As our December 2023 Insight noted, California’s SB 184 (enacted in June 2022) and accompanying regulations contain pre-transaction notice requirements by “specified health care entities” for certain “material change transactions” involving the provision of “health care services” in the state. SB 184, which takes effect on April 1, 2024, also established a state Office of Health Care Accountability.
While many transactions involving health care entities will already face the notice requirements of SB 184, AB 3129, introduced by California Assembly Member Jim Wood, seeks to create an approval process for private equity group or hedge fund investors. AB 3129 was introduced on February 16, 2024, and would, with certain waiver exceptions, require a private equity group or hedge fund to provide written notice to, and to obtain the written consent of, the state’s attorney general prior to a change in control or an acquisition of a health care facility or provider group. In contrast to the already burdensome notice requirements of SB 184, the proposed AB 3129 legislation would establish a regulatory framework requiring approval of private equity sponsored healthcare transactions.
AB 3129 also builds upon the California (Corporations Code § 5194) requirement nonprofit corporations operating or controlling a health facility to provide notice to and obtain consent of the attorney general prior to any disposition of its assets to a for profit entity.
The attorney general would be authorized to adopt regulations to implement the new requirements. The bill, if enacted, will be enforceable up to “the maximum possible extent consistent with federal law and constitutional requirements.”
The attorneys at Epstein Becker Green are monitoring state legislation on this topic closely and are ready to assist with developing compliance plans.
Notice and Approval Requirements
As noted above, AB 3129 would generally require—in subsection 1190.10—a private equity group or hedge fund to provide written notice to, and obtain the written consent of, the state’s attorney general prior to a change in control or an acquisition between the private equity group or hedge fund and a health care facility.” This notice:
- Shall be submitted at the same time that any other state or federal agency is notified under state or federal law, and “otherwise shall be provided at least 90 days before the change in control or acquisition.” (The attorney general may extend the time period under certain conditions.)
- Shall contain information sufficient to evaluate the nature of the acquisition or change of control and information sufficient for the attorney general to determine that the criteria set forth in subdivisions (a) and (b) of Section 1190.20 (relating to adverse competitive effects, health care access/availability, and the interest of the public) has been met; OR that a waiver may be granted under subdivision (f). Waiver conditions under subdivision (f) include, for example,
- if the party requests a waiver by submitting a written description of the proposed acquisition or change of control, a copy of relevant documents, etc.
- risk of bankruptcy, business failure, inability to meet debts, etc.
- The acquisition or change of control will ensure continued health care access in the relevant markets; and more.
The private equity group or hedge fund shall provide advance written notice to the attorney general prior to a change in control or acquisition between a private equity group/hedge fund and a nonphysician provider, OR between a private equity group or hedge fund and a provider, where:
- The nonphysician provider has annual revenue of more than four million dollars, or
- The provider has annual revenue between four million dollars and ten million dollars. [Note that these are not subject to the consent requirements, below].
Consent Requirements
Subsection 1190.30 provides that the attorney general will make the required determination in writing and may hold a public meeting beforehand—after notice and consent to consumers that may be affected by the acquisition or change of control. Any party to the acquisition or change of control may apply for a reconsideration of the AG’s decision or seek judicial review in superior court.
Prohibitions on Control of Physician/Psychiatric Practice
Subsection 1190.40 states that a “private equity group or hedge fund involved in any manner with a physician or psychiatric practice doing business in California, including as an investor in that practice or as an investor or owner of the assets of the practice, shall not control or direct that practice.” The prohibition includes:
- Influencing or entering into contracts on behalf of that practice with any third party;
- Influencing or setting rates for that practice with any third party;
- Influencing or setting patient admission, referral, or physician/psychiatrist availability policies.
On the physician/psychiatrist side, subsection 1190.40(b) states that “a physician or psychiatric practice shall not enter into any agreement or arrangement with any entity controlled in part or in whole directly or indirectly by a private equity group or hedge fund in which that private equity group or hedge fund manages any of the affairs of the physician or psychiatric practice in exchange for a fee to be charged to that practice or passed through by that practice directly or indirectly to any health plan, insurer product, or patient” (the provision does not bar revenue sharing).
1190.40(c) further prohibits, in contracts between physician or psychiatric practices and private equity groups or hedge funds, noncompete clauses in the event of a termination or resignation, or clauses preventing those persons from disparaging, opining, or commenting “as to any issues involving quality of care, utilization of care, ethical or professional challenges in the practices of medicine or revenue-increasing strategies employed by the private equity group or hedge fund.”
Takeaways
Health care transactions are coming under increased scrutiny based upon the perceived adverse impact to patients, providers, and the cost of health care resulting from investment by for profit entities in health care. Whether California AB 3129 passes or not, additional state and federal regulations in this area are likely coming—and will require careful examination. These new requirements will impact each transaction differently. Providers and sponsors that may be impacted by this or other similar legislation should begin considering now how they would demonstrate that any future transaction would not have adverse competitive effects, adversely impact health care access/availability, and how the transaction would benefit the interests of the public and begin gathering and tracking supporting data.
For additional information about the issues, or if you have any other questions or concerns about proposed legislation, please contact one of the authors or the Epstein Becker Green attorney who regularly handles your legal matters.
Epstein Becker Green Staff Attorney Ann W. Parks contributed to the preparation of this post.
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