On August 31, 2024, California's legislature passed Assembly Bill 3129 (“AB 3129”), which will be enacted if approved by California Governor, Gavin Newsom. AB 3129 would establish a mandatory approval process for a broad range of healthcare-related transactions involving private equity funds and hedge funds, giving the California Attorney General (“CA AG”) broad authority to block or impose restrictions on transactions to protect public interest. AB 3129 would also impose limits on private equity funds' and hedge funds' involvement in certain facets of practice management, including through management services organizations (“MSOs”). Governor Newsom has until September 30, 2024, to sign the bill into law, so unless he vetoes the bill it will take effect on January 1, 2025.
Bill Summary and Applicability
Pursuant to AB 3129, transactions meeting certain criteria and closing on or after January 1, 2025, must be approved by the CA AG before becoming effective. The approval process is mandatory for any transaction in which a private equity group or hedge fund directly or indirectly either (1) acquires 15 percent or more of the market value or ownership shares of certain healthcare entities, or (2) obtains rights significant enough to constitute a change in control of such healthcare entities, such as supermajority, veto, or exclusivity rights. The requirement applies to acquisitions of groups of licensed healthcare providers and healthcare facilities other than hospitals. There is a narrow exception from the consent requirement where all of the following apply: (1) the private equity group or hedge fund has not been involved in any healthcare acquisitions in the preceding seven years, (2) the group consists of fewer than ten providers, and (3) the group's gross annual revenue is less than $25 million, though notice may still be required.
Notice Timing and Contents
The acquiring private equity group or hedge fund must submit notice to the CA AG no later than 90 days prior to the anticipated closing date or, if another other state or federal agency requires notice at an earlier date (such as an HSR filing), on the date on which such other state or federal agency receives notice. Notably, although AB 3129 only applies to transactions closing on or after January 1, 2025, it will require notice to be submitted in connection with such transactions at least as early as October 3, 2024. The CA AG has the authority to extend the 90-day period for an additional 45-day period if additional information is needed, the proposed transaction is substantially modified after the original notice, or the proposed transaction involves a multi-facility or multi-provider health system serving multiple communities, rather than a single facility or entity. The CA AG may also hold a public meeting, which extends the waiting period by 14 days. The CA AG may waive the notice and consent requirement for transactions involving healthcare entities “at grave risk of immediate business failure [that] can demonstrate a substantial likelihood that [they] will have to file for bankruptcy” to ensure continued access to care.
The bill does not specify the documents that must be submitted with the notice filing, but there must be information sufficient for the CA AG to determine whether approval is appropriate. At a minimum, private equity funds and hedge funds will need to provide deal documents and related information that communicates the nature of the transaction and its likely impact on competition, costs, and access to healthcare services.
Attorney General Review
At the end of the 90-day period (and any applicable extensions), the CA AG may consent to, not consent to, or conditionally consent to the transaction, “depending on the Attorney General's determination of whether the transaction may (1) have a substantial likelihood of anticompetitive effects, including a substantial risk of lessening competition or of tending to create a monopoly, or (2) may create a significant effect on the access or availability of health care services to the affected community.” The CA AG's standard of review is broad: It must apply the “public interest standard,” 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.” After the CA AG issues its determination, the private equity group or hedge fund that submitted the notice can move for an evidentiary hearing, which can take up to 105 days before the CA AG issues a new determination.
Practice Management Restrictions
AB 3129 prohibits private equity funds and hedge funds from performing certain functions on behalf of healthcare providers, strengthening California's already restrictive corporate practice of medicine doctrine. The bill provides that private equity funds and hedge funds, including MSOs they directly control, may not interfere with the professional judgment of physicians, psychiatrists, or dentists in making healthcare decisions, including by determining what diagnostic tests are appropriate, determining the need for referrals, or by establishing hours or patient visit requirements for such providers. AB 3129 would also restrict private equity- and hedge fund-controlled entities from owning medical records, making certain employment decisions regarding clinical personnel, controlling contracting with providers and third-party payers, and making coding and billing decisions. Finally, the bill would prohibit MSO contract provisions imposing non-compete and non-disparagement restrictions on providers who no longer work for an MSO-managed provider.
Recent Amendments
The California Senate made several rounds of amendments in the two weeks before passing AB 3129 on August 28, 2024. The most notable amendments exempt hospital acquisitions from the notice and consent requirements (though such transactions are likely to be subject to notice OHCA notice requirements) and exclude dermatology groups from the definition of a “group practice.” The state Assembly passed the amended version of the bill on August 31, 2024.
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