California Governor Vetoes Private Equity and Hedge Fund Health Care Transaction Review Law (AB-3129)

On September 28, 2024, California Governor Gavin Newsom vetoed California Assembly Bill 3129 (AB-3129) originally introduced by California Attorney General Rob Bonta (AG) and Assembly Speaker pro Tempore Jim Wood and passed by the California legislature earlier in the month. While the California legislature can override the Governor’s veto, legislators likely will not take this extraordinary step, which has not been taken in several decades.

As we discussed in a previous post, AB-3129 would have authorized the AG to review certain private equity group and hedge fund health care transactions. The stated intention of the bill was to address purported price increases, lower quality services, and decreased accessibility to health care services associated with private equity and hedge fund acquisitions of certain health care entities. Noting last year’s enactment of Senate Bill 184 (SB-184) creating the California Office of Health Care Affordability (OHCA), Governor Newsom stated in his veto letter that OHCA is the appropriate agency for assessing proposed health care transactions and their cost and market impacts and AB 3129’s structure would have impeded this process.

The Office of Health Care Affordability and AB-3129

The underlying purposes of SB-184 align with AB-3129 as SB-184 requires certain parties to a transaction to submit a notice to OHCA at least 90 days prior to closing if: (1) the party is a “health care entity”; (2) the health care entity meets certain materiality thresholds; (3) the transaction qualifies as a “material change transaction”; and (4) no exemption applies (see our previous post here). Based upon review of a required pre-transaction notice filing, OHCA determines whether the agency will conduct a cost and market impact review (CMIR) of the transaction or if the transaction may proceed without a CMIR. While OHCA cannot block a transaction, the agency may refer a transaction to the AG for further review of unfair methods of competition, anticompetitive behavior, or anticompetitive effects.

Effective January 1, 2025, AB-3129 would have required private equity groups and hedge funds to directly provide the AG notice at least 90 days prior to closing of a “change of control” or a material acquisition with a health care facility or provider group. If the transaction could have a substantial likelihood of anticompetitive effects or could create a significant impact upon the access or availability of health care services, the AG would have the authority to grant, deny, or impose conditions on the transaction subject to an administrative and judicial review process.

Importantly, transactions subject to review under AB-3129 would be exempt from OHCA review. As stated in Governor Newsom’s letter vetoing AB-3129, “OHCA was created as the responsible state entity to review proposed health care transactions, and it would be more appropriate for the OHCA to oversee these consolidation issues as it is already doing much of this work.”

Lobbying Regarding AB-3129

As with most significant California legislation, there was substantial lobbying efforts both in support of and against AB-3129. Several California labor unions, medical associations, and patient advocacy groups were active proponents of AB-3129 citing alleged private equity and hedge fund impacts upon increasing health care costs, lower quality health care, and decreased access to care. Several business groups and health providers were staunchly opposed to AB-3129 noting that private equity and hedge funds often provide necessary administrative, financial, and/or clinical support in an increasingly complex and expensive health care environment (e.g., staffing support, equipment and technology upgrades). 

Further, several groups were successful in obtaining notable amendments to AB-3129 during the legislative process and prior to delivery to Governor Newsom. First, hospitals and dermatology practices were excluded from AG review under AB-3129. Second, AB-3129’s provisions regarding certain management services relationships were amended to squarely align with existing California corporate practice of medicine prohibitions.

Takeaways

Both the creation of OHCA and AB-3129 are examples of the ongoing trend of states enacting health care transaction review laws. In addition to California, fourteen other states have enacted such laws, most requiring pre-closing notice and, in some cases, additional review and/or approval. Over half of these health care transaction review laws were passed in the last three years.

Four states in addition to California (Connecticut, Massachusetts, Minnesota, and Oregon) have recently considered legislation specifically applying to health care transactions involving private equity firms and/or hedge funds. Notably, only California AB-3129 moved forward in the legislative term. Notably, even in the face of the demise of private equity-backed Steward Health Care, the Massachusetts legislature failed to pass legislation that would have augmented its current health care transaction review process to require notice to the state agency of certain private equity transactions.

While California, the four states above, or other states might consider private equity-specific legislation in the future, interest in such legislation may be waning. Many states continue to evaluate the expense and infrastructure required to facilitate their new pre-transaction review processes, as demonstrated by Governor Newsom’s recognition that California already has a process for reviewing health care transactions. Further, as states review more pre-transaction notice filings and collect information regard approved transactions, the actual impact of health care transactions upon cost, quality, and access will become clearer. Lastly, opposition to such bills has increased in sophistication and become more vocal over time, with interested parties often successful in obtaining significant concessions.

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