On June 6, 2025, the California Office of Health Care Affordability (“OHCA”) issued its first determination to conduct a Cost and Market Impact Review (“CMIR”) under its health care oversight law.1 This CMIR will involve review of portions of a Material Change Notice submitted by Covenant Care California LLC (“Covenant Care”) regarding the transfer of assets, operations and leases of skilled nursing facilities (“SNFs”) from Covenant Care to affiliates of The Ensign Group, Inc. (“Ensign”), Links Healthcare Group, International Equity Partners, and Spyglass Healthcare.
While OHCA waived CMIRs for the majority of Covenant Care facilities involved in the transaction, it has decided to initiate a CMIR for components of the transaction involving three Covenant Care SNFs.2 Under the proposed transaction, these three SNFs will be operated by affiliates of Ensign, and their property will be transferred to a subsidiary of CareTrust REIT, Inc. (“CareTrust”). According to OHCA’s Determination Notice, Covenant Care appealed the CMIR decision, but it was ultimately upheld by the Director of the Department of Health Care Access and Information (“HCAI”) on June 23, 2025. Supporting documentation submitted in connection with Covenant Care’s notice, including transaction documents,3 corporate governance documents, and financials related to the three Covenant Care SNFs, has been published on OHCA’s website for the public’s review.4
This decision to initiate a CMIR is significant for health care transactions in California. As the still relatively new regulatory body in California that oversees material changes in ownership or governance of health care entities, OHCA reviews notices of material change transactions and decides whether to initiate a CMIR or issue a waiver to a CMIR (see previous Alert). A CMIR is a more in-depth review that OHCA may choose to conduct after determining that a proposed health care transaction is likely to significantly affect market competition, the state’s ability to meet designated health care targets, or affordability for patients. Since OHCA began accepting material change notices in January 2024, it has completed review of 23 transactions, all of which (with the exception of the Covenant Care transaction) have received waivers to CMIRs (see Law360 article discussing OHCA reviews in 2024). The low rate at which OHCA has decided to initiate CMIRs (less than 5%) aligns with prior statements OHCA has made to take a balanced approach in choosing to conduct such reviews, and to follow the model of other states like Massachusetts, which has only ordered 10 reviews equivalent to California CMIRs since the program’s inception in 2013.5
While OHCA has not spoken to the rationale for its determination to conduct a CMIR for the three Covenant Care SNFs, there are several factors that may have contributed to this decision:
- The post-closing operator of the three SNFs, Ensign, is the second largest chain (as measured by number of SNFs) in the country,6 and has a significant market presence in California. According to Covenant Care’s Material Change Notice, Ensign and its affiliates operate over 50 SNFs in the 11 California counties involved in this transaction.7 By comparison, the notice provides that the other post-closing operators for which a CMIR was not ordered, Links Healthcare Group and Spyglass Healthcare, currently operate 15 and two SNFs in the relevant counties, respectively, and International Equity Partners does not operate any SNFs in these counties. As such, OHCA’s focus on the SNFs Ensign is acquiring may reflect its concerns regarding how Ensign’s acquisition may lessen competition and enhance its market dominance in California.
- The post-closing property owner of the three SNFs, CareTrust, is a subsidiary of a real estate investment trust (“REIT”). REITs have faced increased scrutiny from state legislators recently, with several states introducing legislation seeking to impose restrictions on REITs’ investments in health care real estate due to concerns regarding their impact on affordability and quality of care.8
- The acquiring entities have been involved in a significant number of related transactions over the past 10 years. Ensign’s acquiring entities collectively report that they have been involved in the acquisition of 37 health care facilities in the past 10 years,9 and CareTrust reports that it has been involved in over 250 acquisitions, subject to triple-net leases to a third-party licensed operator.10
Over the next few months, OHCA will proceed in its initiation of a CMIR for the three Covenant Care SNFs. In conducting this CMIR, OHCA will examine factors relating to the SNFs’ business and market position, including the effect of the transaction on:
- Availability, accessibility, quality and affordability of health care services;
- Lessening competition or creating a monopoly that could result in increased costs;
- Ability to meet OHCA’s designated health care cost targets;
- Competition for workers and impact on the labor market; and
- Any other factors OHCA determines to be in the “public interest.”11
Upon completion of its CMIR, OHCA will issue a preliminary report of its findings and will allow the public to submit written comments in response to the report. While OHCA technically has 90 days to complete this preliminary report after initiating a CMIR, it has broad authority to toll the review period as it seeks additional information. A potential timeline of OHCA’s review of Covenant Care’s transaction is pictured below (assuming OHCA does not toll review periods). Based on other potential regulatory approvals required for this transaction, the CMIR can have material delays in when and if this transaction closes.
OHCA’s initiation of its first CMIR comes amid other efforts in the state legislature to expand OHCA’s current review process to require notices from private equity groups and management services organizations involved in health care transactions,12 and to restrict private equity management of health care providers.13 Investors and health care entities transacting in California should closely follow these developments, as they may have significant impacts on deal timelines and regulatory requirements in the state.
