Governor Newsom Vetoes Statute Regulating Private Equity and Hedge Fund Healthcare Transactions

November 4, 2024

Elizabeth Mann, Managing Partner

California’s legislature passed a law that required PE firms and hedge funds to obtain prior written consent from the AG’s office before closing a transaction that involved a material investment in, or a change of control of, a California healthcare facility or provider group. Governor Newsom vetoed this bill.  His rationale for vetoing this statute was that California’s Office of Health Care Affordability (OHCA) had jurisdiction over similar transactions, stating:

The Office of Health Care Affordability (OHCA) was established in 2022 to review and evaluate health care consolidation transactions through cost and market impact reviews (CMIR) of mergers, acquisitions, or corporate affiliations involving health plans, hospitals, physician organizations, pharmacy benefit managers, and other health care entities. OHCA analyzes transactions that may

significantly impact market competition, meeting state spending targets, or

affordability and will compile data about market consolidation. While OHCA

itself cannot block a proposed transaction, it can coordinate with other state

entities, including referring transactions for further review to the AG.

I.     What Triggers a Material Change Transaction Review Before OHCA?

There are three facets to OHCA’s jurisdiction to review a proposed transaction.  First, a “health care entity” must be party to, or the subject of, a transaction.  Second, the transaction must involve a “material change.” A material change transaction is one that substantially impacts the control, management, or finances of a covered health care entity. A covered transaction must also meet certain financial or geographic requirements.[1] The financial requirement is met when:

One transaction party is a health care entity that has annual California revenue of at least $25 million, or owns or controls California assets of at least $25 million ($25/25 thresholds)[2] or

A health care entity with $10 million in revenue or that owns or controls California assets of $10 million, and is a party to or a subject of a transaction with:

• A healthcare entity that meets either of the $25/25 thresholds, or
• An entity that owns or controls a healthcare entity that meets the $25/25 thresholds.

The geographic requirement is met where a health care entity is a transaction party, or is subject to a transaction, and that entity provides healthcare services in a designated primary care health professional shortage area.

II.    Timing and Potential Outcomes from a Material Change Transaction Review

A.     Review Timing

The statute requires parties involved in a Material Change Transaction to submit detailed information about the proposed transaction to the Office 90 days before the transaction is scheduled to close. The Submitter(s) must supply information about the parties, the transaction, and its potential market impacts. Submitted materials are posted on the Office’s website, confidentiality can be requested, but the Office is not obliged to grant this request. Key documents are automatically deemed confidential (contracts, compensation, rates, valuation documents and resumes) (if properly requested).

After the filing of a complete notice, the Office will review a proposed transaction, to determine whether it will issue a Waiver, or require a CMIR (Cost, Market Impact Review). Generally, the Office must notify the Submitter within 45 days if it elects to issue a Waiver and within 60 days if it elects to conduct a CMIR.[3] If a Waiver is issued, the transaction may close without delay.

Within 10 business days after receiving a CMIR notice the Submitter(s) may request a review the by Office’s Director. The Director has 5 business days (with a 5-business day extension) to either affirm the CMIR requirement or grant the Waiver.  This determination is final.

The Office has 90 days to complete a CMIR, with the power to grant itself a 30-day extension. Should the Office decide that the submitted documentation is insufficient, or if other agencies are reviewing the transaction, the Office may toll these periods.

Once review is complete, the Office will issue factual findings in a preliminary report.  The transaction parties and the public may submit comments within 10 business days.  Within 15 days of the closing of this comment period, subject to good cause extension rights, the Office will issue its Final Report. After issuance of the Final Report, the parties must wait 60 days to close the transaction. H&S § 127507.2; CCR 22 § 97442.

The Office does not have the power to block or condition the parties’ transaction.  The Office can refer its report to the California AG’s office.  Fairly noted however, if any transaction party is subject to the regulatory jurisdiction of California’s healthcare and insurance regulators, they will likely take note of Office’s findings in its Final Report.[4]  Neither the statute nor accompanying regulations provide for a filing fee. However, OHCA may recover “all actual, reasonable, and direct costs incurred in reviewing, evaluating, and making” their determination. H&S § 127507.4.

B.     Review Focus and Objectives

The Office undertakes a CMIR review where it finds, from its review of the preliminary submissions, that the transaction may reduce competition, create a monopoly, depress wage growth, reduce services, or curtail “culturally competent care.”  The Office also considers whether the transaction will negatively impact the parties’ ability to meet the health care cost increase targets that the Office must designate, oversee and enforce. It also considers whether a transaction involving an out-of-state entity would negatively impact affordability, quality, limit access to health care services in California, or whether this transaction would undermine the financial stability of a California entity.

Mann Legal has a great deal of experience in these matters and would be pleased to advise. Find us at www.mannlegalteam.com.   Mann Legal provides this information as a service to clients and other friends for educational purposes only. It should not be construed or relied on as legal advice or to create a lawyer-client relationship. Readers should not act upon this information without seeking advice from professional advisers.

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[1] Health & Safety Code §127500 et. seq.; Code of Regulations (CCR), Tit. 22, § 97431 et. seq.

[2] “Revenue” for this purpose is defined as the “total average annual California-derived revenue received for all health care services by the company and all affiliates over the three most recent fiscal years.” “Revenue” is specifically defined by provider type. For a covered transaction, parties must file (where available) “certified financial statements for the prior three years” which the regulation defines as “audited financial reports.” CCR 22, §§ 97438, 97435(d).

[3] That timeline is tolled if the Office requests more information from a Submitter or where another agency reviews the proposed transaction. In addition, the 45- and 60-day clocks restart where the core of a proposed transaction changes materially.  CCR 22, § 97440.

[4] Additionally, the statute tasked the Office with setting and enforcing annual statewide healthcare cost increase targets. The Office has set a cost increase ceiling of 3.5% for 2025 and 2026, declining to 3% by 2029 (During 2015-2020 California costs increased by more than 5%). The Office is also tasked with broad healthcare data collection obligations that health care firms must comply with. Contrary to the CMIR provisions, the statute gives the Office significant power to enforce these cost limitations on health care organizations whose cost increase profiles exceed these targets. The Office has the power to impose corrective action plans and fines. It can enforce these requirements in court, including injunctive relief.