California: Health Care Transactions “Material Change” Regulations are Finalized
In late December, the California Office of Health Care Affordability (OHCA) issued final regulations for the new material change transactions filing process, which goes into effect this year. (22 Cal. Code of Regs. §§ 97431-97442.) Section 97435(c) identifies eight types of material change transactions that will require filing, discussed in more detail below.
Health care entities contemplating mergers, acquisitions, and other transactions in California have been anxiously waiting for OHCA to issue final regulations on this new regulatory approval process. SB 184 was passed by the California legislature in June of 2022, and requires health care entities to provide a 90-day pre-closing notice to OHCA of any proposed merger, acquisition, corporate affiliation, or other transaction that will result in a material change to the ownership, operations, or governance structure of a health care entity. We previously summarized the Health Care Quality and Affordability Act (HCQAA) here and the initial draft of OHCA regulations here. OHCA issued further proposed regulations in November, and these final regulations were published at the end of December.
What Changed in the Final Regulations?
The final regulations include several updates that will assist health care entities working through the new OHCA regulatory process.
Management Services Organizations. One key change in the final regulations was the removal of a reference to “management service organizations” from the definition of a “health care entity” that is subject to the statute. The HCQAA defines a health care entity subject to the pre-closing filing requirement as a payer, provider, or a fully integrated health system. The implementing regulations expand the definition of a health care entity to include pharmacy benefit managers and certain parents, affiliates or subsidiaries of a payer. Prior drafts of the regulations also included management services organizations in the definition of a “payer,” but this concept was removed from the final regulations. While health care management service organizations are not directly subject to the regulatory review process, health care entities that enter into a management arrangement may still be required to file an OHCA notice if the arrangement with a management services organization is considered a “material change transaction.”
Material Change Transactions Defined. The final regulations also removed two types of arrangements from the types of “material change transactions” that trigger a filing obligation. Health care entities that are subject to the statute are required to file a pre-closing notice if they are engaging in a “material change transaction.” A “material change transaction” is defined in the statute, and was expanded upon in the regulation to include a host of transactions or arrangements that would trigger a filing. Prior drafts of the regulations required a filing if health care entities were to join, merge, or affiliate with another health care entity, affiliation, partnership, joint venture, or parent corporation related to the provision of health care services where any health care entity had at least $10 million in annual California-derived revenue. Prior drafts of the regulations also required notice of transactions which would change the form of ownership of a health care entity that is a party to the transaction, including a change from a physician-owned to “private equity-owned” entity or a publicly held to a “privately held” form of ownership. The final regulations deleted these two circumstances from the list of transactions that require a filing. Note, however, that the formation of a new health care entity, affiliation, partnership, joint venture, or parent corporation for the provision of health care services that is projected to have at least $25 million in California-derived annual revenue or the transfer of control of $25 million in assets will require a filing. This means that health care entities have more flexibility to continue to explore joint venture arrangements of less than $10 million, or private equity investment opportunities, so long as the transaction doesn’t trigger another concept in the definition of a material change transaction.
Health Care Entities Required to File. The final regulations also revised references to the type of health care entity that is required to submit a filing, which narrows the potential circumstances that will require a filing. Prior drafts of the regulations suggested that a filing would need to occur if a transaction involved a health care entity and required a notice of transactions involving the sale or disposition of 25% or more of the total California assets of any health care entity in the transaction. The final regulations changed this obligation to the sale or disposition of 25% or more of the assets of the submitter. This could include either the health care entity that is the buyer or the seller in the transaction.
Key Concepts Remain
The final regulations provide further clarification to California health care entities entering into material transactions, but the key concepts of the enabling statute remain unchanged. Health care entities that are entering into material change transactions closing on or after April 1, 2024, are required to file a pre-closing notice with OHCA, and the transactions may be subject to a cost and market impact review process. Whether a particular transaction will require pre-closing review will depend on the type of health care entity involved, and whether the structure of the transaction is considered a material change that requires a filing.
Want To Learn More?
- California: Health Care M&A Market Heats up as New Regulator Takes a Closer Look
- California: Proposed Regulations Impacting the M&A Market in California
- Health Care Joint Ventures: What’s the Big Deal?
Foley is here to help you address the short and long-term impacts in the wake of regulatory changes. We have the resources to help you navigate these and other important legal considerations related to business operations and industry-specific issues. Please reach out to the authors, your Foley relationship partner, or to our Health Care Practice Group with any questions.
