Background

OHCA’s transaction review process took effect on April 1, 2024, and currently requires “health care entities” to report certain material transactions to OHCA at least 90 days before the closing of the transaction. Transactions subject to review by other agencies, as well as those that do not meet specified thresholds for revenue, assets, or change-of-control percentages, are exempt from the OHCA transaction review process. After reviewing the information provided in the transaction notification, OHCA has the right to conduct a more thorough cost and market impact review (CMIR), which can significantly delay the closing of a transaction by at least several months.

Following Governor Newsom’s veto of AB 3129 during the prior legislative session, legislators introduced AB 1415 to expand OHCA’s review authority, particularly as it applies to healthcare investments by PE groups and hedge funds, but the recently-signed statute will have implications for health systems and other stakeholders.

New notification requirements for “noticing entities” and transactions involving MSOs

Under the existing OHCA requirements, only certain “health care entities” are required to provide notice of material transactions. AB 1415 introduces a new reporting obligation for “noticing entities” and MSOs when they enter into agreements or transactions involving a sale of a material amount of assets or transfer of control of a health care entity or MSO. “Noticing entities” are defined to include PE groups, hedge funds, MSOs, newly formed business entities created to enter into agreements or transactions with health care entities, and entities that own or operate a provider.

New focus on MSOs

AB 1415 broadly defines an MSO as an entity that provides management and administrative support services for a provider in support of the delivery of healthcare services. However, management and administrative support services must include either provider rate negotiation, revenue cycle management, or both, which helps narrow the types of entities that are considered MSOs under AB 1415. The definition also includes a carve out for entities that own one or more general acute care or acute psychiatric hospitals, acknowledging that such entities are not traditionally considered MSOs.

In addition to being subject to the notification requirements outlined above as a designated “noticing entity,” MSOs may be subject to future data reporting requirements from OHCA. While the exact nature of these data reporting requirements is unclear, it is anticipated that OHCA will seek greater insight into the nature of MSOs’ relationships with other health care entities.

Key takeaways

• OHCA’s expanded authority would likely apply to transactions closing on or after January 1, 2026, and may capture certain transactions that are not reviewable by OHCA under the current requirements. Stakeholders entering into transactions that are anticipated to close after January 1, 2026, should closely review the updated statutory language to determine whether they will be required to provide notice to OHCA. Although OHCA does not have the power to approve or impose conditions on a transaction, OHCA’s decision to conduct a CMIR can significantly delay the closing of a transaction.

• OHCA will likely need to promulgate new regulations to effectuate the amendments made by AB 1415 and make corresponding changes to its submission portal. Those new regulations may provide additional clarity as to timing, revenue thresholds, contents of the notice, and other details for the new reporting requirements applicable to “noticing entities” and MSOs, although OHCA may simply apply its existing thresholds and standards for health care entity notices to “noticing entities” and MSOs. Stakeholders should closely monitor the development of those regulations and consider submitting comments during the applicable public comment periods.

• Transactions solely involving a sale of assets or change of control of an MSO would escape regulatory scrutiny under the existing OHCA notice process, but they may become reportable under the new requirements. Importantly, not all MSOs are captured by AB 1415, as the definition of an MSO is limited to entities that provide services to a “provider,” which has a specific definition under the OHCA statute. For example, MSOs that solely provide services to home health agencies, physician groups with fewer than 25 physicians, and other entities that are not considered “providers” would not be subject to the new requirements under AB 1415.

• Given that notifications to OHCA require a substantial amount of information regarding the reporting entities and their operations, the new reporting requirement applicable to “noticing entities” will likely allow OHCA to gain significantly more visibility into the operations of PE groups and hedge funds. The information required in the notice could include financial statements, organizational charts, and information regarding past healthcare transactions consummated by the PE group or hedge fund, among other things.

• Health systems and other stakeholders may be impacted by the AB 1415 provision that requires newly created business entities to provide notice to OHCA when they enter into transactions with health care entities or MSOs. This provision tightens a loophole in the current OHCA requirements, such that parties may no longer be able to avoid the notice requirements simply by using a newly formed entity to purchase the assets or equity of a health care entity.

• AB 1415 is one of two bills signed by Governor Newsom this month targeting PE and hedge fund involvement in healthcare. The other bill, SB 351, codifies California’s existing prohibitions on the corporate practice of medicine and dentistry as they apply to PE groups and hedge funds. For more information on SB 351, see our recent client alert, “Newsom Signs SB 351, Codifying Existing California CPOM Guidance.”