In May, we wrote about the recent trend of state level review of major healthcare transactions vis-à-vis New York’s new legislation requiring 30-day notice to relevant state authorities of certain transactions of at least $25 million (“New York Legislation”). On July 27, 2023, California released draft regulations similar to New York’s, whereby “material” transactions in the healthcare space of at least $25 million requires certain enumerated “health care entities” to comply with a 90-day notice requirement to California’s Office of Health Care Affordability (“COHCA”) (“Draft Regulations”). California’s Draft Regulations, scheduled to take effect on January 1, 2024, cover more types of transactions and require more categories of disclosure than the New York Legislation, imposing consequential notice and review requirements. This article details important requirements for private equity firms, and other investors engaging in “material” healthcare transactions in California and the lenders who finance them, and highlights key differences between the California Draft Regulations and the New York Legislation.
Defining a “Health Care Entity”
The Draft Regulations define “health care entity” as payers (including management service organizations (“MSOs”)), providers, and fully integrated delivery systems (“network[s] that link various healthcare providers to provide a coordinated, vertical continuum of service”). Notably, unlike the similar New York Legislation, California’s version captures insurers and Pharmacy Benefit Managers (“PBMs”), greatly expanding the number of potential transactions around which notice will need to be provided.
Who Must File Notice?
The Draft Regulations require an entity to provide notice to COHCA if two conditions are met: a transaction must (1) meet certain dollar threshold requirements and (2) affect a “material change.”
The dollar threshold requirements include a “health care entity”:
- With annual California-derived revenue or California assets of at least $25 million;
- With annual California-derived revenue or California assets of at least $10 million and is involved in a transaction with an entity with annual revenue or California assets of at least $25 million; or
- Located in or serving at least 50% of patients who reside in a “health professional shortage area,” as defined by Federal regulations.
“Material change” is defined as any of the following nine enumerated conditions, with limited exceptions:
- The proposed fair market value of the transaction is or exceeds $25 million;
- The transaction is likely to increase the annual revenue of any health care entity that is a party to the transaction by at least $10 million or 20% of annual revenue;
- 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 submitting party;
- The terms of the transaction contemplate an entity negotiating or administering contracts with payers 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 or have control of assets valued at $25 million or more;
- The transaction involves a health care entity joining, merging, or affiliating with another health care entity where any health care entity has at least $10 million in annual revenue;
- The transaction changes the form of ownership of a health care entity that is a party to the transaction to, for example, a “private equity-owned” entity; or
- The transaction involves a health care entity that has consummated any transaction regarding provision of health care services in California within the preceding 10 years.
If a transaction triggers the Draft Regulations, a health care entity must comply with extensive notice requirements, including submitting to COHCA narrative responses regarding the transaction and certain supporting documentation.
Regarding the narrative responses, a health care entity must provide, in part, (i) general information including business name, mailing address, and description of the organization; (ii) counties served by the submitter; (iii) other states served by the submitter; (iv) primary languages used by all health care entities in the transaction when providing services to Medi-Cal beneficiaries; (v) description of all other entities involved in the transaction; (vi) proposed date of transaction closure; (vii) description of the transaction, including summary of terms, the necessity of the transaction, public impact, and competitive impact; and (viii) a description of current services provided and expected impacts on these services.
A health care entity must also submit certain documentation, including, in part, (i) copies of all current agreements and term sheets related to the proposal; (ii) org charts; (iii) three years of certified financial statements; (iv) articles of organizations or incorporation, bylaws, partnership agreements, or other corporate governance documents; (v) copies of FTC Premerger Notification, if applicable; and (vi) any documentation supporting submitter’s responses to the narrative answers.
While all responses are publicly posted to COHCA’s website, certain information is automatically withheld from disclosure as confidential or can be designated confidential upon a submitter’s request. Because the information is public, state and federal enforcement authorities will have access to deal details, creating new risks of enforcement scrutiny for California-based transactions.
Once a filing is deemed complete, as part of its review process, COHCA may conduct a “Cost and Market Impact Review” (“Impact Review”) if it determines that any one or more of the following factors exist: the transaction may (i) negatively impact the availability or accessibility of health care services; (ii) result in negative impact on costs for payers, purchasers or consumers; (iii) lessen competition or create a geographic monopoly; (iv) directly affect a general acute care or specialty hospital; (v) negatively impact quality of care; or (vi) increase the price of health care services or limit access in California if the transaction involves an out-of-state entity.
The Draft Regulations provide COHCA with 60 days after receiving a notice of material change to decide whether to conduct the Impact Review. If COHCA conducts an Impact Review, it has 90 days to issue a preliminary report, with an optional unilateral COHCA-initiated 45-day extension should COHCA require additional time to review. Following release of the preliminary report, a 10-business day comment period begins, after which COHCA has 30 days to issue a final report of findings, unless it extends the time period for good cause. The Impact Review process—from notice of a material change to issuance of a final report—can take upwards of eight months.
California’s Draft Regulations create new costs and delays for healthcare investors and their lenders, and at worse potential barriers for private equity firms and other investors consummating transactions in the health care space. It is vital to analyze potential transactions to identify those triggering the Draft Regulations, and – where triggered – analyzing the transaction in view of the disclosures required, considering specifically the responses to be provided, the potential enforcement perspective on the transaction, and any resulting impact to transaction timing and value. Our team of seasoned Paul Hastings lawyers and consultants are available to assist in navigating this ever evolving state and federal regulatory space.
- NY Pub. Health L. § 4550
- See 22 CCR §§ 97431 et seq.
- 22 CCR § 97435(a)
- Expressly excluded from this definition are physician organizations with 25 or fewer physicians. See 22 CCR § 97431(g)(5)
- 22 CCR §§ 97431(g); Cal. Health & Safety Code § 127501(c)(12); see Alain C. Enthoven, Integrated delivery systems: the cure for fragmentation, 15 Am. J. Manag. Care S284 (Dec. 2009), https://pubmed.ncbi.nlm.nih.gov/20088632/
- 22 CCR § 97435(b)
- See, e.g., 22 CCR § 97435(f) (exempting a health care entity if it “directly, or indirectly through one or more intermediaries, already controls, is controlled by, or is under common control with, all other parties to the transaction, such as a corporate restructuring”)
- 22 CCR § 97435(c)
- 22 CCR § 97439(b)
- 22 CCR § 97439(c)
- 22 CCR §§ 97439(a), (b), (d)
- 22 CCR § 97441(a)
- 22 CCR §§ 97441(d), (f)(1)
- 22 CCR §§ 97441(f)(2), (g)
- 22 CCR § 97441(d)(1)
The Editorial Team at Healthcare Business Today is made up of skilled healthcare writers and experts, led by our managing editor, Daniel Casciato, who has over 25 years of experience in healthcare writing. Since 1998, we have produced compelling and informative content for numerous publications, establishing ourselves as a trusted resource for health and wellness information. We offer readers access to fresh health, medicine, science, and technology developments and the latest in patient news, emphasizing how these developments affect our lives.