HEALTH CARE COST CONCERNS LEAD TO INCREASED SCRUTINY OF HEALTH CARE TRANSACTIONS

In a wave of growing interest around health care costs, access, and consolidation, California is one of a number of states that have recently enacted, or are considering enacting, legislation to increase the amount of governmental scrutiny over health care transactions.

California Senate Bill 184 (SB 184) passed on June 30, 2022, establishing a new Office of Health Care Affordability (OHCA) to help contain health care spending in the state. Among OHCA's regulatory powers is the ability to review proposed health care transactions through the cost and market impact review (CMIR) process, which applies to certain material health care transactions that occur on or after April 1, 2024. Unlike the California Office of the Attorney General (AG) in its review of nonprofit health facility transactions in California, OHCA does not have the ability to stop the transaction or impose conditions on the transaction. However, the CMIR process allows OHCA to require the production of a market impact report that could significantly delay the transaction.

At a high level, the CMIR process requires a "health care entity" (which includes hospitals, payors, certain physician groups, medical foundations, ambulatory surgery centers, and imaging facilities, among others) entering into a transaction involving the sale or transfer of control of a material amount of its assets or operations to provide at least ninety days' prior written notice of the transaction to OHCA. After the health care entity provides notice, the agency then has sixty days to either advise the health care entity of its determination to conduct a market impact review or provide a written waiver from such review. OHCA will issue a preliminary report upon completion of the market impact review. Then, after allowing the parties and the public to provide input, OHCA will issue its final report. There is currently no time limit specified for OHCA's market impact review, and no transaction for which OHCA conducts a market impact review may close until sixty days following delivery of the final market impact report. Importantly, health care entities that are already subject to AG review for nonprofit health facility transactions are exempt from the CMIR process.

OHCA is required to conduct a market impact report if the transaction is "likely to have a risk of a significant impact on market competition, the state's ability to meet cost targets, or costs for purchasers and consumers." This broad statutory language appears to grant OHCA significant discretion in determining whether a market impact report is required. The report would look at factors such as changes in size and market share in a particular service or geographic region, prices for services compared to other providers, and quality, equity, costs and access. This emphasis on market impact mirrors a recent trend in the current AG review process for nonprofit health facility transactions. While the AG review process does not expressly require the AG to assess market impact, recent transactions going through the AG review process have included market impact as one of the key areas of focus.

OHCA is planning to promulgate regulations by the end of September to clarify current uncertainties of SB 184. The agency plans to establish materiality thresholds for submitting notice, specify what information needs to be submitted in the notice, and consider options for expedited review. Stakeholders can participate in the regulation development process through the agency's workshopping sessions in the coming months.

While many states, including California, have had long-standing requirements for nonprofit entities to obtain state attorney general approval prior to entering into certain transactions, the for-profit sector has generally been free from such requirements. Now, however, California joins states like Massachusetts, New York, Illinois and Oregon, by adding an additional regulatory hurdle, on top of the standard approvals related to facility licensing, certificate of need (CON), and other specific license and accreditation requirements. California and other states passing recent transaction notice legislation have generally followed in Massachusetts' footsteps by framing the transaction notice requirement as part of an effort to contain health care costs. The requirements for each state slightly differ, though, in terms of the information required to be provided to the agency, the timing of the notice, the types of entities impacted by the requirement, and the materiality thresholds involved.

As April 1, 2024 approaches, health care entities undergoing transactions in California may be deciding whether to expedite their current transaction timelines in order to avoid the CMIR process. Given that the health care entity is responsible for the costs of producing the market impact report, and that there is no time limit for the production of the report, the CMIR process may be extremely burdensome and may have the unintended effect of stifling innovation that would be beneficial to patients. The regulations to be promulgated in the coming months will hopefully clarify some of the uncertainties about the process, but only time will tell how the CMIR process will impact the number, size, and speed of future health care transactions in California. Regardless of whether the CMIR process will actually help contain health care spending in California, SB 184 and its sister bills passed around the country are signaling an intense focus on curbing the increases in health care spending in the United States, with more legislation on the way.

James F. Owens is a partner, and Cathy Ren is an associate at McDermott Will & Emery.