California Senate Bill 184 (SB 184), which was passed in June 2022, created the state Office of Health Care Affordability (OHCA) to contain healthcare spending in California.
Effective for transactions closing on or after April 1, 2024, SB 184 requires a healthcare entity (HCE) entering into a transaction that meets certain materiality thresholds to submit a regulatory filing to OHCA at least 90 days before the transaction becomes effective.
For more information regarding SB 184, see Goodwin’s previous client alert on the bill.
California’s SB 184 is one example of state healthcare transaction review laws that have taken effect in several jurisdictions. To read Goodwin alerts addressing similar laws in other jurisdictions, follow the links below:
New York Enacts Requirement for Healthcare Entities to Provide Notice of “Material Transactions”
An Emerging State Trend: Increasing Oversight of Physician Group Practice Transactions (goodwinlaw.com)
In August 2023, OHCA published draft regulations related to the review process for required regulatory filings and accepted public comments through August 31. In October and December, OHCA published revised draft regulations, each subject to a public comment period. OHCA published final regulations (the Final Regulations) on December 18, 2023. The Final Regulations:
- Establish the definition of a “health care entity” subject to the regulatory filing requirement
- Establish materiality thresholds triggering a filing obligation, based on the value of the transaction and the parties’ revenue and assets
- Describe the information that must be submitted to OHCA in connection with covered transactions
- Identify the factors OHCA takes into consideration when determining whether to conduct a cost and market impact review (CMIR)
- Establish the timeline for the CMIR process
Definition of “Health Care Entities”
Pursuant to the Final Regulations’ HCE definition, HCEs subject to SB 184’s filing requirements include the following:
- Healthcare providers, other than physician organizations with fewer than 25 physicians that are not high-cost outliers
- Healthcare payment programs, including any parents, affiliates, or subsidiaries that act in California on behalf of a payment program and control, govern, or are financially responsible for the payment program or are subject to the control, governance, or financial control of the payment program, or, in the case of a subsidiary, are a subsidiary acting on behalf of another subsidiary
- Fully integrated healthcare delivery systems
- Pharmacy benefit managers
Notably, the Final Regulations narrowed the HCE definition by excluding management services organizations (MSOs), which had been included in previous versions. While MSOs commonly used in private equity healthcare transactions are no longer explicitly mentioned, MSOs could still be subject to these requirements if they meet the HCE definition or are the owners of HCEs through MSO structures.
Material Change Transactions
The Final Regulations describe which transactions are considered “material change transactions” subject to SB 184’s regulatory filing and review requirements. The Final Regulations require HCEs to make a regulatory filing in connection with transactions that effectuate a “material change.”
An HCE must make a filing if the HCE is a party to a material change transaction and:
- The HCE has annual revenue of at least $25 million, or owns or controls at least $25 million in California assets
- The HCE is a party to a transaction with an HCE meeting the criterion above and has annual revenue of at least $10 million or owns or controls at least $10 million in California assets (note that, in this scenario, multiple parties to a single transaction may be required to make regulatory filings)
- The HCE is located in a designated mental health or primary care health professional shortage area
“Material change transactions” include:
- Transactions with a proposed fair market value of at least $25 million that concern the provision of healthcare services
- Transactions more likely than not to increase annual California-derived revenue of an HCE party by at least $10 million or 20 percent of annual California-derived revenue
- Transactions involving the sale, transfer, lease, exchange, option, encumbrance, or other disposition of at least 25 percent of the total California assets of any HCE
- Transactions contemplating the transfer of at least 25 percent of the voting power of an HCE’s governing body, or the vesting of voting rights significant enough to constitute a change of control (i.e., supermajority rights, veto rights, and similar provisions) even if ownership shares or representation on the governing body are less than 25 percent
- Transactions contemplating an entity contracting with payers on behalf of consolidated or combined providers that are more likely than not to increase the annual California-derived revenue of any providers in the transaction by at least $10 million or 20 percent of annual California-derived revenue at normal or stabilized levels of utilization or operation
- Transactions that involve the formation of a new HCE, affiliation, partnership, joint venture, or parent corporation for the provision of healthcare services in California that is projected to have at least $25 million in California-derived annual revenue (or transfer control of California assets related to the provision of healthcare services valued at $25 million or more)
Importantly, a series of transactions can require a filing in two scenarios. First, a series of two or more related transactions occurring in a 10-year span that involve the same HCE will be treated as a single transaction for determining whether a material change has occurred. Second, two or more acquisitions of HCEs occurring in a 10-year span will be treated as a single transaction, if the acquiring entity is the same and each of the acquired HCEs provides the same or related services.
If a transaction triggers SB 184's regulatory filing requirement, the covered HCE or HCEs must submit extensive information and documentation. Required information relates to ownership, revenue, California licenses held, provider types and qualifications, services and expected post-transaction impact on those services, geographic and patient backgrounds, information regarding prior transactions, and entity governance details. The filing must also include information regarding the transaction, including descriptions of the entities involved, the closing date, and anticipated impact of the transaction on competition and municipal contracts. Required documents include copies of all transaction agreements and term sheets, contact information for individuals responsible for such transaction agreements, organizational charts, pro forma post-transaction balance sheets for surviving or successor entities, financial statements from the past three years, organizational documents for the parties to the transaction, and FTC filings made in connection with the transaction.
Submitted materials will be made publicly available in most circumstances. To remain confidential, information or documentation must be of a kind that OHCA presumptively considers confidential. Examples include marked-confidential versions of stock purchase agreements, compensation documents, contract rates, and transaction valuation documentation. Alternatively, a submitting party may submit a request to keep certain documents confidential, which must be supported by a detailed justification explaining why certain confidentiality standards are met.
Filing and Process Timelines
There are two timelines HCEs should be aware of when submitting regulatory filings: (1) the timeline for OHCA to determine whether to conduct a CMIR; and (2) the timeline for the CMIR process.
If OHCA determines that no CMIR is necessary, it will notify the filing party no later than 45 days after the date on which OHCA received a complete filing. If OHCA determines that a CMIR is necessary, OHCA will notify the filing party no later than 60 days after OHCA received a complete filing.
CMIR Process Timeline
OHCA has 90 days to conduct a CMIR but may extend the period by 30 days if more time is needed. Once the CMIR is completed, OHCA will make factual findings and issue a preliminary report. The parties to the transaction and the public will have 10 days to submit comments on the preliminary report. After the comment period closes, OHCA has 15 days to issue a final report of its findings. From inception to conclusion, the entire filing and review process can take longer than six months if OHCA conducts a CMIR.
The Final Regulations include an expedited review process, which is available on request if an HCE can demonstrate expedited review is needed because of the severe financial distress of a party to the transaction or a significant reduction in the provision of critical services within a geographic area.
Factors Considered in Determining whether to Conduct a CMIR
The Final Regulations establish the factors OHCA may consider in determining whether to conduct a CMIR. OHCA may consider any of the following:
- A transaction’s effect on the availability or accessibility of healthcare services to the community affected by the transaction, including the accessibility of culturally competent care
- A transaction’s effect on the quality of healthcare services to the community affected by the transaction
- Whether a transaction will lessen competition or tend to create a monopoly
- Whether a transaction will lessen competition for HCEs to hire workers or negatively impact the labor market
- Whether a transaction will negatively impact a general acute care or specialty hospital
- Whether a transaction will negatively impact the quality of healthcare services available to patients from the parties to the transaction
- Whether a transaction is part of a series of similar transactions by an HCE or HCEs that furthers a trend toward consolidation
- Whether a transaction may entrench or extend a dominant market position of any HCE in the transaction, including extending market power into related markets through vertical or cross-market mergers
- Whether a transaction between a California HCE and an out-of-state entity may negatively impact affordability, affect quality, or limit access to healthcare services in California, or undermine the financial stability or competitive effectiveness of a healthcare entity located in California
The Final Regulations approved by OHCA establish the categories of HCEs and transactions subject to filing and review requirements. The filing and review process conducted by OHCA as set out in the regulations will be extensive and could potentially delay the closing of planned healthcare transactions in California by months. HCEs and other stakeholders who conduct or intend to conduct transactions in California should follow developments related to California’s law closely and should work with Goodwin’s experienced healthcare regulatory and transaction counsel as they navigate these new requirements.
This informational piece, which may be considered advertising under the ethical rules of certain jurisdictions, is provided on the understanding that it does not constitute the rendering of legal advice or other professional advice by Goodwin or its lawyers. Prior results do not guarantee a similar outcome.