Last weekend, California Governor Gavin Newsom vetoed Assembly Bill (AB) 3129, which would have required healthcare investors to notify and obtain written consent from the California Attorney General (AG) before investing in certain healthcare facilities and providers. In a letter to the California State Assembly, Governor Newsom reasoned that California’s existing Office of Health Care Affordability (OHCA) is the more appropriate entity for healthcare transaction reviews:
“I appreciate the author's continued efforts and partnership to increase oversight of California's health care system in an effort to ensure consumers receive affordable and quality health care. However, the 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.”
For more information and analysis on AB 3129, please see Wilson Sonsini’s recent alert.
California Office of Health Care Affordability. As noted by the governor, the veto of AB 3129 does not impact existing law that gives California’s OHCA authority over California healthcare transactions that are likely to significantly impact market competition or affordability for consumers and purchasers. Similar to the proposal in AB 3129, under the OHCA’s existing Cost and Market Impact Review (CMIR) regulations, certain healthcare entities must notify OHCA of “material change transactions” at least 90 days prior to the closing date of the transaction. Upon receipt of a notice, OHCA will conduct a preliminary review of the transaction and determine whether to conduct a CMIR. If OHCA proceeds with a review, the CMIR process can take several months and may delay closing. Unlike the proposal in AB 3129, OHCA cannot block a transaction; however, it can refer transactions to the AG for further review of unfair methods of competition, anticompetitive behavior, or anticompetitive effects.
California Corporate Practice of Medicine. Healthcare entities and investors should also note that California’s corporate practice of medicine (CPOM) regulations, which prohibit corporate entities from interfering with the professional judgment of a healthcare provider, are unaffected by the veto of AB 3129. States continue to increase scrutiny on healthcare investors and providers utilizing the management services organizations (MSO) and professional corporations (PC) structure to comply with the CPOM.
Healthcare investors and providers utilizing the MSO-PC model should carefully review their MSO-PC agreements and assess whether their actual operations are compliant with state law requirements. Although MSO-PC documents are often drafted by experienced healthcare counsel, investors and providers may not fully understand or adhere to these rules in practice, leading to potential issues when seeking future investments or planning an exit, or leading to scrutiny from regulatory bodies. To maintain compliance with CPOM requirements, healthcare investors and providers using the MSO-PC model should also implement policies and procedures and provide regular training on the topic for employees, many of whom may be unfamiliar with CPOM restrictions.
Continued Scrutiny of Consolidation in the Healthcare Industry. Despite the veto of AB 3129, companies should be aware that consolidation in the healthcare industry remains a focus of antitrust enforcers, including the AG, and parties entering into certain “material change” healthcare transactions may still need to provide advance notice of the transaction to the California OHCA. Additionally, acquisitions involving retail pharmacies may need to submit notice to the AG prior to implementing the transaction. Parties should also consider whether their transaction is subject to Hart-Scott-Rodino (HSR) notification requirements, in which case the parties will need to submit an HSR notification to the federal antitrust agencies and abide by a mandatory waiting period (which is typically 30 days) before completing the transaction.
