California’s Pre-Closing Health Care Transaction Review Regulations Take Effect: Where Did We Land?

Key Highlights:

• In the final iteration of California’s Office of Health Care Affordability pre-closing health care transaction regulations, Health Care Entities that are party to a “material change transaction” closing on or after April 1, 2024 must file a notice with the agency at least 90 days prior to closing.
• Health Care Entities include payers, providers, fully integrated delivery systems, and pharmacy benefit managers, but are no longer defined to expressly include Management Services Organizations.
• Material change transactions now include an exception for transactions occurring in the ordinary course of business or pursuant to certain corporate restructuring activities.
• Transactions occurring in a series of related transactions or by a serial acquirer may be material change transaction circumstances which require the filing of a notice.

On December 18, 2023, California’s Office of Health Care Affordability's (“OHCA” or the “Office”) highly anticipated regulations outlining the pre-closing review of certain health care transactions (the “Final Regulations”, and generally, the “Regulations”)¹ became effective. This follows a review and comment period which kicked off in July of 2023 and several revisions to the initially proposed Regulations, which we previously discussed in more detail in an earlier alert.² This article summarizes a few material changes included in the Final Regulations of which parties transacting in the health care space in California should be aware.

OHCA’s revisions clarify the scope and applicability of the Regulations, but the operative principles of the Regulations’ prior iterations remain largely unchanged. Health Care Entities (each an “HCE”) that are a party to a “material change transaction” that is expected to close on or after April 1, 2024, must file a notice with OHCA at least 90 days before such closing date (a “Notice”).³ Following receipt of a Notice, the Office may elect to perform a cost and market impact review of the subject transaction(s).⁴ While the Final Regulations function similarly to prior versions, the most material revisions impact whether an HCE or a material change transaction triggers the Regulations’ requirements.

For example, OHCA changed the scope of the HCE definition. The definition still includes payers, providers, fully integrated delivery systems, and pharmacy benefit managers. However, OHCA clarified in the revised definition that HCEs include parents, affiliates, or subsidiaries that perform the functions of an HCE, and that “control, govern, or are financially responsible for the HCE or are subject to the control, governance, or financial control” of the same.⁵ OHCA removed the reference to Management Services Organizations (“MSO”). Nevertheless, it is important to note that MSOs may still fall under the definition to the extent they are involved in transactions with other HCEs that otherwise would trigger the notice and review process.

The Final Regulations also add exemptions to the definition of a “material change transaction.” A “material change transaction” now exempts transactions in occurring in the ordinary course of business (those that are typical in the day-to-day operations of the HCE) and adds a corporate restructuring exemption for situations in which the HCE already directly (or indirectly through an intermediary) controls, is controlled by, or is under common control with, all other parties to the transaction.⁶ Further, revisions to the definition of a “transaction” clarify that subject transactions must involve a transfer, in whole or in part, of an HCE.

OHCA also added two material change transaction “circumstances” which require the filing of a Notice. The first circumstance is a roll-up transaction, which is considered a series of related transactions occurring over the past ten years and involving the same HCEs (or their affiliates).⁷ The second is a serial transaction, under which an HCE is acquired by another entity which has consummated similar transactions in the last ten years.⁸ As stated in the Health Care Affordability Board Meeting held on December 19, 2023⁹ (the “Meeting”), these additions attempt to capture material change transactions which would otherwise not be subject to notice and review requirements on an individual basis, but that may result in market dominance in the aggregate.

The Final Regulations include other various revisions which aim to foster the practical and appropriate applicability of the notice and review process. The “designated mental health” professional shortage area was deleted as a threshold for determining which HCEs must file Notice. At the Meeting, the Office noted that this threshold encompassed nearly all of California, and as such, was overly broad. Under the Final Regulations, a “transfer of control” no longer includes “a transfer of 25% or more of the governance of the management and policies of at least one health care entity that is a party to the transaction.”¹⁰ The Office noted that this provision was too difficult to quantify, but that it may be revisited following the practical application of the current transfer of control language. Also, OHCA is now obligated (rather than permitted) to toll the Notice review period under certain circumstances.

For HCEs that are considering (or are already a party to) a material change transaction expected to close on or after April 1, 2024, OHCA’s new online Notice submission platform has gone live and may be found here.¹¹ The new notice and review process will extend the transaction timeline for qualifying transactions and it is important for parties to be aware of and account for such timeframe as they enter negotiations and decide on closing dates.

If you have any questions regarding the Final Regulations, please contact your local Quarles attorney, or:

• Amy Cotton Peterson: (602) 229-5530 / amy.cottonpeterson@quarles.com
• Jonathan Howard: (602) 230-4628 / jon.howard@quarles.com
• Bailey Walden: (602) 229-5432 / bailey.walden@quarles.com
• Allie Glover: (602) 229-5204 / alexandra.glover@quarles.com
• Kiel Zillmer: (414) 277-5437 / kiel.zillmer@quarles.com

END NOTES

¹https://govt.westlaw.com/calregs/Document/I851A84A0A3C011EEBA50C25A6EAD63BF?viewType=FullText&originationContext=documenttoc&transitionType=CategoryPageItem&contextData=(sc.Default). For additional information, the “CMIR Finding of Emergency” provides a detailed summary of the purpose behind each provision in the Final Regulations: https://hcai.ca.gov/wp-content/uploads/2023/12/CMIR-Finding-of-Emergency-Updated.pdf  

²California Follows the Lead of Other States in Heightening the Scrutiny of Health Care Transactions: Quarles Law Firm, Attorneys, Lawyers

³Cal. Code Regs. tit. 22, § 97435(a)-(b)

⁴Cal. Code Regs. tit. 22, § 97441

⁵ Cal. Code Regs. tit. 22, § 97431(g)

⁶Cal. Code Regs. tit. 22, § 97431(j)(1)-(2)

⁷Cal. Code Regs. tit. 22, § 97435(c)(7)

⁸Cal. Code Regs. tit. 22, § 97435(c)(8)

⁹https://hcai.ca.gov/public-meetings/december-health-care-affordability-board-meeting/

¹⁰Cal. Code Regs. tit. 22, § 97435(e)(1)

¹¹https://ohca-mcn.hcai.ca.gov/