On August 31, the Office of California Healthcare Affordability (OCHA) will conclude its public comment period regarding proposed regulations under a new law focusing on healthcare M&A deal oversight in California, due to be enacted next year. OCHA’s chief objective is to bridge the existing oversight gaps in healthcare consolidation. The California attorney general currently holds the authority to approve the merger of non-profit healthcare organizations, while both the Department of Managed Health Care and the California Department of Insurance have authority to approve mergers involving healthcare service plans and the state’s health insurers, respectively. However, public information officer Andrew DiLuccia of the California Department of Health Care Access and Information sees gaps in the following areas:
- For-profit hospital and health facility transactions among physician organizations
- Purchases or affiliations of health plans or health insurers with other healthcare entities, such as physician groups
- Health plans, health insurers, and management service organizations involving Private Equity
- Exclusive contracting
Starting January 1, organizations falling under the aforementioned categories and over a certain financial threshold will need to provide formal notice 90 days prior to any significant changes in ownership or control of the assets or operations.
Charles Oppenheim, a partner at the healthcare-focused legal firm Hooper, Lundy & Bookman, explains that this transaction review process was part of a broader legislation passed last year aimed at controlling the growth of healthcare costs in California. The process primarily seeks to highlight transactions that may potentially hinder competition in the marketplace.
If OHCA predicts that a prospective transaction will considerably impact consumers negatively in terms of market conditions or cost, it will instigate an extensive “cost and market impact review”. The entity proposing the transaction will need to wait for the completion of this final review report before proceeding with the transaction. Notably, OHCA lacks the power to block the transaction’s actual close.
Identifying a covered healthcare entity that has to comply with the proposed regulations can be complex. An analysis by Hooper, Lundy & Bookman proposes they would include (i) payers such as Knox-Keene plans, (ii) providers, including health facilities, clinical laboratories, and physician organizations, and (iii) fully integrated delivery systems.
The law firm also notes that these regulatory proposals would limit coverage to healthcare entities with annual revenue or California assets of at least $25 million, or smaller entities involved in a transaction with a healthcare entity meeting these financial requisites. It also includes those located in or providing service to at least 50% of patients residing in a “health professional shortage area”.
The proposed legislation comes with its share of ambiguities, particularly the extent of its application to out-of-state entities desiring to purchase a California organization. At present, the legislation is intended to cover incidents occurring in California, potentially involving a California entity being acquired by an entity from another state.
While OHCA lacks the authority to block transactions, Charles Oppenheim suggests that the agency has the potential to slow transactions down and, in cases where the agency believes the deal would reduce competition or hike costs, the California Attorney General might get involved.
However, it should be noted that California is not the only state seeking to bring a degree of oversight to healthcare consolidation. A map, created by law firm Ropes & Gray, provides an overview of states with varying levels of healthcare deal regulation.
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