The Federal Trade Commission and the U.S. Department of Justice made a splash this summer with their announcement of proposed changes to the federal premerger notification form and the premerger notification rules implementing the Hart-Scott-Rodina Antitrust Improvements Act. While industries across the board await the finalized changes to the federal premerger notification form and rules, health care businesses should also be keeping track of state law developments creating additional state specific notification requirements applicable to transactions involving various types of health care entities and provider organizations. These state law requirements can have a meaningful impact on transaction timelines and budgets and should be taken into account by deal teams early in the planning process as they evaluate the viability of certain transactions and the time it will take to get to closing.

Some key states that have recently adopted premerger notification requirements targeted at transactions in the health care industry include California, Illinois, Minnesota, and New York. The notice requirements in each of these states are summarized below.

California

The California Health Care Quality and Affordability Act (the “California Act”) was signed into law on June 30, 2022, and will impose significant pre-closing notice requirements on certain health care entities operating in California that enter into transactions on or after April 1, 2024, involving either (1) a sale, transfer, lease, exchange, option, encumbrance, conveyance, or disposition of a material amount of the assets of a health care entity, or (2) a transfer of control, responsibility or governance of a material amount of the assets or operations of a health care entity, in either case to one or more entities.¹ As directed by the terms of the California Act, the California Office of Health Care Affordability (OHCA) issued proposed emergency regulations on July 27, 2023, further defining the types of entities and transactions that are subject to the California Act’s notice requirements and review process and then revised them on Oct. 9, 2023, in response to public comments (the “Proposed Regulations”).² The Proposed Regulations go into effect on Jan. 1, 2024, subject to any changes the OHCA elects to make in response to public comments it receives prior to Oct. 17, 2023. The OHC plans to issue final regulations in November.

As updated by the Proposed Regulations, the California Act will apply to a wide array of health care entities operating in California, including payors, physician organizations with 25 or more physicians, risk-bearing entities, hospitals, ambulatory surgery centers, clinical laboratories, imaging facilities, pharmacy benefit managers, any health care entity entering into a transaction with a physician organization with fewer than 25 physicians, and any entity that performs the functions of a health care entity and either controls, governs, or is financially responsible for a health care entity or is subject to the control, governance, or financial control of the health care entity, such as any organization that acts as an agent of a provider in negotiating with payors or developing provider networks. Management services organizations, however, are not considered health care entities under the California Act. At least 90 days prior to closing a transaction covered by the California Act, a health care entity operating in California must notify the OHCA in writing of the proposed transaction, provided that the health care entity (1) has annual revenue of at least $25 million or owns or controls California assets of at least $25 million; (2) has annual revenue of at least $10 million or owns or controls California assets of at least $10 million and is entering into a transaction with a health care entity that has annual revenue of at least $25 million or owns or controls California assets of at least $25 million; or (3) is located in or serves at least 50% of patients who reside in a health professional shortage area. Only transactions constituting a “material change transaction,” including those meeting the following criteria, need to be reported to OHCA:

• Transactions with a proposed market value of $25 million or more and concerning the provision of health care services;
• Transactions involving the sale or other disposition of 25% or more of the total California assets of any health care entity that is a party to the transaction;
• Transactions likely to increase the annual revenue of any health care entity that’s a party to the transaction by at least $10 million or 20% of annual revenue;
• Transactions that change the form of ownership of a health care entity, including from physician-owned to private-equity owned;
• Transactions involving a transfer of 25% of more of the control, responsibility, or governance of a health care entity;
• Transactions that result in the vesting of supermajority rights, veto rights, and similar provisions, even with a change of less than 25% of the control, responsibility, or governance of a health care entity;
• Transactions that will result in an entity contracting with payers on behalf of consolidated or combined providers and is more likely than not to increase the annual California-derived revenue of any providers in the transaction by either $10 million or more or 20% or more of annual California-derived revenue at normal or stabilized levels of utilization or operation;
• Transactions involving the formation of a new health care entity, affiliation, partnership, joint venture, or parent corporation for the provision of health services in California that is projected to have at least $25 million in California-derived annual revenue at normal or stabilized levels of utilization or operation, or transfer control of California assets related to the provision of health care services valued at $25 million or more;
• Transactions involving a health care entity joining, merging, or affiliating with another health care entity, affiliation, partnership, joint venture, or parent corporation related to the provision of health care services where any health care entity has at least $10 million in annual California-derived revenue;
• Transactions that are part of a series of related transactions for the same or related health care services occurring over the past ten years involving the same health care entities or entities affiliated with the same entities, with the proposed transaction and its related transactions constituting a single transaction for purposes of calculating the size of party and size of transaction thresholds described above; or
• Transactions involving the acquisition of a health care entity by another entity and the acquiring entity has consummated a similar transaction(s), in the last ten years, with a health care entity that provides the same or related health care services, with the proposed transaction and its related transactions constituting a single transaction for purposes of calculating the size of party and size of transaction thresholds described above.

“Material change transaction” does not include (1) transactions in the usual and regular course of business of the health care entity, meaning those that are typical in the day-to-day operations of the health care entity, or (2) situations in which the health care entity directly, or indirectly through one or more intermediaries, already controls, is controlled by, or is under common control with, all other parties to the transaction, such as a corporate restructuring.

In the event both a health care entity involved in a transaction and the terms of the transaction meet the notice requirements under the California Act, the health care entity is required to provide the OHCA with a substantial amount of information, including, without limitation:

• A detailed description of the transaction and the entities to a transaction;
• Information regarding submissions to any other state or federal agencies;
• Copies of current agreements and term sheets;
• A pro-forma post-transaction balance sheet for the surviving/successor entity;
• Certified financial statements for the prior three years;
• Any HSR filings with the Federal Trade Commission;
• Documentation related to the mitigation of any potential adverse impacts of the transaction on the public; and
• Documentation supporting the submitter’s responses.

All information submitted to the OHCA by the parties to a proposed transaction will be treated as public record unless the parties are able to convince the OHCA to keep portions of the notice and related documentation confidential.

Once all the required information has been provided to the OHCA, the OHCA has 60 days to decide whether to (1) conduct a cost and market impact review (CMIR) of the proposed transaction or (2) waive such review; provided, however, the parties to the transaction can request expedited review by submitting an explanation and supporting documentation demonstrating a need for the transaction to close immediately due to one or more of the parties to the proposed transaction being in financial distress and the transaction being necessary to ensure the availability of critical health care services in the area. The decisions to grant or reject a request for expedited review and whether or not to conduct a CMIR are subject to the OHCA’s discretion, but health care entities can expect a CMIR to be conducted if a proposed transaction may make a significant impact on the market competition and California’s ability to meet cost targets or costs for purchasers and consumers. A proposed transaction that must be reported to the OHCA cannot be completed until 60 days after the OHCA issues a final report unless the OHCA elects to waive the CMIR. In the event the OHCA does decide to conduct a CMIR, it will work toward issuing a preliminary report within 90 to 135 days thereafter. Once the preliminary report is issued, it will be subject to a 10 day public comment period. The OHCA will then issue its final report within 30 days of the expiration of the public comment period unless it determines that there is “good cause” for an extension. Additionally, the OHCA is entitled to seek reimbursement from transacting parties for all actual, reasonable, and direct costs related to its review of transactions constituting a “material change.” This may add to the transacting parties’ total transaction costs.

While OHCA approval of a transaction is not required, the scope of the notice requirements and the OHCA’s discretion to extend the deadline for its final report create the possibility that proposed transactions may be subject to significant delays and increased costs.

Illinois

Illinois House Bill 2222 (Public Act 103-0526) (the “Illinois Act”) was signed into law on Aug. 11, 2023, and goes into effect on Jan. 1, 2024. The Illinois Act requires certain “healthcare facilities” and “provider organizations” operating in Illinois to provide the Illinois Attorney General with 30 days prior notice of any merger, acquisition, or contracting affiliation between two or more health care facilities or provider organizations not previously under common ownership or contracting affiliation (a “Covered Transaction”). Under the terms of the Illinois Act, “health care facilities” include ambulatory surgery centers, hospitals, kidney disease treatment centers and institutions, places, buildings, or rooms used for the provision of a health care “category of service,” as defined under the Illinois Health Facilities Planning Act. “Category of service” means “a grouping by generic class of various types or levels of support functions, equipment, care, or treatment provided to patients or residents, including, but not limited to, classes such as medical-surgical, pediatrics, or cardiac catheterization.” “Category of service” specifically does not include the practice of a physician or other licensed health care professional while functioning in an office providing for the care, diagnosis, or treatment of patients.

Further, the Illinois Act defines “provider organization” as “a corporation, partnership, business trust, association, or organized group of persons, whether incorporated or not, which is in the business of health care delivery or management and that represents 20 or more health care providers in contracting with health carriers or third-party administrators for the payment of health care services.” The phrase “in the business of health care delivery or management” as used in the definition of “provider organization” will likely be broadly construed by the Illinois Attorney General to mean (1) being involved in the business of delivering health care services directly to patients, and (2) providing management services to businesses engaged in delivering health care services directly to patients. Businesses engaged in delivering health care services directly to patients include physician groups, dental practices, and other health care provider groups. Businesses involved in providing management services to businesses engaged in delivering health care services directly to patients include health care management services organizations and dental services organizations. That said, simply being engaged in the business of health care delivery or management doesn’t make a company a “provider organization” under the terms of the Illinois Act. In order to be a “provider organization,” a business entity must both be engaged in the business of health care delivery or management and represent 20 or more health care providers in contracting with third-party payers of health care services (i.e. health and dental benefits plans).

In addition to imposing the notice requirements described above, the Illinois Act grants the Illinois Attorney General the authority to request additional information about the details of a Covered Transaction within 30 days of receiving notice of the Covered Transaction. If the Illinois Attorney General requests additional information about a Covered Transaction, the parties to the Covered Transactions may not finalize the transaction until 30 days after the parties have substantially complied with the requests. Notably, the Illinois Act does not define substantial compliance and instead appears to leave the determination of whether parties to a Covered Transaction have substantially complied with requests for additional information up to the Illinois Attorney General’s discretion. This has the potential to produce delays as parties to Covered Transactions will be required to wait for confirmation from the Illinois Attorney General that they have substantially complied with all information requests with no apparent guardrails on the timeline for determining substantial compliance in the Illinois Act’s text.

Minnesota

In May of 2023, Minnesota formalized and put into effect new reporting requirements for certain health care entity transactions involving health care entities operating in Minnesota (the “Minnesota Act”).³ Minnesota makes it clear that the intent of these expanded notification requirements is to assist the state in prohibiting transactions by any health care entity that may substantially lessen competition or create a monopoly. In order to enforce this prohibition, Minnesota’s law not only institutes a number of transaction notification requirements but also grants the Minnesota Attorney General the power to review, enjoin, or unwind any applicable transaction that it believes to be in violation of the law.

Minnesota defines a health care entity as hospitals, hospital systems, captive professional entities, medical foundations, health care provider group practices, entities organized or controlled by one of the above entity types, and entities that own or exercise control over one of the above entity types. Both for-profit and nonprofit health care entities are subject to the notice requirements in Minnesota.

Minnesota’s health care entity transaction notification requirements generally apply to transactions involving all traditional forms of consolidation, including mergers and acquisitions that result in a change in control or involve a certain amount of interest in the business. Accordingly, a “transaction” under Minnesota law is defined as a single action or a series of actions that occur within a five-year period in Minnesota or involving a health care entity formed or licensed in Minnesota, that constitutes: (1) a merger or exchange of a health care entity with another entity; (2) the sale, lease, or transfer of 40% or more of the assets of a health care entity to another entity; (3) the granting of a security interest in 40% or more of the assets of a health care entity to another entity; (4) the transfer of 40% or more of the shares or other ownership of a health care entity to another entity; (5) an addition, removal, withdrawal, substitution, or other modification of one or more members of a health care entity’s governing body that transfers control, responsibility for, or governance of the health care entity to another entity; (vi) the creation of a new health care entity; (6) an agreement or series of agreements that results in the sharing of 40% or more of a health care entity’s revenues with another entity, including affiliates of such other entity; (7) an addition, removal, withdrawal, substitution, or other modification of the members of a health care entity formed under the Minnesota Nonprofit Corporation Act that results in a change of 40% or more of the membership of the health care entity; or (8) any other transfer of control of a health care entity to, or acquisition of control of a health care entity by, another entity.

Notably, Minnesota’s notification requirements differ based on the size of the proposed transaction, such that the regulation recognizes both “small transactions” and “large transactions” for the purposes of determining applicability and notification requirements. Pursuant to Minnesota law, a “small transaction” is defined as a health care entity with an average annual revenue between $10 million and $80 million — or the transaction will result in an entity projected to have average annual revenue between $10 million and $80 million once operating at full capacity — whereas a “large transaction” is a health care entity with an average annual revenue of at least $80 million per year.

The applicable notification period varies depending on whether the proposed transaction is considered to be a small transaction or a large transaction pursuant to the above definitions. Small transactions must be reported to the Minnesota’s Commissioner of Health (the “Commissioner”) and Attorney General at least 30 days prior to the proposed closing date of the transaction or within 10 business days of the date the parties first reasonably anticipate entering into the transaction if the expected completion is within less than 30 days. Large transactions, on the other hand, must be reported to the Commissioner and Attorney General at least 60 days prior to the transaction’s proposed closing date, but the parties may request that the Attorney General extend this time period by an additional 90 days. Notably, the notification requirements for small transactions do not go into effect until Jan. 1, 2024.

Pursuant to Minnesota law, the transacting parties must disclose an extensive amount of information related to the proposed transaction in their notice. This includes, but is not limited to, information regarding the entities involved in the transaction, transaction agreements, expert reports conducted in evaluating the transaction, relationships between the entities involved and affected health care providers, the primary and proposed service area for each location, markets to be impacted by the transaction and tax records for all entities involved in the transaction. This requirement is essentially the same for both small and large proposed transactions.

Lastly, health care entities should note that the Minnesota Attorney General and Commissioner are not required to review the notice and filings in any specified amount of time. However, after receiving the notice contents, the Commissioner will analyze the transaction’s potential impact on health care cost, quality, and competition. Moreover, if the Minnesota Attorney General determines that the transaction is anticompetitive or otherwise harms the public interest, the Attorney General may bring a civil action to enjoin or unwind the transaction.

New York

Article 45-A of the Public Health Law of New York (the “New York Act”) went into effect on Aug. 1, 2023 and requires certain health care entities in New York to provide notice to the New York State Department of Health of a material transaction at least 30 days prior to the closing of the transaction. The following entities are considered “health care entities” under the New York Act and are required to comply with the notice requirements in the event they elect to pursue a material transaction (as defined in the New York Act):

• A physician practice or group;
• A management services organization or similar entity that provides turnkey management services to a physician practice under the terms of a management contract;
• A provider-sponsored organization;
• A health plan; and
• Any other kind of health care facility, organization, or plan that provides health care services in New York.

Under the terms of the New York Act, a “material transaction” includes any of the following that occur during a single transaction or a series of related transactions occurring within a rolling 12 month period that result(s) in a health care entity increasing its total gross in-state revenues by $25 million or more:

• A merger of one or more health care entities;
• An acquisition of one or more health care entities, including the assignment, sale, or other conveyance of assets, voting securities, membership or partnership interests or the transfer of control, such as contracting for services commonly provided through a management or administrative services agreement between a physician practice and a management services organization;
• An affiliation agreement or contract formed between a health care entity and another person; or
• The formation of a partnership, joint venture, accountable care organization, parent organization, or management services organization for the purpose of administering contracts with health plans, third-party administrators, pharmacy benefit managers, or health care providers.

The New York Act directs the New York State Department of Health to publish the following information about material transactions reported to it on its website for public comment:

• A summary of the proposed transaction;
• An explanation of the groups or individuals likely to be impacted by the proposed transaction; and
• Information about services currently provided by the health care entities involved in the transaction, commitments by the health care entities to continue providing such services, and any services that will be reduced or eliminated.

Health care entities that are party to a material transaction are also required to notify the New York State Department of Health of the closing of the transaction. Additionally, the New York State Department of Health has the ability, if it deems necessary, to notify the New York Attorney General of its findings with respect to any material transaction.

If you have any questions on the new laws summarized above or would like additional information, please contact the authors of this update.

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¹Cal. Health & Safe. §127500 et. seq.
²22 CCR 97431 et seq.
³Minnesota Statutes, sections 145D.01 and 309.715, available at 2023 Minnesota Laws Chapter 66 – H.F.No. 402. These requirements took effect May 26, 2023.