California Board Reviews Health Care Deals

State governments are increasingly entering the realm of health care market oversight and enforcement.

State governments are looking for ways to regulate market activity in the health care industry to stem rising health care costs in an issue that was once typically left to the federal government. The end of May brought another example of what the future may offer in this regard.

Regulation and enforcement at the state level

The California Council on Health Care Affordability (the “Board”) – part of the state Office of Health Care Affordability (OHCA) – is one such entity preparing to scrutinize health care transactions. In 2022, the California Legislature passed SB 184, which established the OHCA within the state Department of Health Care Access and Information. In the December 2023 issue of Epstein Becker Green View in this case, we noted that SB 184 was intended to limit adverse competitive and cost impacts resulting from, among other things, (i) increased transaction volume resulting in consolidation of health care companies; (ii) increased private investment and potential abuses of “corporate medical practice”; (iii) a recognized need for more patient-centered care; and (iv) financial/budgetary constraints.

The OHCA’s mandate is broad and includes monitoring cost trends and conducting research and analysis in the health care market, including, but not limited to, the effects of consolidation, market power, and venture capital activity on competition, pricing, access, quality, and equity.( 1) State Legislature California provided that the OHCA would accomplish this task by controlling mergers and acquisitions (M&A), corporate affiliations, or other transactions that involve significant changes in ownership, operations, or management structure.(2) The statutes authorizing the OHCA go far to reach “plans health care services, health insurers, hospitals or hospital systems, physician organizations, health care providers, pharmacy benefit managers and other health care entities” and applies to them.

Since its inception, the OHCA has published regulations specifying the requirements for submitting and considering a notice of a significant change transaction by a healthcare entity. The statute and accompanying regulations authorize the OHCA to conduct a cost and market impact review and, if the OHCA determines that a material change “may have a risk of significant impact” on competition in the market, to refer the transaction to the California Attorney General for further investigation and enforcement action consistent with the Attorney General’s authority.(4) California is not alone; other West Coast states have similar initiatives – Oregon’s regulations for health care providers include the Material Change Transaction Regulations and the Health Care Market Oversight Program.(5) Washington’s regulations include material change notification requirements for market participants health care.( 6)

And for those wondering if this development is a West Coast-only phenomenon, the answer is “No.” For example, an Indiana bill signed into law on March 13, effective July 1, amends the Indiana Code regarding notification of health care mergers and acquisitions. The legislation was a direct result of recommendations from a state health care oversight task force examining why Indiana residents were reportedly paying some of the highest health care costs in the nation. As our colleagues noted in a previous blog on healthcare M&A delays, other states regulating this area include New York, Connecticut, Massachusetts, Nevada, Rhode Island, Illinois, and Minnesota.(7)

Recent OHCA activity

At a recent Board meeting, the main area of discussion was setting standards for alternative payment models and goals for their implementation. In a recently published revised memo, OHCA outlines its approach to promoting payment models that focus on equitable, high-quality care in an effective and value-based manner. OHCA proposes to achieve this by, among other things, encouraging an industry-wide transition away from fee-for-service, convening and engaging a broad range of healthcare industry stakeholders, collecting demographic data to develop stronger models and insights into healthcare consumers, and providing providers technical assistance and training on how to implement these new payment models. Perhaps optimistically, the OHCA has recommended a two-year timeline that projects a 65% member adoption rate for commercial HMO plans by 2026. However, the revised memo notes that these adoption targets may be revised after the first two years of data collection. Under current projections, OHCA expects most members to have all commercial HMO plans, commercial PPO plans, Medi-Cal, and Medicare Advantage plans within 10 years.

In addition to stemming the rising tide of health care costs in California, Board members expressed particular interest in equity and affordability, which appear to be achieved by emphasizing and incentivizing quality through certain risk-sharing mechanisms and the development of minimum thresholds for shared savings and the creation of specific incentives to aimed at increasing quality and profitability. The board emphasized the need to introduce bonuses and penalties to help drive this work and, over time, focus on the provider part of the equation. The Board also expressed concern about new third-party entities increasing the costs of the health care system and the overall cost of health care in California.

While we expect more from the OHCA Board, what is particularly interesting is the many similarities between its focus and the work of the Federal Trade Commission (FTC) and the Department of Justice in the context of clinical integration. In March 2024, these agencies and the U.S. Department of Health and Human Services issued a joint request for information seeking public comments on business ownership in health care, and the FTC hosted a webinar. Most recently, on May 23, the U.S. House of Representatives Committee on Budget held hearings on Eliminating Monopolies in Health Care: A Study of the Budgetary Impacts of Health Care Consolidation, and the House Ways and Means Subcommittee sponsored a bill titled: The Decline of Private Practice: Exploring the Challenges Facing Independent Medicine. California is also considering further legislative action in this area. Another California bill, AB 3129, introduced in February, would establish a regulatory framework requiring approval of private equity-sponsored health care transactions. AB 3129 passed the State Assembly on May 21 and is currently pending in the State Senate. Thus, one wonders what interplay may occur in this space between the federal and state levels as more laws are passed and additional regulations are promulgated.

To go

Scrutiny of health care transactions is part of a nationwide trend, whether it is driven by concerns about health care costs or poor patient outcomes after the deal is made. No matter where they are, those operating in this space would be wise to keep an eye on California. It is certain that healthcare transactions will take longer to finalize. Both California and federal agencies appear to be interested in the cumulative effect of various transactions. This means that while there may only be one transaction for which approval will be sought, prior transactions that, when combined with the current transaction, could be viewed as anti-competitive are likely to come under greater scrutiny.

Creative M&A advisors and regulatory lawyers are not enough to speed up the transaction. Such an advisor will either need to have significant expertise in the economics and analytics of clinical integration, value-based purchasing and risk sharing, or have expertise in consulting in this area to develop the case well in advance of seeking the required regulatory approvals . Additionally, any acquisitions or joint ventures should ultimately be aimed at demonstrating that they will increase quality and cost effectiveness, as it is not enough to identify suppliers that do not meet expectations or economies of scale due to greater size and scope.

Companies operating in this space should consult legal counsel. Epstein Becker Green will continue to monitor this area and can assist with M&A, regulatory, antitrust and more. See our latest blog post about the Department of Justice’s new task force to combat monopolies and collusion in health care.

Epstein Becker Green staff attorney Ann W. Parks contributed to this post.

NOTES

(1) See Cal. Occupational Health and Safety Code § 127507, basic (AND).

(2) ID.

(3) ID.

(4) See Cal. Occupational Health and Safety Code § 127507.2, basic (a) and (d)(1)-(2); see also 22 CCR 97438(d)(4).

(5) ORS §§ 415.500 et seq.; Oregon Administrator. Policies 409-070-0000 et seq.

(6) Wash. Rev. Code Ann. § 19.390.010 it next.

(7) New York Pub. Health L. §§ 4550-4552; Connect. Gen Stat. § 19a-486i; Mass. Gen. Laws Ch. 6D § 13; Nev. Rev. Stat. § 598.A.370; RI Gen. Regulations § 23-17.14.-1 et seq.; 740 ILCS 10/7.2a (Illinois Antitrust Act) and 20 ICLS 3960/8.5 (Illinois Health Care Facilities Planning Act); Min. stock § 145d. 01, .02.