Effective January 1, 2025, if enacted, California Assembly Bill 3129 (Bill) would grant sweeping power to the Attorney General by authorizing the Attorney General to approve, conditionally approve, or disapprove of certain health care transactions involving private equity groups or hedge funds. Further, the Bill would outright prohibit certain arrangements – potentially including current arrangements – between private equity groups or hedge funds and physician or psychiatric practices.
The stated goals of the proposed legislation are to address health care practices by private equity groups and hedge funds that can lead to higher prices, lower quality, less efficiency, and restrict access to and the choice of consumers' health care services.
The Senate Health Committee is set to vote on the Bill on June 26, 2024.
Key Points
Notice and Consent Requirement – Health Care Facilities and Provider Groups
Private equity groups and hedge funds would be required to provide written notice to and obtain the written consent of the Attorney General prior to a change of control or the acquisition between the private equity group or hedge fund and a health care facility or provider group. Of note:
- A “change of control” would mean an arrangement in which a private equity group or hedge fund establishes a change in governance or sharing of control over health care services provided by a health care facility or provider doing business in California, or in which a private equity group or hedge fund otherwise acquires direct or indirect control over the operations of a health care facility or provider in whole or in substantial part doing business in California. An “arrangement” encompasses any agreement, association, partnership, joint venture, or other arrangement that results in a change of governance or control. A change of control would not exist where a health care facility only extends an offer of employment to, or hires, a provider.
- An “acquisition” would mean the direct or indirect purchase in any manner, including, but not limited to, lease, transfer, exchange, option, receipt of a conveyance, creation of a joint venture, or any other manner of purchase, by a private equity group or hedge fund of a material amount of the assets or operations, of a health care facility or provider doing business in California, including any arrangement, written or oral, that alters voting control of, responsibility for, or control of the governing body of the health care facility or provider.
- A “health care facility” would mean a facility, nonprofit or for-profit corporation, institution, clinic, place, or building where health-related physician, surgery, or laboratory services are provided, including, but not limited to, a hospital, clinic, long-term health care facility, ambulatory surgery center, treatment center, or laboratory or physician office located outside of a hospital.
- A “provider group” would mean a group of 10 or more licensed health professionals acting within the scope of their practice or a group of two to nine licensed health professionals acting within the scope of their practice that generated annual revenue of $10,000,000 or more. A provider group may include any combination of licensed health professionals.
- A “licensed health professional” would mean all of the following: (1) physicians and surgeons; (2) dentists; (3) optometrists; (4) pharmacists; (5) nonphysician mental health professionals including but not limited to, psychologists, licensed clinical social workers, and marriage, family, and child counselors; and (6) physician assistants or advanced practice registered nurses, including but not limited to, nurse practitioners, certified nurse-midwives, and clinical nurse specialists.
Notice to and consent of the Attorney General would not be required if the Attorney General gives the private equity group or hedge fund a written waiver for the specific acquisition or change of control. A waiver could be granted if certain conditions apply. The conditions center around the target being unable to pay debts, the potential impact on availability of health care services in the relevant market, exhausting alternative remedies, and other similar factors.
Notice Requirement – Nonphysician Providers
Private equity groups and hedge funds would be required to provide advance written notice to the Attorney General prior to a change of control or the acquisition between a private equity group or hedge fund and a nonphysician provider where the nonphysician provider has an annual revenue of more than $4,000,000. Attorney General consent would not be required for transactions with a nonphysician provider. A “nonphysician provider” would mean a group of two or more health professionals that do not provide health-related physician, surgery, or laboratory services to consumers.
Notice Requirement – Providers
Private equity groups and hedge funds would be required to provide advance written notice to the Attorney General prior to a change of control or the acquisition between a private equity group or hedge fund and a provider where the provider has an annual revenue between $4,000,000 and $10,000,000. Attorney General consent would not be required for transactions with a provider. A “provider” would mean a group of two to nine licensed health professionals acting within their scope of practice, except a provider group.
Consent Options of the Attorney General
As currently proposed, the Bill grants the Attorney General sweeping power in either consenting to, conditionally consenting to, or not consenting to, a change of control or acquisition. The decision ultimately would rest in the Attorney General's determination of whether the change of control or acquisition “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.” The Attorney General is instructed to apply the “public interest standard,” which is defined to mean “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.”
Under any decision rendered by the Attorney General, a party to the transaction would have the right to make an application for reconsideration based on new or different facts, circumstances, or law and the parties to the transaction also would have the right to seek judicial review of the Attorney General's final decision.
Prohibited Arrangements
Most notably, the Bill also would outright prohibit certain arrangements. A private equity group or hedge fund involved with a physician or psychiatric practice doing business in California would not be able to “control or direct” such a practice, which per the text, includes but is not limited to: (1) influencing or entering into contracts on behalf of the practice or the physicians or psychiatrists of the practice, with any third party; (2) influencing or setting rates for the practice or the physicians or psychiatrists of the practice, with any third party; or (3) influencing or setting patient admission, referral, or physician or psychiatrist availability policies.
Although the above prohibitions are to some extent already addressed by California's ban on the corporate practice of medicine, the inclusion of the words “including but not limited to” leaves open the possibility that other arrangements not mentioned in the text could be considered controlling or directing a practice in violation of the law, leaving vague how parties are to structure management arrangements. The prohibition also arguably would apply retroactively, requiring parties to restructure existing arrangements.
Further, physician and psychiatric practices doing business in California would be prohibited from entering into any agreement or arrangement with an entity that is directly or indirectly controlled in whole or in part, by a private equity group or hedge fund in which the private equity group or hedge fund manages any of the affairs of the physician or psychiatric practice in exchange for a fee or a fee that is passed through by the practice directly or indirectly to any patient or payor. This prohibition does not bar “revenue-sharing” between the practice and the private equity group or hedge fund.
The Bill would also prohibit the inclusion of non-competes, non-disparagements, and other restrictive covenants that a private equity group or hedge fund may try to impose on a physician or psychiatric practice.
Current State of Play
In addition to other potential broad-sweeping ramifications, passage of this Bill as currently proposed could have a significant impact on companies operating under the traditional friendly-physician management services organization (MSO) model in California. Also of concern is that other states could follow suit in short order. To date in 2024, similar legislation has been introduced, but not passed, in Oregon and Minnesota. With the California Senate Health Committee scheduled to vote on the Bill on June 26, private equity firms and their portfolio companies doing business in that state should consider taking action now. There are a number of coalitions opposing the Bill, including Californians to Protect Community Health Care.
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