commenters who expressed concern that OHCA’s review timeline could prevent distressed businesses and healthcare assets from obtaining financial help. The revised draft regulations contemplate an expedited review process, which is available by request if an HCE sufficiently demonstrates expedited review is warranted due to either (1) severe financial distress of one or more of the parties, or (2) significant reduction in the provision of critical health care services within a geographic area. The expedited process will not be available for most transactions, as it requires the parties to essentially be approaching bankruptcy or insolvency to qualify. OHCA also does not specify the timeframe for expedited review or provide any meaningful comparison to the ordinary review timeframe, as further described below.
- Consideration of “Material Change Transactions” and CMIR
Generally speaking, OHCA appears to have taken a light touch in terms of revisions to the standards regarding which transactions will warrant a CMIR. Indeed, OHCA did not revise the rules to require the consideration of potential benefits of a transaction, as requested by some commenters. However, it did incorporate certain comments on the criteria for deciding whether to conduct a CMIR. Specifically, it added factors related to the transaction’s: (i) potential negative impacts on the labor market; (ii) furthering of a trend toward consolidation; (iii) ability to generate a dominant market position; and (iv) if between an HCE in California and an out of state entity, the effect on affordability, quality, or access to services or to the financial stability of the California HCE.
- Timing Considerations, Reporting Requirements and Fees
There are multiple components to the timeline for review of any transaction that falls within the scope of OHCA’s regulations, and for the most part, the revised regulations (apart from the limited expedited review process highlighted above) do not fundamentally change the timeline framework. An HCE must provide notice at least 90 days prior to the transaction’s closing date, if expected to be on or after April 1, 2024. Then, within 60 days after a complete notice, OHCA will share its decision whether to conduct a CMIR. This period may extend past 60 days because OHCA may toll the time period during any time it waits on an HCE for information it has requested, or while another state or federal agency reviews the transaction. Assuming the HCE does not challenge the determination about whether to conduct a CMIR, OHCA shall complete the CMIR within 90 days. Similar to the initial decision, this is not a hard deadline, as the 90 day period may be extended by up to 45 days if additional time is needed.
If all goes according to plan, and OHCA does not toll its clock at any point throughout the notice and review process, the CMIR will be completed between 60 and 105 days after the anticipated closing date. To further complicate this calendar of events, in cases where multiple parties to a transaction must submit notice, the “clock” will not begin until all parties have submitted effective notice.
Aside from the cost associated with potentially serious delays in consummating a transaction, the reporting requirements for the regulations are extensive. Entities considering a transaction with a target closing date anywhere near April 1, 2024 should be prepared to deploy considerable time and resources to meet the reporting requirements contemplated in OHCA’s regulations, assuming this latest draft becomes finalized.
The draft regulations require certain documents to be submitted with the initial. These include certified (i.e., audited, if routinely prepared by the entity) financial statements, contact information for those responsible for the transaction, corporate organizational documents, agreements related to the transaction, and any pro forma post-transaction balance sheet for any surviving entity. The revised draft also requires documentation related to the valuation of the transaction and documentation that identifies the number of patients or enrollees per zip code in the last year to this list.
The revisions to the draft regulations appear to be responsive to some of the concerns raised by commentors following the release of the initial draft. Nonetheless, these revisions likely do not satisfy all concerns (and may not satisfy the core concerns), particularly given that there is still a considerable amount of ambiguity related to OHCA’s review standards, timelines to conduct a CMIR, and the definitions and criteria which bring many parties within the scope of these regulations. Such ambiguity could lead to litigation and challenges to the regulations if parties feel OHCA gives disparate results in similar transactions. Concerns have also been raised that the breadth of the regulations could deter parties from entering transactions otherwise desirable for their potential cost-savings, such as those aiming to achieve value-based reimbursement. Similarly, there are concerns that the broad scope of the regulations could also chill transactions that do not impact affordability, including vendor contracting that falls outside of the regular course of business, smaller private equity investments, and emerging technology deals.
The revised regulations have yet to be finalized, so further changes by OHCA are possible. OHCA aims to submit the final regulations as a part of an emergency rulemaking action in November, following its next board meeting on October 24. We will keep our readers posted on any developments and share our key takeaways in the coming weeks, once the final regulations are issued. Stay tuned . . .