On February 16, 2024, another Bill was introduced in California that could have significant implications on certain health care transactions. As proposed by Assembly Speaker pro Tempore Jim Wood, Assembly Bill 3129 (“AB-3129” or the “Bill”) seeks to expand state oversight of transactions involving private equity groups or hedge funds and health care facilities or providers. The goal of AB-3129 appears to be two-fold: (1) Impose notification to and approval by the Attorney General regarding changes of control or acquisitions involving a private equity group or hedge fund and a health care facility or provider group; and (2) Place general prohibitions on such groups entering into certain arrangements, such as management services agreements, or otherwise controlling or directing health care providers and their practices.
What is in the Text of the Bill?
If passed into law, AB-3129 would require private equity groups or hedge funds to provide written notice to and receive approval from the California Attorney General prior to any change of control or acquisition involving a qualifying health care facility or provider. Notice would have to be given no later than 90 days prior to the date of the change in control or acquisition unless a waiver of such requirements has been authorized by the Attorney General.
Upon review of the proposed transaction, the Attorney General would be granted the authority to approve, deny, or impose conditions on the change in control or acquisition if it is determined that such transaction may have a substantial likelihood of anticompetitive effects or may create a significant impact on the access or availability of health care services to the affected community. In making such determination, the Attorney General would apply the public interest standard, as defined. Within 10 days of the Attorney General’s decision, either party to the proposed transaction may petition the Attorney General to modify, amend, or revoke his or her prior decision. The Attorney General would subsequently have 30 days to either grant or deny the request for reconsideration. If the request is denied, then either party to the transaction would have 30 days to seek judicial review of the Attorney General’s final determination.
Lastly, the Bill significantly limits the ability of physician practices doing business in California to enter into agreements with private equity groups or hedge funds that would assign the latter the authority to direct or control the physician practice in any way. For example, the Bill specifically prohibits private equity groups or hedge funds from controlling or directing a physician practice in exchange for a fee. This restriction applies not only to agreements directly between a physician practice and a private equity group or hedge fund, but it also applies to arrangements that delegate the ability to manage the practice to a separate entity that is merely controlled in part or in whole by a private equity group or hedge fund. As such, if passed as drafted, the Bill would take the guidelines already in place by the California Medical Board even further and would significantly curtail management services arrangements.
Who and What Does the Bill Cover?
As discussed, AB-3129 applies to changes of control or acquisitions involving private equity groups or hedge funds of health care facilities or providers doing business in California. The Bill broadly defines several key terms that address its potential scope and applicability. Note, however, that these definitions are subject to change as the Bill continues to progress through the legislative process.
The potentially effected entities are broadly defined as follows:
Private Equity Group – means an investor or group of investors who engage in the raising or returning of capital and who invests, develops, or disposes of specified assets.
Hedge Fund – means 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 or private limited partnership employ investment strategies of any kind to earn a return on that pool of funds.
Health Care Facility – means 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.
Provider or Provider Group – “Provider” means a group of 2 to 9 licensed health professionals acting within their scope of practice, except for a provider group. “Provider group” means a group of 10 or more licensed health professionals acting within the scope of their practice, or a group of 2 to 9 licensed health professionals acting within the scope of their practice that generated annual revenue of ten million dollars ($10,000,000) or more. A provider group may include any combination of licensed health professionals.
Similarly, the Bill characterizes the type of transactions that would be implicated:
Acquisitions – means 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, as used in Sections 5914 and 5920 of the Corporations Code, of a health care facility or provider doing business in this state. A transfer includes, but is not limited to, 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.
Change of Control – means 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 this state, 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 this state, as consistent with subdivision (a) of Section 5914 of, and subdivision (a) of Section 5920 of, the Corporations Code. For purposes of this division, an “arrangement” shall include any agreement, association, partnership, joint venture, or other arrangement that results in a change of governance or control. A change of control does not exist where a health facility only extends an offer of employment to, or hires, a provider.
Finally, the Bill broadly defines the public interest standard to be used by the Attorney General in determining whether to grant, deny, or impose conditions on the proposed transaction:
Public Interest – The term “public interest” is 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.
Latest Updates on AB-3129
Following the post-introduction 30-day waiting period, AB-3129 is currently with California’s Assembly Committee on Health (the “Committee”) and is waiting to be voted on. Despite the Bill being discussed at its April meeting, the Committee was unable to vote on AB-3129 due to there being a lack of a quorum. Nevertheless, comments from the Bill’s author and other meeting attendees suggest that the Bill is likely not in its final form. Based on the attendees and the testimony presented during the April meeting, there appears to be a split as to those who support and those who oppose the Bill’s passage. There were concerns from those in opposition of the Bill as to how these new requirements and prohibitions would impact innovation and investments in the health care arena. Additionally, some mentioned that this Bill seemed duplicative of laws already in place in California and the Medical Board guidelines that prevent the corporate practice of medicine or that already provide for governmental review of certain health care transactions, such as California’s new Material Change Transaction and Pre-Transaction Review law and regulations.1 The arguments raised by those in support of the Bill primarily focused on access to affordable health care and the fear that private equity involvement in the health care space limits market competition.
With AB-3129 still being in the early stages of this legislative process, it is important to note that this process will take time. Not only is it likely that the Bill will undergo several changes and revisions, but the current language of the Bill suggests that even if approved as-is, it would not become effective until the first day of January of the next year, which is standard for most bills. The Bill’s current status leaves open several questions, including but not limited to, how it could impact management services arrangements that are already in place; how the Bill would change, if at all, the California Medical Board guidelines pertaining to and enforcement of prohibitions against corporate practice of medicine; and exactly what types of transactions will be subject to review and how such transaction differ from those already subject to review by the Office of Health Care Affordability under the health care Material Change Transaction and Pre-Transaction Review law and regulations. Nevertheless, the substantial implications of AB-3129 make it worth tracking as it continues to make its way through the California legislature. Stay tuned for updates as AB-3129 makes its way through the legislative process.
END NOTES
1 California’s Pre-Closing Health Care Transaction Review Regulations Take Effect: Where Did We Land?: Quarles Law Firm, Attorneys, Lawyers
California Follows the Lead of Other States in Heightening the Scrutiny of Health Care Transactions: Quarles Law Firm, Attorneys, Lawyers
