California: Health Care M&A Market Heats up as New Regulator Takes a Closer Look

California health care entities can expect increased scrutiny of future mergers, acquisitions, and other transactions following the passage of the California Health Care Quality and Affordability Act (HCQAA). Effective April 1, 2024, a newly minted regulatory agency will review certain California health care deals for their impact on market competition and health care prices prior to closing. Any health care entity considering a significant transaction in California should seek legal advice before attempting to navigate this new, complex, and potentially costly regulatory regime.

The HCQAA – signed into law on June 20, 2022 as part of Senate Bill No. 184 – establishes the Office of Health Care Affordability ( OHCA). OHCA is tasked with combatting rising health care costs and promoting competition in the California health care market. Included in OHCA’s broad grant of authority is the power to investigate anti-competitive consolidation among health care entities, which the California legislature has identified as a primary driver of escalating health care costs in the state.

To this end, California health care entities will be required to provide ninety days prior written 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. Health care entities that are subject to this obligation include payors, providers, and fully integrated delivery systems.  A “material change” is defined as any change in ownership, operations, or governance for a health care entity, involving a material amount of assets of a health care entity.  Transactions subject to this obligation include transactions that occur on or after April 1, 2024 that: (a) involve the sale, transfer, lease, exchange, option, encumbrance, conveyance or other dispensation of a material amount of the assets of a health care entity; 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.  There are several types of transactions that do not require notice, including transactions that are subject to comparable regulatory oversight from the Department of Insurance or Department of Managed Health Care, certain nonprofit organization transactions, and agreements or transactions where a county is taking control of an entity.

If, based on the written notice, OHCA determines that the transaction threatens market competition or health care affordability, it will conduct a “cost and market impact review”, as described in further detail below. OHCA will then publish its findings in a publicly-available report detailing the transaction’s anticipated impact on the health care market. It may also refer its findings to the Attorney General for further review of any OHCA identified anticompetitive behavior discovered during the review process.

The specifics of OHCA review and reporting process will be implemented are pending further rulemaking. But based on the timelines, investigatory powers, and potential costs set forth in the HCQAA, OHCA cost and impact reviews are likely to play a significant role in health care  transactions going forward.

Below is an estimated timeline of the OHCA review process:

Timeline of a deal subject to OHCA cost and market impact review

1. At least 90 days before entering into the agreement or transaction, the health care entity must submit written notice of the transaction to OHCA. OHCA will evaluate the notice and determine if the transaction poses a significant risk to market competition or consumer costs.
2. Within 60 days of receiving a notice of material change, OHCA will inform the health care entity whether it will conduct a cost and market impact review.
   • If chooses to conduct a review, OHCA will make the notice of material change publicly available, including all information and materials submitted to OHCA for review.
   • The agreement cannot proceed unless the OHCA has issued a waiver or a final report of the transaction.
3. The OHCA conducts a cost and market impact review of the transaction.
   • Factors considered during the review will include:
     • Changes in the health care entity’s size and relative market share in a given service or geographic region
     • The health care entity’s prices for services compared to other providers of the same services
     • The potential benefits for consumers arising from the transaction, as proposed by the health care entity
     • Quality, equity, cost, access, or any other factors the OHCA determines to be in the public interest
   • During the review, OHCA has broad investigatory authority, including the power to subpoena the health care entity and other relevant market participants for data and documents related to the transaction and to the entity’s general operations.
   • OHCA may contract with experts or consultants to assist in reviewing the proposed transaction.
   • The health care entity must reimburse the OHCA for all actual, reasonable, and direct costs incurred during the review process.
4. Upon conclusion of the review, OHCA will issue a publicly available preliminary report, including its findings of fact.
5. Comment period, during which the affected parties and the public may respond in writing to the findings in the preliminary report.
6. OHCA publishes a final report, incorporating public comments from the preliminary report.
   • While OHCA is required to keep confidential all nonpublic information and documents obtained during the review process, it may nonetheless disclose nonpublic information in preliminary and final reports if it believes that doing so is in the public interest, after taking into account any privacy, trade secret, or anticompetitive considerations.¹
7. OHCA refers its finding to the Attorney General for further review of any unfair methods of competition, anticompetitive behavior, or anticompetitive effects discovered during the review process, if any.

Without more concrete guidance from OHCA regarding timelines for the review and reporting phases, it is difficult to predict exactly how long the process may take. But given the complexity of the subject matter and the breadth of OHCA’s investigatory authority, it could be several months or even a year from the time that a notice of material change is given to the publication of the final report when OHCA decides to perform a cost and market impact review.

This change in California follows recent steps taken in a number of other states to regulate health care transactions, including Oregon, Nevada and Massachusetts. 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.