Starting in April 2024, California Joins Growing Trend of Implementing Advance Review Processes for Healthcare Transactions

With the passage of SB-184 (the “Bill”), California — like Maine, New York, and several other states — has addressed “pervasive” mergers and acquisitions across the healthcare industry by requiring prior notice to regulators of certain healthcare transactions. To this end, the Bill establishes the Office of Health Care Affordability (“OHCA”) to monitor cost trends by conducting research and studies on the healthcare market, including the impact of consolidation, market power, venture capital activity, profit margins, and other market affects on competition, prices, access, quality, and equity. Among other things, OHCA will be tasked with advance (pre-closing) reviews of certain healthcare transactions, which may result in significant delays, increased transaction costs, confidentiality concerns, and heightened regulatory enforcement with respect to such transactions.

I. Overview of OHCA Review Process and Timeline

To facilitate OHCA’s advance review, the Bill requires “health care entities” to provide at least 90 days’ prior notice of certain healthcare transactions occurring on or after April 1, 2024. With certain exceptions, the healthcare entities subject to this notice requirement include healthcare service plans, health insurers, hospitals, health systems, fully integrated delivery systems, pharmacy benefit managers, physician practices with more than 25 physicians, other providers (e.g., ASCs (ambulatory surgery centers), certain clinics, clinical labs, imaging facilities, and other health facilities), and other payors. Such healthcare entities must generally provide notice of transactions involving a change to ownership, operations, or governance structure, including specifically transactions that will result in:

1. the sale, transfer, lease, exchange, option, encumbrance, conveyance, or other disposal of a material amount of assets; or
2. the transfer of control, responsibility, or governance of a material amount of assets or operations of a healthcare entity.

Certain transactions currently subject to review by the Department of Managed Health Care, the Department of Insurance, the California Attorney General, and those in which a California county is acquiring an entity to ensure continued access to care are exempt from the advance notice requirement. Notably, however, these notice-exempt arrangements may still be referred to OHCA for a cost and market impact review by the applicable governing agency.

Sixty days following receipt of the advance notice, OHCA must advise the noticing healthcare entity (1) of its determination to conduct a cost and market impact review or (2) provide a written waiver from the review. If OHCA determines that a transaction is likely to result in significant impact on market competition, California’s ability to meet cost targets, or costs for purchasers and consumers, it will conduct a cost and market impact review examining factors relating to the healthcare entity’s business and its relative market position, including changes in size and market share in a given service or geographic region; prices for services compared to other providers for the same services, quality, equity, cost, or access; or other factors OHCA determines to be in the public interest.

If OHCA decides to conduct a cost and market impact review, it will issue a public preliminary report of its findings; after allowing the parties and the public an opportunity to comment, OHCA will issue its final report.

Transactions are not permitted to close until (1) OHCA waives the cost and market impact review or (2) 60 days after OHCA issues its final report.

The timeline prescribed by the Bill will significantly delay transactions because OHCA has 60 days to determine whether it will conduct a cost and market impact review; transactions may not close until 60 days after OHCA issues its final report; and, notably, the Bill does not limit the time frame for OHCA to complete its review. The Bill specifically permits OHCA to adopt regulations to expedite the prescribed timelines based on the nature of transactions; however, no such regulations have been promulgated.

In addition to the risk of long delays, costs of healthcare transactions that are subject to OHCA’s review may increase as well. OHCA will be entitled to prompt reimbursement from reviewed healthcare entities for all costs incurred by OHCA in conducting its review. Such costs may be significant, because OHCA has the authority to contract with experts and consultants to assist in its review.

II. Confidentiality Concerns

Further, OHCA’s collaboration with other California regulatory agencies, as well as its public review process, are cause for confidentiality concerns. While OHCA is generally subject to confidentiality obligations with respect to certain nonpublic information and documents submitted in connection with the advance notice, OHCA is free to share all confidential information and documents obtained with the California Attorney General — without the consent of the source of such information. In addition, after providing the source of the information an opportunity to object, OHCA may include such confidential information in its public preliminary and final reports if it believes disclosure should be made in the public interest (after taking into account any privacy, trade secret, or anticompetitive considerations). Although confidential information and documents obtained by OHCA are not subject to disclosure pursuant to the California Public Records Act, the broad exceptions to OHCA’s confidentiality obligations are troublesome for parties involved in transactions subject to review.

As described above, in the event that OHCA decides to conduct a cost and market impact review, the prescribed review process requires OHCA to issue preliminary and final reports to the public, and transactions subject to review may not be closed until 60 days after OHCA issues its final report. Therefore, reviewed transactions will be disclosed to the public significantly earlier than the transaction parties may otherwise prefer, for various reasons.

III. Potential for Increased Regulatory Enforcement

OHCA’s role in promoting competitive healthcare markets by examining certain healthcare transactions is expressly supplemental to the efforts of the California Attorney General, Department of Managed Health Care, and Department of Insurance. The Bill expands the broad range of subjected healthcare transactions, adding a layer of review and enforcement on top of the already complex and burdensome oversight of healthcare regulatory licensing and transactions in California. For example, while OHCA itself does not have the authority to block subject transactions, OHCA may refer its findings, including documents gathered and data analysis performed, to the California Attorney General for further review for unfair methods of competition, anticompetitive behavior, or anticompetitive effects. In addition, as mentioned above, transactions that are expressly exempted from OHCA review under the Bill may be referred to OHCA for a cost and market impact review by such transactions’ applicable reviewing authority.

OHCA’s broad authority to review numerous healthcare transactions, including by conducting investigations with subpoena power, in support of other oversight and enforcement authorities may result in heightened regulatory enforcement going forward.

IV. Conclusion

With the passage of the Bill, California joins a growing number of states that have adopted advance notice or approval requirements with respect to certain healthcare transactions. While we await regulations to provide additional detail on OHCA’s review process, the Bill represents a significant hurdle for future California healthcare transactions. Healthcare entities considering transactions in California would be well advised to seek counsel who are experienced in navigating such hurdles.