On June 30, 2022, California Governor Gavin Newsom signed SB-184 into law, which, among other things, created a new Office of Health Care Affordability (OHCA) within the CA Department of Health Care Access and Information.
OHCA has a wide range of responsibilities relating to its mandate to "…be responsible for analyzing the health care market for cost trends and drivers of spending, developing data-informed policies for lowering health care costs for consumers and purchasers, creating a state strategy for controlling the cost of health care and ensuring affordability for consumers and purchasers, and enforcing cost targets."[1]
One of the most notable of OHCA's authorities is its responsibility to "[r]eview and evaluate consolidation, market power, and other market failures through cost and market impact reviews of mergers, acquisitions, or corporate affiliations involving health care service plans, health insurers, hospitals, physician organizations, pharmacy benefit managers, and other health care entities."[2]
These advance or pre-closing regulatory reviews of transactions (each, an "OHCA Transaction Review") are slated to begin on April 1, 2024. OHCA will start accepting transaction notices required by the statute in January of 2024.[3]
Certain Health Care Entities Are Subject to Transaction Reviews
The statute defines "Health Care Entity" as a "payer, provider, or a fully integrated delivery system," which generally includes health care service plans, health insurers, hospitals, hospital systems, pharmacy benefit managers, physician organizations (with more than 25 physicians), other providers (e.g., ASCs, certain clinics, clinical labs, imaging facilities, and other health facilities), and other payers.[4]
There are also other types of providers and health care services that are not subject to the review process because they are not deemed to be Health Care Entities. These include dentists, pharmacies, drug manufacturers, durable medical equipment suppliers, home health agencies, and emergency medical transportation service providers.
It is important to note that providers and health care services that are initially exempt from review may still end up subject to review if they are acquired by, or become affiliated with, an entity that is subject to an OHCA Transaction Review.
Certain Transactions Are Subject to OHCA Transaction Reviews
Health Care Entities must provide OHCA written notice of any agreements or transactions that will occur on or after April 1, 2024, at least 90 days prior to entering into such agreement or transaction (Notice Requirement),[5] if the Health Care Entity plans to (a) sell, transfer, lease, exchange, option, encumber, convey, or otherwise dispose of a material amount of its assets to one or more entities; or (b) transfer control, responsibility, or governance of a material amount of the assets or operations of the health care entity to one or more entities.[6]
OHCA is expected to promulgate regulations that will provide additional detail on types of transactions subject to review and any qualifying factors, such as thresholds for annual gross and net revenues and market share in a given service or region.
Within 60 days of receipt of the Notice Requirement by the Health Care Entity, OHCA will either (a) advise the noticing party that OHCA will conduct a cost and market impact review; or (b) provide a written waiver from the review. An agreement or transaction subject to a cost and market impact review cannot proceed until 60 days after OHCA issues a final report.[7]
Preparing for Transaction Reviews
We are still awaiting the implementation of OHCA's regulations, which we anticipate seeing in mid-2023. Analyzing the specificity provided by the regulations will give interested parties a better understanding of the guardrails. We will update this alert when there is more information available.
Even without the implementing regulations, the statute provides a foundational understanding of which health care stakeholders will be subject to OHCA Transaction Reviews and who will be exempt. At minimum, those entities subject to potential reviews must plan to (a) provide appropriate notice to OHCA regarding their transactions and (b) anticipate a likely executory period required for OHCA to perform its analysis and issue a subsequent report; such executory period may be expressly accommodated between the signing and closing of any relevant purchase agreement.
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If you have further questions about the upcoming implantation of health care transaction reviews in California or need assistance with health care-related matters in general, please feel free to contact any member of our health care team or your Venable relationship attorney.
[1] CA Health and Safety Code §127501(b).
[2] CA Health and Safety Code §127501(c)(12).
[3] CA Health and Safety Code §127507(c).
[4] CA Health and Safety Code §127500.2(k).
[5] CA Health and Safety Code §127507(c)(2).
[6] CA Health and Safety Code §127507(c)(1)(A)-(B).
[7] CA Health and Safety Code §127507.2.(a)(3).