The Health Law Ticker

California’s new Office of Health Care Affordability recently adopted emergency regulations (Final Regulations) implementing the Health Care Market Oversight Program, required under California’s Health Care Quality and Affordability Act (HCQAA). HCQAA, which created the Office of Health Care Affordability (OHCA), requires “health care entities” to provide written notice of certain “material change transactions” to OHCA. (Cal. Health & Safety Code § 127500 et seq.) OHCA may then conduct a cost and market impact review (CMIR), with the overarching goal of combatting rising health care costs and promoting market competition among health care entities.

HCQAA specifically directs OHCA to adopt emergency regulations necessary to conduct CMIRs. After several rounds of soliciting public feedback and publishing draft regulations, OHCA adopted the Final Regulations on November 28, 2023. California’s Office of Administrative Law (OAL) approved the Final Regulations on December 18, 2023, with an immediate effective date. The Final Regulations will remain in effect for five years, while OHCA works to establish permanent regulations to take effect thereafter.

A summary of the Final Regulations is provided below. Health care entities who are parties to transactions closing on or after April 1, 2024, should review the Final Regulations in detail to ensure an understanding of their obligations.

Notice Requirements

HCQAA requires that a “health care entity” provide OHCA with written notice of “agreements or transactions that will occur on or after April 1, 2024” and that either (1) “Sell, transfer, lease, exchange, option, encumber, convey, or otherwise dispose of a material amount of its assets to one or more entities”; or (2) “Transfer control, responsibility, or governance of a material amount of the assets or operations of the health care entity to one or more entities.” (Cal. Health & Safety §127507, subd. (g).) 

The obligation to report a transaction is based on two factors: (1) whether a party is a qualifying “health care entity” meeting certain threshold criteria; and (2) whether the transaction itself constitutes a “material change transaction.” The Final Regulations clarify both the type of health care entities as well as the types of transactions that are subject to notice obligations.

“Health Care Entity”

The Final Regulations expand HCQAA’s definition of a “health care entity” to include pharmacy benefit managers. Also included are “parents, affiliates, or subsidiaries” that act in California on behalf of a payer and either (1) control, govern or are financially responsible for the health care entity or are subject to the control, governance, or financial control of the health care entity; or (2) in the case of a subsidiary, are a subsidiary acting on behalf of another subsidiary. (22 CCR § 97431, subd. (b).) These entities are included as qualifying health care entities because when they engage in covered transactions, they are “just as likely in OHCA’s view to affect affordability, access, and equity.” (Finding of Emergency and Notice of Proposed Emergency Regulations, OHCA, 11/2023.) The definition reaching related entities also helps ensure OHCA can review material change transactions in which a health care entity uses affiliated entities, which may not appear to be health care entities in themselves, in order to complete a transaction and otherwise avoid compliance with the notice filing requirements. (Ibid.)

Specifically excluded from the definition of a “health care entity” are physician organizations with less than 25 physicians, unless the organization is determined to be a high-cost outlier under HCQAA. Notably, a qualifying health care entity, entering into a “material change transaction” with a non-qualifying physician organization, is still required to report the transaction to OHCA. 

Each qualifying health care entity must file its own written notice for a covered transaction; if multiple health care entities to a transaction meet the qualifying requirements, multiple notices should be filed with OHCA.

Threshold Requirements

A “health care entity” must also meet certain threshold requirements in order to be subject to written notice obligations:

• Annual revenue of at least $25 million or control of at least $25 million in California assets;
• Annual revenue of at least $10 million or control of at least $10 million in California assets and party to a transaction with any health care entity with at least $25 million in revenue or California assets; or
• Located in a designated mental health or primary care health professional shortage area in California.

(22 CCR § 97435, subd. (b).) The Final Regulations define “revenue” as the “total average annual California-derived revenue received for all health care services by the submitter and all affiliates over the three most recent fiscal years.” (22 CCR 97435, subd. (d).) OHCA limited the term specifically to California-derived revenue, because it is focused on impacts within the state, rather than nationally, and it chose to encompass the “three most recent fiscal years” to account for external factors impacting the entity, such as a global pandemic or recession. (Finding of Emergency and Notice of Proposed Emergency Regulations, OHCA, 11/2023.)

"Material Change Transaction”

Once a health care entity has determined it meets any of the thresholds outlined above, it must evaluate whether the transaction, to which it is a party, is considered a “material change transaction” subject to notice obligations. Specifically, a “material change transaction” must meet one or more of eight circumstances:

• The proposed fair market value of the transaction is $25 million or more and concerns the provision of health care services;
• The transaction will “more likely than not” increase annual California-derived revenue of a health care entity to the transaction by either $10 million or more or 20% of annual California-derived revenue;
• The transaction involves the sale, transfer, lease, exchange or other disposition of 25% or more of the total California assets of the submitter(s);
• The transaction involves the transfer of control or governance, in whole or in part, of the submitter;
• The transaction will result in an entity contracting with payers on behalf of consolidated or combined providers and is “more likely than not” to increase the annual California-derived revenue of any providers in the transaction by at least $10 million or more or by 20% or more of annual California-derived revenue;
• The transaction involves the formation of a new health care entity, affiliation, partnership, joint venture, or parent corporation for the provision of health care services in California that is projected to have at least $25 million in California-derived annual revenue, or the transfer of control of California assets related to the provision of health care services valued at $25 million or more;
• The transaction is part of a series of related transactions for the same or related health care services occurring over the past 10 years involving the same or affiliated health care entities; or
• The transaction involves the acquisition of a health care entity by another entity and the acquiring entity has consummated a similar transaction in the last 10 years with an entity that provides the same or related health care services.

If a health care entity meets the required thresholds and the transaction meets a materiality circumstance, then the entity must provide written notice to OHCA 90 days prior to the transaction’s closing. Note that the Final Regulations apply only to transactions expected to close on or after April 1, 2024. (22 CCR § 97435.)

Filing of Written Notice

A qualifying health care entity must file written notice of a material change transaction under penalty of perjury and submit the notice through OHCA’s online portal. The filing entity (the “submitter”) must indicate which threshold and materiality circumstances have been met and provide a range of general information and documentation about the entity’s business and the transaction. (22 CCR § 97438, subds. (b), (c).) All submitted information will be publicly posted on OHCA’s website and treated as public record. Submitters have the option to request confidential treatment of information and documents, subject to the OHCA’s approval. (Id., subd. (d).)

Notice is deemed complete once all information is submitted by each party to the transaction who is deemed a qualifying “health care entity.” Then, OHCA will determine whether or not to conduct a Cost and Market Impact Review (CMIR) of the transaction. OHCA will make the determination based upon “any” one of nine factors, all of which contemplate whether the transaction may have a negative impact on the availability or accessibility of health care services, costs, or lessen competition or create a monopoly. (Id., § 97441, subd. (a).) The submitters of the notice may also collectively request a CMIR. (Id., subd. (b).)

Timeline for OHCA Review Process

OHCA may elect not to conduct a CMIR, in which case it will provide a written waiver within 45 days. If all parties to a transaction receive a waiver, the transaction may close without a CMIR. If, however, OHCA chooses to conduct a CMIR, it will provide notice of that decision within 60 days. (Id., § 97440, subd. (a).) The CMIR should be completed within 90 days of OHCA’s determination to conduct a review. However, the Final Regulations include several provisions allowing for an extension of this time, including a discretionary 30-day extension if needed by OHCA “to complete its review,” and tolling of the 90-day time frame while awaiting additional documentation or information. (Id., § 97442.)

The CMIR will examine specific factors relating to the health care entity’s business and its market position, including the transaction’s effect on the availability, quality, and cost of health care services and the effect on competition, as well as “[a]ny other factors” that OHCA determines to be in the “public interest”. (Id., § 97442, subd. (b).) After completing the CMIR, OHCA will then issue a preliminary report with its findings. The parties to the transaction, and the public, will have 10 business days to submit written comments in response. (Id., subd. (c).) 

Within 15 days after close of the comment period, or longer if OHCA determines there is “good cause” for an extension of this time, OHCA will issue a final report. (Id., subd. (d).) After issuance of a final report, the transaction may not close for an additional 60 days. (Cal. Health & Safety Code § 127507.2(a)(3)(A).) 

Conclusion

Health care entities that are unsure whether they must file a notice under the Final Regulations may contact OHCA at CMIR@hcai.ca.gov. Covered “material change transactions” involving qualifying health care entities may not proceed to closing without either a waiver of the CMIR requirement or completion of the review process.

OHCA began accepting notices on January 1, 2024, for transactions expected to close on or after April 1, 2024. Health care entities should review the Final Regulations, available on the California Department of Health Care Access and Information’s website Laws & Regulations - HCAI, and consult legal counsel if necessary to ensure understanding and compliance.