On May 16, 2024, the California Office of Health Care Affordability (“OHCA”) released proposed emergency regulations to update its existing rules for the reporting of certain health care transactions to OHCA for consideration of whether a Cost and Market Impact Review (“CMIR”) is warranted under the California Health Care Quality and Affordability Act. The current CMIR regulations became effective January 1, 2024, for transactions with a proposed closing date on or after April 1, 2024.

The proposed regulations include provisions that will require reporting of transactions that were not covered under the current regulations and impose stricter requirements on disclosures and the diligence required of reporting parties in presenting data in the submission of a notice of a “Material Change Transaction,” as defined in the statute.

The most significant change in the proposed regulations is the addition of the term “the subject of a Material Change Transaction” to provisions specifying the entities that must file with OHCA, the definition of transactions subject to reporting to OHCA and the requirements for the contents of a notice of Material Change Transaction. A health care entity is considered “the subject of” a transaction if “the transaction . . . concerns [the] health care entity’s assets, control responsibility, governance or operations, in whole or in part.” (22 CCR §97435(b)). The proposed regulations do not define the term “concerns” in this context. The impact of the proposed change is that transactions involving parties that themselves are not health care entities, and under the existing regulations would not require a filing with OHCA, would be reportable by a health care entity that is the “subject of” the transaction. 

For example, currently a deal between two private investors, who do not provide health care services, for the sale of stock or assets of a management services organization (“MSO”) that manages physician groups is not reportable to OHCA, since the parties are not health care entities. Under the proposed regulations, a physician group managed by the MSO would be required to report the transaction if it meets the size of transaction and revenue tests for reporting, even though the group is not a party, because it is “the subject of” the transaction. In developing the existing regulations, OHCA had originally proposed including MSOs within the definition of a “health care entity” but deleted that provision in response to public comments. This exclusion appears to be undermined under the proposed rules by requiring a report by an affected non-party health care entity, creating the potential for a CMIR review as well as the attendant requirement that the closing of the transaction be delayed to accommodate the CMIR process.

The range of transactions subject to reporting has also been expanded by a revision in the definition of reportable transactions (22 CCR §97435(b)(2)) to include those in which a health care entity with California revenues or assets exceeding $10 million is a party to, or subject of, a transaction with an entity that owns or controls a health care entity with California revenues or assets exceeding $25 million. Thus, even if the other party to a transaction with a health care entity is not a reporting entity in its own right, if it owns or controls an affiliate that is a health care entity meeting the revenue or asset tests (even though that health care entity is not a party to the transaction), the transaction becomes reportable by the health care entity involved. There is an ambiguity in the application of this provision. The language of 22 CCR §97435(b)(2)(ii) refers to an entity party that owns or controls a health care entity, suggesting that it refers only to a parent entity, but not an entity that may be part of the same corporate family (such as brother/sister corporation) as a health care entity, but does not own or control the health care entity.

The proposed changes to the Material Change Notice filing provisions in 22 CCR §97438 incorporate a “reasonable diligence” standard with respect the information submitted. This will include information concerning other parties to the transaction or a health care entity that is the subject of the transaction. This would imply that comparable diligence on transaction parties to what is customary in merger and acquisition deals should suffice, the inclusion of non-parties that are regarded as subject of the transaction imposes a new duty that may not be contemplated.

A final notable change in the proposed regulations is to the standards for determination of whether a CMIR should be conducted the factors that may be considered in a report following a CMIR. The proposed regulations would add to the language of 22 CCR §§97441(a)(1)(B) and 97442((b)(4) a requirement that OHCA consider and report on the effect of the transaction on a health care entity’s ability to meet any health care cost targets established by the Health Care Affordability Board. This factor was not included in the current regulations, in part due to the fact that no cost targets have yet been established and the process of setting cost targets for individual providers will be ongoing for some time yet. Presumably this language was added to prospectively cover future transactions after the targets are established, which is projected to occur in the 2026-27 time frame. 

The proposed regulations will be the subject of discussion at an OHCA Board meeting on May 22, 2024, and remain subject to public comment through May 30, 2024. Following consideration of any comments, OHCA will submit the proposed regulations to the Office of Administrative Law.

The proposed changes appear to reflect concerns on the part of OHCA that certain transactions may escape the CMIR process but have impacts on health care costs in the future and that parties may not make sufficient disclosures in Material Change Notice filings to permit appropriate assessment of the impact of transactions. Since at this date only a single Notice of Material Change Transaction has been filed with OHCA (Rehabilitation Center of Santa Monica) and OHCA has waived conduct of a CMIR in that instance, the impact of the proposed changes to the regulations remains to be seen.