A 2022 law and a bill recently introduced in the California Senate impose significant notice and review requirements for mergers and acquisitions in the California health care industry beginning in 2024. Both items endeavor to address rising health care costs by providing greater oversight of and a spotlight on health care deals. Providers, payors, and investors in the California health care sector should be aware of the potentially significant impact these notice and approval requirements could have on certain future mergers and acquisitions.
SB 184 - Review by New Office of Health Care Affordability
What Is It?
Signed into law on June 30, 2022, California’s SB 184 broadly addressed the increasing costs of health care services in California. Among other changes, SB 184 created the Office of Health Care Affordability (the “Office”) within the Department of Health Care Access and Information (“HCIA”) and charged the Office with collecting and analyzing data related to health care costs. Among other responsibilities, SB 184 empowers the Office to review mergers and acquisitions in the health care industry as a way of monitoring their impact on health care costs.
Notice Requirements and Review Process.
Beginning on April 1, 2024, health care entities (as further identified below) must provide written notice of proposed transactions to the Office at least ninety (90) days “prior to entering into the agreement or transaction.” The notice requirement specifically applies if the entity plans to (1) sell, transfer, lease, exchange, option, encumber, convey, or otherwise dispose of a material amount of its assets to one or more entities, or (2) transfer control, responsibility, or governance of a material amount of the assets or operations of the health care entity to one or more entities. The notice requirement will apply to transactions by a wide variety of health care entities, including payors, physician organizations, hospitals, hospital systems, pharmacy benefit managers, clinical laboratories, and others, with few exceptions. The Office will make the notice of material change publicly available, including all information and material submitted to the Office for review in relation to the material change.
Within sixty (60) days of receipt of the notice, the Office must decide whether to conduct a cost and market impact review of the proposed transaction or to waive the review. The Office must conduct a cost and market impact review if the noticed transaction poses a risk of a significant impact on market competition, California’s ability to meet cost targets or costs for purchasers or consumers. The review will examine factors related to the noticing health care entity’s business and relative market position, including, but not limited to, changes in size and market share in a given service or geographic region, prices for services compared to other providers of the same services, quality, equity cost, access, and other factors that the Office may consider to be in the public interest. The Office is also required to consider potential benefits of the transaction to consumers of health care services, such as increased access, higher quality, and higher efficiency in the delivery of services. The entities providing notices of material change will be allowed to submit information demonstrating these benefits. SB 184 also empowers the Office to issue subpoenas to health care entities in furtherance of its investigations.
After completing its review, the Office shall issue a preliminary report and allow for public comment, after which it shall issue a final report of its findings. The transaction “shall not be implemented” until sixty (60) days after the Office issues a final report unless the cost and market impact review is waived.
Certain Open Questions and Anticipated Regulations.
SB 184 leaves many unanswered questions. First, the statute does not define when a transaction is “enter[ed] into” for purposes of triggering the 90-day notice period. Providing notice ninety (90) days before signing an agreement will be far more challenging than providing notice ninety (90) days before closing. Second, the statute does not define what it means for a transaction to be “implemented” sixty (60) days after the Office issues a final report. Third, the statute does not provide a timeframe for the Office to review noticed transactions. Although the Office does not have authority to “approve” or “veto” a transaction, the uncertain duration of the Office’s review could jeopardize transactions, especially those that may have time-sensitive limitations.
The open questions noted above are not necessarily exhaustive. It is hoped that anticipated interpretive regulations and guidance will help answer at least some of these. The Office’s website states that it will promulgate regulations to define key provisions of the cost and market impact review program, including “material changes that warrant notification, thresholds (e.g., annual revenues or market share) for determining which health care entities or prospective transactions will be subject to the noticing requirements, factors to be considered in the reviews, requests for data, and relevant timelines.” The Office also plans to convene regulations “workshopping” sessions to gather input from stakeholders prior to finalizing regulations.
AB 1091 – Health Care Consolidation and Contracting Fairness Act of 2023
Notice, Consent and Broad Discretion for the California Attorney General.
If signed into law, AB 1091 will create additional reporting and approval requirements for health care deals. As currently drafted, the bill would require medical groups, hospitals, hospital systems, health facilities, health care service plans, health insurers, and pharmacy benefit managers to provide written notice and obtain written consent from the California Attorney General prior to entering into any agreement or transaction to (1) sell, transfer, lease, exchange, option, encumber, convey, or otherwise dispose of a material amount of its assets or (2) transfer control, responsibility, or governance of a material amount of its assets or operations. The reporting and consent requirements would apply to deals valued at $15,000,000 or more. The notice must be provided to the California Attorney General simultaneously with any other mandatory notices to state or federal agencies and no less than ninety (90) days before entering into the agreement or transaction. The Attorney General is required to publicize the notice. As currently drafted, the bill would allow the Attorney General to set its own requirements for the contents of the notice and to waive the approval process in certain circumstances.
The Attorney General would potentially have broad discretion over the approval of noticed transactions. For example, they would be allowed to consider factors such as the transaction’s potential impact on market competition, service costs, quality of care, or availability of care. The Attorney General would also be authorized to consider whether the proposed change is in the public interest and whether it would maintain access to care in rural communities, low-income communities, or disadvantaged communities.
Potentially Long Review Process and Open Questions.
The bill would also require the Attorney General to consent to, give conditional consent to, or refuse consent to the proposed change within ninety (90) days of receipt of the written notice, although the ninety (90) day period may be tolled pending review by other state or federal agencies. The Attorney General may also extend the review period by up to forty-five (45) days if (1) the extension is necessary to obtain additional information, (2) the proposed transaction is substantially modified after the original notice was provided to the Attorney General, or (3) the proposed transaction involves a multifacility health system serving multiple communities. The bill allows for health care entities to appeal a refusal of consent through administrative and judicial means. The Attorney General could also contract with experts to review the proposed transaction and require reimbursement for review costs from the selling or acquiring entity.
AB 1091 raises some questions that are similar to those raised by SB 184. It remains somewhat unclear what triggers the ninety (90) day notice submission deadline, as well as what type of information would be contained in the notice. The statute also appears to give the Attorney General broad discretion over the disclosure requirements and approval standards. If the bill is passed, it will hopefully gain clarity on these points through revision in the legislature or implementing regulation. The bill does not appear to have gained traction in the legislature, as it was referred to Assembly Health Committee and Judiciary Committee on March 2, 2023, but has not shown any legislative activity since.
Conclusion
California health care entities and investors should be aware of the potential impact that SB 184 and AB 1091 could have on the timing and approval of new mergers, acquisitions and certain strategic affiliations and should plan accordingly when entertaining new deals for 2024. SB 184 and AB 1091 appear to follow a trend as other states have similar bills requiring prior notice of health care transactions, including a New York law passed in May 2023 requiring health care entities to provide a thirty (30) day pre-closing notice to the State Department of Health for any “material transactions.” Health care entities and investors should also consider how their respective California deals will impact access to and affordability of health care services and be prepared to explain the impact of the deals when making disclosures to the Office of Health Care Affordability and potentially the California Attorney General. In some cases, it may be prudent to consider moving up the timeline to California's anticipated health care deals so they close in 2023.
