California’s Office of Administrative Law on Oct. 2 approved updated Office of Health Care Affordability regulations implementing Assembly Bill 1415. The regulations expand which private equity, hedge fund, MSO and real estate transactions must be reported to the state.
Here are 10 things to know about the regulations, according to a brief by attorneys Jessica Robinson Hanna, Caroline Farrington and Viraj Paul:
1. The regulations take effect Nov. 2.
2. AB 1415’s statutory requirements took effect before the implementing regulations were finalized, which left regulated entities unsure how far the expanded filing requirements reached. The regulations set more specific filing thresholds, transaction triggers and disclosure requirements.
3. The OHCA review framework now covers a broader group of “noticing entities.” These include private equity groups, hedge funds, MSOs, newly created acquisition entities and other entities that own, operate or control providers. Falling into one of these categories does not trigger a filing on its own. Specific thresholds and transaction circumstances decide whether notice is required.
4. A filing may be required when a transaction leaves a private equity group or hedge fund holding 10% or more of the assets, equity, debt or liabilities of a qualifying healthcare entity or MSO.
5. Smaller stakes can also trigger a filing if the investor gains certain governance, operational, financial or management rights. These include the power to appoint leadership, veto decisions, alter operations, approve debt, manage the entity through management agreements, charge fees, or direct the use of capital or net income.
6. MSO triggers include an MSO starting to provide management and administrative services to a qualifying healthcare entity. They also cover an MSO serving two or more providers that together generate at least $10 million in annual California revenue, and any transaction that transfers control, responsibility or governance of a healthcare entity. The authors said these provisions are especially relevant to physician practice management arrangements in states that restrict the corporate practice of medicine.
7. A new real estate trigger captures some sale-leaseback structures. Notice may be required when real estate used for healthcare services is transferred to an entity other than the acquirer or its direct parent and the surviving healthcare entity will lease or pay rent on the property afterward.
8. Disclosure requirements are much broader than in many other state transaction notices. Depending on the deal, filings may need:
- organizational charts up to the ultimate parent
- owners holding 5% or more
- valuation analyses
- three years of financial statements
- private equity portfolio information
- debt-to-enterprise-value and debt-to-equity ratios
- investor presentations and board materials
- patient and enrollee information by county
- staffing data
- support for any claimed quality, access or cost benefits
9. Covered transactions still require 90 days’ notice before closing. Once a notice is complete, OHCA generally has 45 days to decide a cost and market impact review is unnecessary or 60 days to decide one should proceed, subject to tolling. A full review could push the deal timeline well past the initial notice period.
10. The review clock starts only when OHCA deems a notice complete. An incomplete or inconsistent filing can delay review even if it was submitted 90 days before the planned closing. The authors recommend that parties identify every entity with its own filing obligation and coordinate their submissions.
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