California passed legislation in 2022 that authorizes a new state agency, California’s Office of Healthcare Affordability (OHCA), to review certain healthcare transactions. OHCA has the authority to collect and analyze healthcare cost data. The state agency also has the authority to review healthcare mergers and acquisitions to ensure that the mergers and acquisitions don’t adversely affect the affordability of healthcare services.
The legislation, formally called the California Healthcare Quality and Affordability Act became law on June 30, 2022. The law creates the Office of Healthcare Affordability (OHCA) within the Department of Healthcare Access and Information.
The law requires that OHCA:
Monitor cost trends in the healthcare market and to examine healthcare mergers, acquisitions, corporate affiliations, or other transactions that entail material changes to ownership, operations, or governance of healthcare service plans, insurers, hospitals or hospital systems, physician organizations, providers, pharmacy benefit managers, and other healthcare entities.
OHCA is required, within 60 days from receipt of the notice, to conduct a “cost and market impact review of the proposed transaction or waive the review.”
If OHCA determines that the transaction poses a risk of significant impact on market competition, the agency is required to conduct a cost and market impact review (CMIR). The implementation of a covered transaction is prohibited until 60 days after OHCA issues a final report unless the review is waived.
Which healthcare entities are covered by the new legislation?
The new legislation specifically requires that “healthcare entities” in California, beginning January 1, 2024, meet new notice and review requirements. The requirements will apply to transactions that “close on or after April 1, 2024. The legislation requires that healthcare entities (defined by the new legislation) must provide written notice to OHCA if the entity plans to “transfer a significant amount of their assets or transfer control over their operations to other entities.” The entity must provide the notice at least 90 days before the agreement or transaction takes place – which is why there’s an effective date of January 1, 2024, even though the covered transactions close on or after April 1, 2024.
Healthcare entities that should comply with the OHCA notice requirements include physician practices with 25 or more physicians, ambulatory surgery centers, imaging centers, and others that we can explain.
Some of the entities that don’t need to comply with the OHCA notice requirements include dentists, drug manufacturers, home health agencies, EMT services, and durable medical equipment suppliers.
The proposed regulations that will become effective on January 1, 2024:
- Define the requirement to file a notice of a “material change” to apply to a healthcare entity:
- With annual revenue of $25 million or California assets of at least $25 million.
- With annual revenue of $10 million or California assets of at least $10 million – and which meets certain other criteria
- Define material change in nine ways based on the amount of revenue or assets, the type of ownership, and other factors.
The new OHCA regulations and MSOs
According to Express Healthcare Management, a recent revision to the proposed regulations removes management service organizations (MSOs) from the definition of “Healthcare Entities.”
“However, MSOs may still be subject to notice requirements if they perform functions of a healthcare entity and meet certain criteria, such as being under the control or governance of a healthcare entity.”
MSOs are companies that help medical practices separate the business of practicing medicine from the practice of medicine – to ensure that the patient’s health always comes first. There are many benefits to using an MSO such as helping to show compliance with Stark Law and the Anti-Kickback Statute (AKS) – if certain conditions are met. Our skilled healthcare lawyers help medical practices and MSOs understand the benefits and risks of working together. We help negotiate agreements between the medical practice and the MSO.
The recent revision to the OHCA regulations seems like another way that MSOs can help medical practices meet their compliance requirements. We’ll explain how an MSO can distinguish itself from a healthcare entity – as defined by OHCA – and how that can benefit medical practices.
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In today’s video we talk about the MSO model (once again) for a large health and wellness or integrative care center.
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HOW MSOS CAN HELP MEDICAL PRACTICES AFTER A MERGER OR AN ACQUISITION – PART ONE
The advantages and risks of using an MSO after your medical practice buys another medical practice or merges with another medical practice.
The purpose of the OHCA notice requirements
OHCA has three primary responsibilities:
- Slow healthcare spending growth
- Promote high value system performance, and
- Assess market consolidation.
OHCA will achieve these goals by:
Promoting high value system performance by measuring quality, equity, adoption of alternative payment models, investment in primary care and behavioral health, and workforce stability. Through cost and market impact reviews, OHCA will analyze transactions that are likely to significantly impact market competition, the state’s ability to meet targets, or affordability for consumers and purchasers. Based on results of the review, OHCA will then coordinate with other state agencies to address consolidation as appropriate.
The covered transactions involve agreements and transactions that would:
Sell, transfer, lease, exchange, option, encumber, convey, or otherwise dispose of a material amount of assets, or that would transfer control, responsibility, or governance of a material amount of the assets or operations to one or more entities.
The law does not provide specific standards for conducting the cost and market review. OHCA’s report will be made public once the report is completed. OHCA can charge the transaction parties for the reasonable cost of the review including administrative costs and other costs.
How the cost review regulations are expected to work
OHCA does not need to approve the transaction. Its role is to provide a cost and market analysis so the public can be made aware of the consequences of the merger or acquisition. The review process is expected to take several months.
- The information the notice should contain. The regulations also explain what information the party that is notifying OHCA of a material change transaction must provide such as submissions to other agencies (federal or state), any court actions, descriptions of the entities and the transactions, certain other prior transactions, certain post-transaction changes to the ownership of the entity, governance, and other workplace factors.
- The documentation the notice should contain. The OHCA regulations also explain what documentation is required such as agreements, balance sheets, organizational charts, certified financial statements (for the three prior years), articles of incorporation, and other governance documents (where applicable), explanations of how adverse impacts will be reduced, certain FTC filings, and other information.
The OHCA regulations also explain the various timeline requirements what constitutes a “material change,” and other issues.
New York, Oregon, Washington, New Jersey, and other states have similar oversight laws.
The aim of the legislation is to ultimately provide recommendations on how to limit healthcare costs.
Healthcare practices starting in 2024 need to understand when their practices must provide notice to the California Office of Healthcare Affordability. Generally, the requirement to notify the state agency applies to mergers, acquisitions, and material changes of ownership, operations, or governance of a covered healthcare entity.
Experienced healthcare lawyers will explain whether you are a covered healthcare entity, when you must give notice, and what information you must provide. Generally, the information that is being provided to OHCA is informational so the agency can make recommendations and provide information to the public about the cost of medical services. OHCA isn’t approving or disproving any transactions but you can’t complete the transaction if you fail to provide proper notice.
Medical practices, hospitals, and other medical businesses should contact Cohen Healthcare Law Group, PC to discuss their need to comply with California’s new cost regulations. Our experienced healthcare attorneys advise medical practitioners and medical businesses about healthcare compliance laws and regulations.
Contact our healthcare law and FDA attorneys for legal advice relevant to your healthcare venture.
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