On August 31, the last day of its 2024 Legislative Session, the California Legislature approved Assembly Bill 3129 (Wood), which provides for notification to and review by the Attorney General of health care transactions involving private equity groups and hedge funds. This bill has been subject to intense lobbying, and its scope changed significantly in the month leading up to its passage. Governor Newsom is expected to sign the legislation in September. It is worth a comprehensive look at the final version of the bill, which will have a significant impact on future private equity transactions in California.
The bill requires that a private equity group or hedge fund that seeks to enter into a transaction with certain health facilities, providers, or payors must notify the Attorney General and seek written consent to the transaction. The notice must be given at the time the private equity group or hedge fund is required by law to notify any other state or federal agency (such as the FTC under the Hart-Scott-Rodino Act) or otherwise at least 90 days prior to closing the transaction. The notice and approval requirements apply to transactions entered into after January 1, 2025, or existing arrangements if there is a material change in the corporate relationship between the private equity group or hedge fund and a health facility, provider, or payor after that date.
The stated purpose of this legislation is to “address health care practices by private equity groups and hedge funds that can lead to higher prices for services, lower quality at a given price for services, less cost-efficient services, restricted access to or closure of services, and less choice for services, which ultimately leads to higher prices and more inconvenience for consumers, and higher total cost of care for services.”
Entities Required to Provide Notice
A “private equity group” means an investor or group of investors who primarily engage in the raising or returning of capital and who invest, develop, or dispose of specified assets. The definition of a “hedge fund” is a pool of funds managed by investors for the purpose of earning a return on those funds, regardless of the strategies used to manage the funds, including funds managed or controlled by private limited partnerships. Both definitions exclude natural persons or other entities that contribute or promise to contribute funds to the private equity group or hedge fund but do not otherwise participate in its management or in any change of control of its assets. In addition, lenders or other entities that provide or manage debt financing secured by the assets of a health care facility, including banks, credit unions, commercial real estate lenders, bond underwriters, and trustees, are not considered to be hedge funds.
Health Care Facilities, Providers, and Payors
The definition of a health care facility includes licensed facilities (as described in Chapter 2 of Division 2 of the Health and Safety Code, other than hospitals), clinics, outpatient settings, ambulatory surgery centers, clinical laboratories, and imaging facilities. Health care providers are divided into three categories: (1) a “Provider Group,” which is a group of licensed providers acting within the scope of their practice with gross annual revenues of $25,000,000 or more; (2) a “Provider,” which is a group of two to nine licensed professionals that is not a Provider Group; and (3) a “Non-physician Provider,” which is a group of two or more health professionals. A “Payor” can be any of (1) a health insurer, (2) a health care service plan (including a Medi-Cal managed care plan), (3) a publicly funded health care program (including Medi-Cal and Medicare), (4) a third-party administrator, (5) a public or private entity that arranges, pays for, or reimburses for any cost for the provision of health care services, or (6) an organization that purchases health care services, including trust funds, trade associations, or employers that provide healthcare benefits. Last-minute amendments to AB 3129 excluded for-profit hospitals from these definitions (nonprofit hospital transactions are subject to Attorney General review under different statutory authority) and groups providing dermatology services. The bill also excludes transactions involving managed care plans or insurance firms that are subject to the existing jurisdiction of the Department of Managed Health Care or Department of Insurance.
Definition of a Transaction
A transaction is defined as the direct or indirect acquisition in any manner, including by leases, transfers, options, conveyances, or creation of a joint venture, of a material amount of the assets or operations of a health care facility, provider, or payor, or a change in control of such a party. A material amount of the assets or operations is defined as an amount greater than 15% of the market value or ownership of shares of the acquired entity. In addition, a change in control can occur if the private equity group or hedge fund obtains supermajority voting or veto rights, exclusivity provisions, or other similar rights that effect a change in control over the assets or operations of a health care facility, provider, or payor, even if less than 15% of the market value of assets or ownership shares are affected.
It is significant that there is no notification threshold based on the value of a transaction, in contrast to the recently enacted reporting regime overseen by the Office of Health Care Affordability. The bill’s focus is on the character and size of the entity that is the subject of the transaction. AB 3129 was amended to specifically exempt transactions reported to the Attorney General from parallel submission to the Office of Health Care Affordability for cost and market review of potential impacts.
Notice and Review
AB 3129 does not specify the contents of the required notice to the Attorney General beyond the vague command that the notice contain sufficient information to permit the Attorney General to evaluate the nature of the transaction and determine whether the transaction may have anti-competitive effects, lessen access or availability of health care services to an affected community, or cause other negative effects, such as increased costs for health care services. The Attorney General is authorized to promulgate regulations to implement the law, which likely will include clarifications of certain definitions, notice requirements, and changes in review periods. The bill does provide authority for the Attorney General to waive compliance with the notice and review process in certain instances where a private equity group or hedge fund proposes to acquire a health care facility, provider, or payor that is failing financially, and a waiver is appropriate to prevent the closure of a facility or provider and loss of services to an affected community.
The Attorney General has the authority to extend the 90-day notice period by 45 days if additional information is required, the transaction has changed during the notice period, or the transaction involves multiple facilities or providers. In addition, the notice period may be extended for an additional 14 days if the Attorney General determines to hold a public meeting on the transaction.
The Attorney General is required to make a written determination, within the review period, to consent to, give conditional consent to, or not consent to the transaction, based on consideration of anti-competitive factors, access to or availability of care, the views of the affected local community, and the public benefits that may accrue from the transaction, such as decreased prices for services or availability of financing to permit needed capital improvements to facilities. Ultimately, the determination is to be made in accordance with the Attorney General’s findings as to the public interest. In the event of the failure by the Attorney General to make a written determination within the notice and review period (including any extensions), the parties may proceed with closing the transaction.
If the Attorney General gives conditional consent or does not consent to the transaction, the private equity group or hedge fund may request either a hearing before an administrative law judge for administrative review or a court, seeking a writ of mandate to direct the Attorney General to reach a different conclusion. In an administrative law proceeding, the Attorney General bears the burden of establishing the existence of the factors supporting the determination. In a mandamus proceeding, the court may review all relevant evidence and make an independent finding of whether the Attorney General has acted within statutory authority, abused discretion, or made a determination inconsistent with the weight of evidence.
There is a category of transactions for which notice to the Attorney General is required but are not subject to approval. These involve deals between a private equity group or hedge fund and a Non-Physician Provider with revenues of $4 million or more or a Provider with revenues of between $4 million and $25 million. The ostensible purpose of this requirement is to permit the Attorney General to track smaller transactions that may be part of a roll-up strategy involving a significant number of providers, which could have the same impact on the market as a single deal involving a larger provider group.
Practice of Medicine Provisions
AB 3129 contains provisions intended to reinforce existing laws restricting the corporate practice of medicine. Private equity groups and hedge funds may not interfere with the exercise of professional judgment of physicians, psychiatrists, dentists, or other licensed health professionals and may not exercise control over certain administrative aspects of professional practices, including the parameters for contractual arrangements with third-party payors, decisions on coding and billing for professional services, and selection of medical equipment and supplies. These restrictions apply to existing management arrangements as well as those entered into after the effective date of AB 3129.
In addition, AB 3129 would enact prohibitions on clauses in management agreements between private equity groups or hedge funds and physician, dental, or psychiatric practices that explicitly or implicitly preclude a professional departing from the practice from competing with the practice or from making disparaging comments or expressing opinions concerning issues of quality of care, utilization, ethical or professional challenges, or revenue-increasing strategies employed by a private equity group or hedge fund.
Even though these provisions do not necessarily break new ground, they may call for private equity firms and hedge funds that are parties to existing management services agreements, which may include physician employment agreements with restrictive terms, to evaluate whether their terms are consistent with the new provisions. Further, the legislation may fuel aggressive litigation by the California Medical Association, which has been very supportive of AB 3129 and recently won a case before the Supreme Court that provides a basis for the Association to have standing to challenge management arrangements.
Practical Considerations
AB 3129 reflects ongoing concerns that investments by private equity groups and hedge funds have engendered detrimental impacts on the costs and delivery of health care services. The new provisions are intended to be broadly construed, and the expectation is that the Attorney General will play an active role in restraining transactions that may not serve the public interest. The language of the bill creates some areas of significant uncertainty that may require guidance from the Attorney General. This will require a significant effort, since as little as three months will pass between approval of the legislation by the Governor and the effective date specified in the bill.
For example, the definitions of private equity group and hedge fund are very general and vague, but the supporters of the bill were concerned that more precise definitions would create incentives to change the character of acquisition entities to avoid compliance with the notice and approval requirements. What the definitions do not address is that the structure of investments by many private equity groups and hedge funds involves layers of subsidiary enterprises below the actual investment pool, which serve as holding companies, or in some cases, operating companies that manage health care entities. If a lower-tier entity in such a structure proposes to enter into a transaction with a qualifying health care entity, will this be treated as a transaction involving a private equity group? Similarly, will a change of control of an upper-tier entity within such a structure, which does not directly own a California health care facility or provider, nonetheless be considered a reportable transaction? It is notable that the provisions applicable to reportable transactions do not contain language that explicitly requires notification from entities that may be controlled by a private equity group or hedge fund but are not themselves within the definition. In contrast, the provisions relating to the practice of medicine do extend the prohibitions to indirect actions of private equity groups or hedge funds, i.e., actions of subsidiaries.
In the case of the restrictions on interference with practices, there are additional uncertainties. In many situations, the types of decisions that would be prohibited by AB 3129 are not executed by the private equity group or even its subsidiary—but rather by a joint committee consisting of representatives of the providers as well as the private equity group. Will the prohibitions apply where the private equity group has a role in the decision-making process but does not control it? Similarly, does the inclusion of a prohibition on terms that “implicitly” prevent a departing practitioner from competing reach customary restrictions on solicitation of providers who remain with the group or making use of confidential or proprietary information, which have heretofore been enforceable?
Conclusion
AB 3129 represents a dramatic advance in the regulation of transactions involving private equity groups and hedge funds. There is considerable uncertainty as to how the law will work in practice and whether it will discourage transactions or drive innovative transaction structures that do not implicate the notification requirements. Husch Blackwell will be following developments with this legislation and be prepared to advise clients on its implications.