*[co-author: Lingxi Chen]

California is looking to take the lead on regulating private equity deals in the health care space by introducing bill AB 3129, which requires private equity groups or hedge funds to receive the state attorney general’s approval before purchasing a health care entity. At present, California’s proposal is the most extensive state legislation that seeks to regulate health care industry transactions in the U.S. and may encourage other states to establish similar legislation.

The bill’s stated goal is to protect the public interest, preserving competitive and accessible health care for communities and the state as a whole. To achieve this goal, state attorneys general are required to consider the potential positive and negative outcomes for the public resulting from a private equity firm’s proposed purchase. Price increases, quality decreases, or the resulting decrease in accessibility or availability of health care services are potential negative effects to be considered by the state attorneys general when deciding whether to consent to a transaction. On the other hand, potential benefits from the transaction to be considered may include price decreases directly passed to patients, improvements in access or availability of services to the community, or access to capital that the local community would not receive otherwise. [cite].

The bill is currently supported by the state’s medical trade associations and consumer advocacy groups. It has been approved by California’s Senate Judiciary Committee and sent to the Senate Appropriations Committee on August 5. It will then head to the Senate floor to be voted on in late August before the legislative session ends.

Private equity firms and health care entities alike are concerned that the California legislation, as well as legislation proposed in other states targeting private equity transactions, will have a chilling effect on investment. For example, Massachusetts has a bill (H. 4643) that seeks to regulate private equity deals by expanding existing transaction requirements and increasing penalties for failure to comply with certain reporting requirements. Likewise, Pennsylvania’s proposed legislation (HB 2344) would add written notice requirements for hospitals, nursing homes, and other facilities 90 days before entering into certain transactions or agreements. Similar bills introduced this year in Connecticut, Florida, Maine, Minnesota, and Washington have failed or are on pause at this time.

As more states propose legislation regulating private equity deals in the health care industry, it will become increasingly important for states to balance regulation of private equity in the industry against the risks of stifling investment.

*Lingxi Chen, a Cozen O’Connor summer associate, is a co-author of this article.