California’s Office of Health Care Affordability Kicks into Action: Are Organizations Ready for Increased Scrutiny in Health Care Transactions?

Categories: Health Care Transactions, Mergers and Acquisitions

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

In what was once an issue typically left to the federal government, state governments are looking for ways to regulate market activity in the health care industry as a way to stem increases in health care costs. Late May brought yet another example of what the future may offer in this regard.

State-Level Regulation and Enforcement

California’s Health Care Affordability Board (the “Board”)—part of the state’s Office of Health Care Affordability (OHCA)—is one such entity gearing up to scrutinize health care transactions. In 2022, the California legislature passed SB 184, which established OHCA within the state’s Department of Health Care Access and Information. In Epstein Becker Green’s December 2023 Insight on the subject, we noted that SB 184 was intended to reduce the adverse impact on competition and costs arising from, among other things, (i) an increased volume of transactions, resulting in consolidation among health care businesses; (ii) increased private investment and potential “corporate practice of medicine” abuses; (iii) a recognized need for more patient-centered care; and (iv) financial/budgetary constraints.

OHCA’s mandate is broad and includes monitoring cost trends and conducting research and studies on the health care market, including but not limited to the impact of consolidation, market power, and venture capital activity on competition, prices, access, quality, and equity.[1] The California legislature envisioned that OHCA would accomplish this task by scrutinizing mergers and acquisitions (M&A), corporate affiliations, or other transactions that entail a material change to ownership, operations, or governance structure.[2] OHCA’s authorizing statutes are far-reaching and apply to “health care service plans, health insurers, hospitals or hospital systems, physician organizations, providers, pharmacy benefit managers, and other health care entities.”[3]

Since its inception, OHCA has promulgated regulations that lay out the requirements for submission and review of a notice of a material change transaction by a health care entity. Statute and accompanying regulations authorize OHCA to conduct a Cost and Market Impact Review and, if OHCA determines that a material change is “likely to have a risk of a significant impact” on market competition, to refer transactions to the California attorney general for further investigation and enforcement action consistent with the powers of the attorney general.[4] California is not alone; other West Coast states have similar initiatives—Oregon’s regulation of health care entities includes regulation of material change transactions and a Health Care Market Oversight Program.[5] Washington State’s laws include notice requirements for a material change with respect to health care market participants.[6]

And for those wondering if these developments are a West Coast–only phenomenon, the answer is a resounding “No.” To illustrate, an Indiana bill signed on March 13, effective July 1, amends the Indiana Code with respect to notice of health care mergers and acquisitions. The legislation was the direct result of recommendations of a state Health Care Oversight Task Force studying reasons why the residents of Indiana reportedly paid among the highest health care costs in the country. As our colleagues have noted in a past blog on transaction delays in health care mergers and acquisitions, other states regulating in this area include New York, Connecticut, Massachusetts, Nevada, Rhode Island, Illinois, and Minnesota.[7]

Recent OHCA Activity

At a recent Board meeting, a main area of discussion was the establishment of Alternative Payment Model Standards and Adoption Goals. In a recently released Revised Memo, OHCA outlines its approach to promoting payment models that focus on equitable, high-quality care in an efficient and value-driven manner. OHCA proposes to do this by, among other things, encouraging an industrywide shift away from fee-for-service payments, convening and engaging a broad range of health care stakeholders, collecting demographic data to develop stronger modeling and insights into the health care consumer, and providing technical assistance and training to providers on how they can implement these new payment models. Perhaps optimistically, OHCA recommended a two-year timeline that envisions a 65 percent member adoption rate for commercial HMO plans by 2026. However, the Revised Memo notes that these adoption goals are subject to revision after the first two years of data collection. Under the current outlook, OHCA envisions adoption for a majority of members across all commercial HMO, commercial PPO, Medi-Cal, and Medicare Advantage plans within 10 years.

In addition to stemming the rising tide of health care costs in California, the Board members expressed a particular interest in equity and affordability, which it seems to believe might be achieved by emphasizing and incentivizing quality through certain risk-sharing mechanisms and the development of minimum thresholds for shared savings and creation of certain incentives designed to increase quality and cost-effectiveness. The Board emphasized the need for bonuses and penalties to help drive this work and, over time, to focus on the provider part of the equation. The Board expressed that it is also concerned about new third-party entrants adding costs to the health care system and the total cost of health care in California.

While we expect more to come from the OHCA Board, what appears particularly interesting are the many similarities between its focus and the activities of the Federal Trade Commission (FTC) and Department of Justice in the context of clinical integration. In March 2024, those agencies and the U.S. Department of Health and Human Services issued a joint Request for Information soliciting public comments on corporate ownership in health care, and the FTC held a webinar. Recently, on May 23, the U.S. House of Representatives Budget Committee held hearings on Breaking Up Health Care Monopolies: Examining the Budgetary Effects of Health Care Consolidation, and the House Ways and Means Subcommittee on Health sponsored The Collapse of Private Practice: Examining the Challenges Facing Independent Medicine. California is also considering further legislative action in this arena. 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’s assembly on May 21 and is currently pending in the state senate. Thus, one wonders what, if any, interplay there might be in this space between the federal and state levels as more legislation is enacted and additional regulations are promulgated.

Takeaways

The scrutiny on health care transactions is part of a national trend—whether driven by concerns over health care costs or poor patient outcomes following a deal. No matter where they are located, entities operating in this space would be wise to keep an eye on California. What is certain is that it will take longer to complete health care transactions. Both California and the federal agencies seem to be interested in the cumulative effect of various transactions. That is, although there may be only one transaction for which they are seeking approval, prior transactions that might be seen as anticompetitive coupled with the current transaction likely will face greater scrutiny.

Creative M&A and regulatory attorneys will not be sufficient to expedite transactions. Such counsel will need to either have significant background in the economic underpinnings and analytics of clinical integration, value-based purchasing, and risk-sharing or retain consulting expertise in this area to develop a case long before they embark upon seeking the requisite regulatory approvals. Additionally, any acquisitions or joint ventures should aim to definitively demonstrate that they will increase quality and cost-effectiveness, as it will not be sufficient to point to failing providers or economies of scale through greater size and scope.

Companies operating in this space should consult with counsel. Epstein Becker Green will continue to monitor this area and can assist with M&A, regulatory, antitrust issues, and more. See our latest blog post on DOJ’s new task force to target health care monopolies and collusion and past posts on health care transactions.

Epstein Becker Green Staff Attorney Ann W. Parks contributed to the preparation of this post.