On September 7, 2018, Governor Jerry Brown signed into law Assembly Bill No. 595, A.B. 595, which amends the California Health and Safety Code to increase oversight by the California Department of Managed Health Care (“DMHC”) of health care service plan mergers and acquisitions (M&A). (See, Cal. Health & Safety Code §§1399.65 and 1399.66). The law allows DMHC to reject M&A transactions that DMHC determines will have an adverse impact on, among other things, competition, subscribers and enrollees, and the stability of the health care delivery system. In addition, DMHC will be empowered to impose conditions that it believes will protect subscribers and enrollees and the public interest as a condition of approval of the transaction (as further described below).
Under the new law, which takes effect on January 1, 2019, a health care service plan that intends to merge, consolidate with, or enter into an agreement that results in its purchase, acquisition, or change of control by another entity, including another health care service plan or a health insurer, has to get prior approval from the director of DMHC (the “Director”). Approval from the Director requires the parties to outline any potential impact to access, network adequacy, handling of consumer complaints, and claims processing and may require a public hearing on the transaction. The parties will not be able to complete the planned transaction until they obtain the Director’s approval.
The Process for DMHC Approval Under A.B. 595
File Information with DMHC. The health care service plan must file all the information that is necessary for the Director to make a determination to approve, conditionally approve, or disapprove the transaction. This necessary information includes, but is not limited to, a complete description of the proposed transaction, any modifications to the plan’s licensure, any approvals from other state or federal agencies that are needed to complete the transaction, and any supporting documentation required by the Director.[1]
The Director’s Decision. The Director can disapprove the transaction based on the information provided and/or if the Director finds that the transaction would substantially lessen competition in health care plan products or create a monopoly in California. The Director can obtain an opinion from a consultant with expertise to assess the competitive impact of the transaction. Conditional approval means that the Director’s approval of the transaction is contingent on the plan’s agreement to fulfill one or more conditions intended to benefit subscribers and enrollees of the health care plan, provide for a stable health care delivery system, and/or achieve other objectives in the public interest.
Independent Analysis. For a major transaction, the Director must obtain an independent analysis of the impact of the transaction on subscribers and enrollees, the stability of the health care delivery system, and other relevant areas before making a determination. A transaction is considered major when it: (1) affects a significant number of enrollees; (2) involves a material amount of assets; or (3) adversely affects either the subscribers or enrollees or the stability of the health care delivery system because of the entity’s market position. Independent analysis is permitted but not required for all other transactions.
Public Meeting. Prior to making a decision on a major transaction, DMHC must hold a public meeting on the proposed transaction. The public meeting will allow the parties to the proposed transaction and members of the public to provide written and verbal comments regarding the transaction. If a substantive change is made after the public meeting, the Director may hold an additional public meeting regarding the change. The Director will consider the testimony and comments received at the public meeting in making her determination whether or not to approve the transaction. For any non-major transactions, the public meeting is optional.
Asset Acquisition Statement. If the Director determines that a material amount of assets of a health care service plan is subject to purchase, acquisition, or change of control, the Director will prepare a statement describing the proposed transaction and make it available to the public before the public meeting.[2]
Fees. The health care service plan will have to reimburse the Director for the reasonable costs associated with obtaining the independent analysis, obtaining the opinion from a consultant, hosting the public meeting, and engaging in any other actions related to the transaction and its review.
Conclusion
A.B. 595 stands to increase government involvement in health care service plan M&A transactions. The impact, if any, on transaction volume and structure remains to be seen.
*Melissa Gertler is a law clerk in the Sheppard Mullin’s Century City office.
[1] Cal. Health & Safety Code § 1399.65(a)(3).
[2] Cal. Health & Safety Code § 1399.65(d).