This month, the California Legislature advanced amendments to AB 3129, a bill proposing to give the California Attorney General (“AG”) approval authority over certain private equity and hedge fund investments in the healthcare industry, as well as regulations governing the review process for the California Office of Affordable Care (“OHCA”). Importantly, the amendments to AB 3129 include removing the prohibition on management services agreements between certain healthcare practices and providers and private equity or hedge fund backed companies, and the OHCA proposes to expand notice requirements to healthcare entities that are not necessarily parties to the transaction but are “subject” to a material change transaction.
AB3129
The California Senate Health Committee passed AB 3129 on June 26, 2024, after two amendments, and the California Senate Judiciary Committee passed the amended bill on July 2, 2024. The California Senate Appropriations Committee will consider the bill on August 5, 2024. As currently proposed, AB 3129 (1) requires notice and potential approval by the Attorney General prior to a change of control or acquisition between certain medical practices and health care providers and private equity groups or hedge funds, and (2) limits the ability of private equity firms or hedge funds to exercise certain powers over physician, psychiatrist, and dental practices.1
The current draft contains the following significant changes compared to the original draft of the bill:
- Health care transactions that are subject to review by the Attorney General under AB 3129 are exempt from review by the OHCA.
- “Hedge funds” include “entities that solely provide or manage debt financing secured in whole or in part by the assets of health care facilities, including, but not limited to, banks, credit unions, commercial real estate lenders, bond underwriters and trustees.”
- The annual total revenue threshold for constituting a “provider group” has been increased from $10,000,000 to $25,000,000.
- The Attorney General’s scope of review has been expanded to include “the lease, transfer, exchange, option, receipt of assignment, formation of a joint venture, or otherwise purchase of, or change of control of, a substantial amount of assets or operations by a health care facility, provider group, or provider private equity group or hedge fund doing business in this State.” A transaction includes a “substantial amount of assets or operations” if the transaction exceeds 15% of the market value or ownership interest of the health care facility, provider group, or provider.
- AB 3129 excludes pledges of assets to secure debt from the scope of the examination.
- Transactions subject to review by the Office of Managed Health Care are exempt from review by the Attorney General.
- Transactions between private equity groups and providers below the $25 million revenue threshold are still subject to notification and approval by the Attorney General if the private equity group has been involved in a transaction involving a health care facility, provider group, provider, or related health care services within the past seven years.
- A private equity group or hedge fund may seek reconsideration of the Attorney General’s initial decision through an evidentiary hearing before an administrative law judge (see “ALJ“. The ALJ will issue a decision within 60 days of receiving the post-hearing report, and the AG will issue a final decision within 45 days of receiving the decision. If the AG does not agree to the transaction or agrees only with conditions, the private equity group or hedge fund can seek judicial review of the decision in a higher court.
- AB 3129 lists aspects of a physician, psychiatrist or dentist’s practice that private equity groups or hedge funds are not permitted to influence, including interference with a physician’s, psychiatrist’s or dentist’s professional judgment in determining appropriate diagnostic testing, the need for referrals, overall patient care, and the number of patients a physician should see in a given period of time. The bill also lists other aspects of practice management that private equity groups or hedge funds cannot control, including ownership of medical records, hiring and firing of specialists and staff, setting parameters for relationships with payers and other medical professionals, billing and coding procedures, and approval of selection of medical equipment and supplies.
- AB 3129 was amended to remove the prohibition against physician, psychiatrist and dental offices entering into management agreements with entities backed by private equity groups or hedge funds in exchange for fees.
Proposed revisions to OHCA regulations
On June 26, 2024, the Affordable Care Commission (the “Commission”) offered proposed changes to the OHCA’s rules governing notice and review of certain health care transactions. The OHCA’s rules currently require health care entities that are parties to certain material change transactions to notify the OHCA at least 90 days prior to the transaction’s expected closing date.2 The Commission’s proposed amendments, among other changes, would extend the notice requirements to health care entities that are “subject” of a material change transaction, even if they are not a party to the transaction. A “subject” of a transaction means that the transaction “pertains to all or any part of the assets, management, liabilities, governance, or operations of the health care entity.” The proposed changes can be found here. The Commission currently plans to post a notice of emergency rulemaking of the proposed amendments on August 6, 2024, and then submit the proposed amendments to the Office of Administrative Law (OAL) on August 21, 2024. The Commission expects the OAL to approve the proposed amendments by September 3, 2024.
summary
AB 3129 and the revisions to the OHCA represent a continuing trend toward expanding regulatory oversight of health care transactions in California. Although the proposed changes described above have not yet gone into effect, members of and potential investors in the California health care industry should continue to monitor these changes to anticipate their potential impact on future operations.
[1] Our previous analysis of AB 3129 can be found here: https://natlawreview.com/article/californias-ab-3129-continues-national-trend-scrutinizing-private-equity
[2] Our analysis of the California Affordable Care Agency’s notice requirements can be found here.
https://natlawreview.com/article/california-health-care-transactions-finalized-regulations-addressing-notice-and
https://natlawreview.com/article/new-california-legislation-and-law-may-have-serious-impact-certain-health-care-deals
https://natlawreview.com/article/california-regulators-publish-highly-anticipated-draft-regulations-mandatory-pre
https://natlawreview.com/article/office-health-care-affordability-appears-both-limit-and-expand-scope-health-care
https://natlawreview.com/article/office-health-care-affordability-publishes-near-final-regulations-health-care
