The Stage is Set: California Finalizes OHCA Rules Requiring Discover and Assessment of Materials Healthcare Transactions in 2024

In the end, the fee and market affect evaluation (CMIR) laws promulgated by the California Workplace of Well being Care Affordability (OHCA) have been authorized by the California Workplace of Administrative Regulation (OAL). The ultimate laws, which can be found to view right here, have been submitted by OHCA on December 8, 2023 and authorized by OAL on December 18, 2023. As we now have highlighted in our sequence of posts[1] all year long, these laws, together with the associated statutory provisions in SB 184, set forth the framework for OHCA’s authority to obtain advance discover of and evaluation a big scope of healthcare transactions within the coming months of 2024, reflecting a dramatic change to California’s healthcare regulatory panorama. To refresh and replace our readers relating to the CMIR laws, this text will present an outline of the important thing elements and sensible issues relating to this new reporting regime, whereas additionally commenting on the important thing remaining tweaks to (and omissions from) the laws.

1. Who’s topic to the CMIR course of?

Well being Care Entities

Below SB 184, “well being care entities”, which embody (i) payers, (ii) suppliers and (iii) absolutely built-in supply programs[2], are doubtlessly topic to OHCA’s CMIR authority. The statute, along with clarifications underneath the laws, defines “payers” to incorporate fully-licensed Knox-Keene well being care service plans, licensed well being insurers, third occasion directors, publicly funded well being care applications, and pharmacy profit managers, and every other entity that pays for or arranges for the acquisition of well being care providers on behalf of staff, dependents or retirees. “Suppliers” embody doctor organizations (together with medical teams comprised of 25 or extra physicians, medical foundations, restricted Knox-Keene plans, and danger bearing organizations), well being amenities (together with hospitals, SNFs and different nursing amenities, intermediate care amenities and hospices), outpatient clinics (together with ASCs and specialty clinics), scientific laboratories and imaging facilities.

Over the course of the yr, in numerous drafts of the laws, OHCA thought of deeming administration providers organizations (MSOs) as well being care entities topic to the CMIR course of. Notably, MSOs are not included as a well being care entity within the remaining laws, however the laws do embody mother and father, associates or subsidiaries of a payer that act in California on behalf of a payer and (i) management, govern or are financially accountable for the payer, (ii) are topic to the management, governance or monetary management of the payer, or (iii) within the case of a subsidiary, are a subsidiary appearing on behalf of one other subsidiary.

The ultimate laws additionally specify that doctor organizations with lower than 25 physicians may very well be thought of a well being care entity if they’re decided to be a excessive value outlier (i.e., whose prices for a similar providers are considerably increased in comparison with the statewide common).

Which well being care entities are topic to CMIR?

Whereas well being care entities are broadly outlined underneath the statute and remaining laws, solely well being care entities assembly at the least one of many thresholds set forth beneath are required to inform OHCA underneath the CMIR course of:

1. Well being care entities with at the least $25 million in CA-derived annual income or that personal or management at the least $25 million of California property;
2. Well being care entities with at the least $10 million in CA-derived annual income or at the least $10 million of California property and are concerned in a transaction with a $25 million well being care entity; or
3. Well being care entities situated in a designated major care well being skilled scarcity space in California, as outlined in Half 5 of Subchapter A of Chapter 1 of Title 42 of the Code of Federal Rules (commencing with part 5.1), obtainable at https://knowledge.hrsa.gov/.

Whereas a lot consideration has been paid to the financial thresholds set forth above as OHCA labored to finalize the laws, it is very important emphasize that the final threshold relating to designated major care well being skilled scarcity areas shouldn’t be ignored in assessing the applicability of the CMIR course of to events, as such areas embody important geographic parts of the state, each city and rural.

2. What sorts of transactions are inside scope of OHCA’s purview?

Materials Change Transactions

Transactions should be thought of “materials change transactions” to be inside the scope of the CMIR course of. Below the statute and remaining laws, all kinds of transactions are thought of materials change transactions, together with these involving:

1. A transaction worth of at the least $25 million and provision of well being care providers, that are outlined to incorporate not simply scientific providers, however associated tools and know-how providers;
2. A rise in a well being care entity’s annual California income by at the least $10 million or 20% at regular or stabilized ranges of utilization or operation;
3. Switch or different disposition of 25% or extra of the property of the submitting occasion;
4. A submitting occasion’s switch of management, accountability, or governance, outlined to incorporate 25% or better possession/management modifications in addition to vesting of great voting rights (e.g., veto rights, supermajority rights) even when possession/management switch is lower than 25%;
5. An entity contracting with payers on behalf of consolidated or mixed suppliers and is extra doubtless than to not improve annual California income by at the least $10 million or 20% of any suppliers within the transaction;
6. The formation of a new entity for the availability of well being care providers projected to have at the least $25 million in annual California income or property;
7. A sequence of associated transactions occurring over the previous 10 years for a similar or associated providers involving the identical well being care entities or entities affiliated with the identical entities; or
8. The acquisition of a well being care entity by one other entity and the buying entity has consummated an identical transaction inside the final 10 years, with a well being care entity that gives the identical or associated well being care providers.

Exceptions

Regardless of the broad applicability of the CMIR framework, the statute and remaining laws do include sure exceptions. Certainly, the ultimate laws specify that the next aren’t thought of materials change transactions: (i) transactions within the typical and common course of the well being care entity (i.e., these which might be typical within the day-to-day operations of the well being care entity); (ii) conditions through which the well being care entity immediately, or not directly via a number of intermediaries, already controls, is managed by, or is underneath frequent management with, all different events to the transaction, akin to a company restructuring; and (iii) affiliations that contain collaboration on scientific trials, graduate medical teaching programs, well being professions coaching applications, well being sciences coaching applications, or different instructional and analysis applications.

Likewise, the textual content of SB 184 exempts from the CMIR course of agreements or transactions (i) involving Knox-Keene well being care service plans, the place such agreements or transactions are topic to the evaluation of the Division of Managed Well being Care (DMHC) for value affect or market consolidation, (ii) involving insurers the place such agreements or transactions are topic to the evaluation of the Division of Insurance coverage (DOI); (iii) the place a county is buying, buying or taking management of an entity to make sure continued entry in that county; and (iv) involving nonprofit companies the place such agreements or transactions are topic to the evaluation of the Legal professional Common. Nonetheless, the statutes and laws don’t present additional specification relating to the precise scope of those exemptions, and thus it’s unclear, for instance, whether or not the inclusion of a Knox-Keene licensee, licensed insurer or nonprofit company in a bigger underlying transaction would exempt a complete transaction from the CMIR course of, or if solely the portion of the transaction involving such entity could be exempt. It’s attainable OHCA could challenge additional steering on such or related truth patterns. Furthermore, SB 184 permits the Legal professional Common, the DMHC and the DOI to refer transactions underneath their respective purview to OHCA for a CMIR.

3. What does the discover and evaluation course of entail?

Timeline and Assessment Requirements

Well being care entities assembly the thresholds recognized above that search to shut a fabric change transaction on or after April 1, 2024 might want to present OHCA with an entire discover of the transaction at the least 90 days previous to the closing of the transaction.

As soon as filed, OHCA should notify the submitter inside 45 days if it determines {that a} CMIR is not going to be carried out. OHCA should notify the submitter inside 60 days of the submitting if OHCA intends to conduct a CMIR. Notice that the 45 / 60 day timeline is tolled whereas OHCA awaits further data from the events or if the transaction is underneath evaluation by one other authorities company. The submitting events could enchantment OHCA’s resolution to conduct a CMIR inside 10 days of OHCA’s dedication, and OHCA will then have 5 days to resolve to uphold the unique dedication or grant a waiver of the CMIR.

In deciding whether or not to conduct a CMIR, OHCA weighs sure elements as specified within the remaining laws, together with whether or not the transaction:

1. Could end in destructive affect on availability or accessibility of well being care providers, together with the filer’s skill to supply culturally competent care;
2. Could end in destructive affect on prices for payers, purchasers, or customers;
3. Could reduce competitors or create monopoly in geographic service areas impacted by the transaction;
4. Could reduce competitors for well being care entities to rent employees or could negatively affect the labor market;
5. Negatively impacts a common acute care or specialty hospital;
6. Could negatively affect the standard of care;
7. Is a part of a sequence of comparable transactions that additional a pattern towards consolidation;
8. Could entrench or prolong a dominant market place of any well being care entity within the transaction; or
9. Is between a California entity and an out-of-state entity and could negatively affect affordability of or restrict entry to well being care providers in California.

If OHCA decides to conduct a CMIR, it’s required to finish the evaluation inside 90 days of its dedication, which interval will be prolonged for one further 30 day interval and tolled whereas OHCA awaits further data from the events or if the transaction is underneath evaluation by one other authorities company. Upon completion of the CMIR, OHCA will challenge a preliminary report of its findings and the events to the transaction and the general public may have the chance to submit written feedback inside 10 days of the preliminary report. OHCA will challenge a remaining report inside 15 days of the shut of the remark interval. Events could not shut the transaction till 60 days following the issuance of the ultimate report.

In sum, there’s a potential for a 9 month timeline from the preliminary discover to OHCA to finish the CMIR course of for relevant well being care entities, not together with any preparation time to submit the submitting or tolling of the timeline underneath the CMIR course of.

The ultimate laws embody a restricted course of for expedited evaluation of a discover of fabric change transaction. The submitter should exhibit, with an in depth rationalization and any underlying documentation substantiating the necessity for expedited evaluation, both that (i) one of many events to the transaction is present process extreme monetary misery (i.e., a grave danger of fast enterprise failure) and the transaction is critical to make sure continued well being care entry within the related markets, or (i) there’s a substantial chance of a major discount within the provision of essential well being care providers inside a number of geographic areas.

What are well being care entities required to supply and disclose?

Events topic to the CMIR course of might want to file via OHCA’s on-line portal. Submitting supplies embody a broad vary of data and disclosure supplies, together with, amongst different issues:

1. Identification and outline of events concerned within the transaction, together with itemizing of Tax IDs and California well being care licenses of events;
2. Description of transaction, present providers, anticipated post-transaction impacts on providers, post-transaction organizational and operational modifications;
3. Description of sure prior M&A exercise involving sure events to the transaction within the final 10 years;
4. Definitive transaction agreements (with accompanying appendices and reveals);
5. HSR filings associated to the transaction;
6. Documentation adequate to indicate valuation of transaction;
7. Pre-closing and post-closing organizational charts;
8. Licensed monetary statements for prior 3 years; and
9. Organizational and governing paperwork of events.

Data included within the discover is handled as a public document except the submitter requests confidentiality for such data and OHCA accepts such designation. Marked-confidential variations of definitive transaction agreements, compensation paperwork, contract charges, and transaction valuation documentation are deemed confidential and nonpublic.

4. Sensible takeaways for stakeholders

It’s secure to say that the CMIR course of detailed in OHCA’s remaining laws and SB 184 marks a major overhaul to California’s healthcare regulatory panorama, and most events trying to consummate transactions within the California healthcare area in 2024 might want to keep in mind and doubtlessly navigate this new regulatory course of.

For events wishing to keep away from going via the CMIR course of, it might be advisable to aim to shut transactions prematurely of the April 1, 2024 date.

For transactions the place such a closing timeline will not be attainable or doubtlessly might slip previous April 1, 2024, events needs to be fastidiously reviewing the transaction elements at the side of the laws to find out whether or not discover of a fabric change transaction can be wanted. And if such discover is required, events could also be smart to start the method of accumulating and making ready data and documentation wanted to submit an entire discover of fabric change transaction, together with accessing the necessity to search confidentially for sure supplies.

Furthermore, definitive transaction agreements involving transactions closing on or close to April 1, 2024 ought to ponder applicable closing situations and/or contingencies within the occasion the transaction fails to shut previous to April 1.

Events must also be ready from an operational perspective that transactions could face substantial delays within the skill to shut, given the potential timeline within the CMIR laws, and it’s definitely attainable that OHCA might expertise backlogs which exacerbate the regulatory timeline.

However, it stays to be seen how aggressive OHCA can be in subjecting all in scope events and transactions to the CMIR course of. SB 184 does entitle OHCA to particular efficiency, injunctive aid, and different equitable treatments a court docket deems applicable for enforcement of any of the necessities of the regulation. That being mentioned, whether or not OHCA decides to focus its CMIR position in the direction of sure sorts of transactions over others and/or be extra prepared to grant waivers for sure transactions are a number of of the important thing enforcement-related questions that might have solutions or extra readability within the coming months.

FOOTNOTES

[1] See hyperlinks to Sheppard Mullin’s weblog sequence re SB 184 and OHCA:

[2] A totally built-in supply programs is outlined as a “system that features a doctor group, well being facility or well being system, and a nonprofit well being care service plan that gives well being care providers to enrollees in a selected geographic area of the state via an affiliate hospital system and an unique contract between the nonprofit well being care service plan and a single doctor group in every geographic area to supply these medical providers.”