California Bill (AB-3129) Targets Private Equity and Hedge Fund Health Care Transactions

California Attorney General Rob Bonta (AG) and Assembly Speaker pro Tempore Jim Wood recently introduced legislation (AB-3129) that would authorize the AG to review private equity group and hedge fund health care transactions. The proposed legislation’s stated intention is to address price increases and lower quality of and decreased accessibility to services associated with private equity acquisitions of certain health care entities, including physician practices. This article provides an overview of the proposed bill, an analysis of the key issues raised by the proposed legislation, and suggestions for next steps for those potentially affected by the proposal. 

Overview of AB-3129

Notice and Timeframe. The proposed bill would require private equity groups and hedge funds to provide the AG notice at least 90 days prior to entering into a change of control or an acquisition with a health care facility or provider group on or after January 1, 2025. The AG could extend the 90-day period by 45 days and would have the power to stay the review period if certain conditions were met, including a determination by the AG to hold a public meeting. Additionally, transactions between private equity groups or hedge funds and nonphysician providers or providers that meet certain annual revenue thresholds would require notice but would not be subject to consent by the AG.  

Review of Transactions and Consent. The AG would have the power to grant, deny, or impose conditions on a transaction if the transaction could have a substantial likelihood of anticompetitive effects or could create a significant effect on the access or availability of health care services. The parties to the transaction may request reconsideration. If the AG gives conditional consent or denies consent to the change of control or acquisition, the parties may seek judicial review. 

Waiver. The proposed bill would authorize the AG to waive the notice and consent requirements if the party makes a written waiver request demonstrating that certain conditions exist, including that the party’s operating costs have exceeded its operating revenue for three or more years, the party cannot meet its debts, the party is at grave risk of immediate business failure, there is a substantial likelihood of a Chapter 11 bankruptcy filing but the party would be substantially unable to successfully reorganize thereunder, the acquisition or change of control will ensure continued access to health care in the relevant market, and the party made “commercially reasonable best efforts in good faith” to elicit alternative offers. The AG would have 60 days to grant or deny the waiver request.

Prohibition of Certain Management Services Relationships. The proposed bill would prohibit physician and psychiatric practices from entering into any agreements or arrangements with any entity controlled in whole or part, directly or indirectly, by private equity groups or hedge funds for the management of any of the affairs of the physician or psychiatric practice in exchange for a fee. Additionally, the proposed legislation would prohibit a private equity group or hedge fund from influencing or entering into contracts on behalf of a practice with any third party, influencing or setting rates for the practice, or influencing or setting patient admission, referral, or provider availability policies. 

Key Issues Raised by AB-3129

The AG Review Process Is Unnecessary. As we discussed in a previous post, California recently enacted legislation (SB-184) intended to address concerns regarding consolidation in California’s health care markets and how such consolidation may impact cost, access, and affordability of health care for patients. The stated purpose of the proposed legislation is to address the same issues regarding health care costs, access, and affordability through a parallel review process by the AG. Also, pursuant to SB-184 and the cost and market impact review regulations (CMIR Regulations), California’s Office of Health Care Affordability (OHCA) has the authority to refer any covered health care transaction to the AG for further review of unfair methods of competition, anticompetitive behavior, or anticompetitive effects. Thus, adding an additional process allowing the AG to review the same health care transactions for the purpose of addressing the same issues in parallel with the CMIR review process is unnecessary, costly, and burdensome on health care providers. 

Additionally, the proposed prohibitions of management services relationships between physician and psychiatric practices and private equity groups and hedge funds are unnecessary. Existing California law prohibits the corporate practice of medicine, which includes a prohibition of the ownership of physician practices by unlicensed individuals and entities and a prohibition of unlicensed individuals and entities from making decisions that are the practice of medicine. According to the Medical Board of California, decisions relating to influencing or entering into contracts on behalf of a practice with third-party payers, setting rates, patient admission, referral, and provider availability are the practice of medicine and must be made by a physician licensed in the State of California. Because existing law already bans the corporate practice of medicine, the proposed restrictions on management services relationships are unnecessary.

The AG Review Process Is Premature. The proposed AG review process is premature. The OHCA is in its initial stage of reviewing and gathering data about health care transactions that may impact cost, access, and affordability of health care for patients in California. On January 2, 2024, less than two months before the introduction of AB-3129, the OHCA began accepting notices of covered health care transactions for transactions closing on or after April 1, 2024. The proposed legislation would impose duplicative requirements on health care entities before the OHCA has had sufficient time to review a meaningful number of transactions and collect information regarding the impact of the transactions on cost, access, and affordability of health care for patients in California. Further, the OHCA is set to begin collecting health care data on September 1, 2024, beginning with payers and fully integrated systems. With this data, the OHCA can analyze factors that contribute to increased health care costs in the state. This data will allow legislators to make informed decisions regarding reducing the costs of health care.  Additionally, the OHCA has the power to address cost increases and is currently establishing health care cost targets, which will be enforceable through a variety of mechanisms, including financial penalties. For these reasons, the AG review process proposed by AB-3129 is premature. 

The Standards for the AG Review Process and Definitions Are Broad and Unclear. Pursuant to AB-3129, the standards that the AG will use to decide whether to consent to, deny, or impose conditions on a health care transaction are broad and unclear. Pursuant to the proposed legislation, the AG will make a determination based on whether the AG believes that the transaction “may have a substantial likelihood of anticompetitive effects” or “may create a significant effect on the access or availability of health care services to the affected community.” Further, the AG will consider the “public interest” when deciding whether a transaction can move forward. The “public interest” is broadly defined as “being in the interests of the public in protecting competitive and accessible health care markets for prices, quality, choice, accessibility, and availability of all health care services for local communities, regions, or the state as a whole.” 

These broad standards raise important questions such as:

• How will the AG measure a “substantial likelihood”? 
• What constitutes a “significant effect”? 
• What specific and measurable criteria will the AG use to determine what affects the “public interest”? 

These broad and unclear standards without any specific or measurable criteria would give the AG the power to deny or impose conditions on most investments by private equity or hedge funds in health care facilities and providers. 

Additionally, the definitions of “health care facility,” “hedge fund,” “nonphysician provider,” and “private equity group” are overly broad and imprecise. For example, the definition of “health care facility” includes “treatment center[s],” which could extend the reach of this bill to non-medical substance use disorder facilities, which are not considered health care facilities in many other contexts. Such broad definitions could have unintended consequences and chill investment in health care facilities and providers. “Hedge fund” is defined to mean a pool of funds by investors, including a pool of funds managed or controlled by private limited partnerships, if those investors or the management of that pool employ investment strategies of any kind to earn a return on that pool of funds. This definition is broad enough to capture just about any investment vehicle, including index funds deployed by nonprofit retirement services providers. “Private equity group” is similarly broadly defined to capture any type of investor or group of investors who engage in the raising or returning of capital and who invest, develop, or dispose of specified assets, which could capture standard medical equipment financing companies – a key source of capital support for medical practices and clinics.

Throwing the Baby Out with the Bathwater. For every well-publicized private equity-backed failure, there are hundreds of companies backed by private equity that have been providing beneficial support and resources to health care facilities and provider groups for years. The delivery of health care increasingly has become more complex and private equity and hedge funds can provide much needed administrative, financial, and clinical support services both directly to health providers and to the myriad of companies that provide administrative and technical support to these providers. Such support frees health care providers to focus on the delivery of care to patients. Private equity and hedge fund investment in health care facilities and in the service providers that support them allows for upgrades to electronic health record systems, the purchase of new equipment, development of new technologies, the provision of telehealth services, and improvements in billing systems, staffing, and other administrative support services that help physicians and other health care providers focus on patient care. The proposed bill mandates scrutiny, costs, and delays on a broad swath of California businesses and services with little demonstration of value, and could upend long established arrangements between health care providers and administrative and management service companies necessary to support the provision of healthcare.

Next Steps

Public Comment. We suggest that interested parties submit comments to the author of the bill directly, or through their counsel or trade associations.

Continued Monitoring. The proposed bill may be heard in committee on March 18. We will continue to monitor this bill as it works its way through the legislative process. 

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