Parties involved in or considering health care transactions in California are focused on complying with new rules set by the California Health Care Affordability Authority (OHCA).[1] Newly proposed legislation could also create additional challenges in completing certain healthcare transactions, particularly those involving private equity. California Assembly Bill 3129, introduced in February 2024, aims to curb consolidation in the healthcare industry that is allegedly being driven by private equity firms and hedge funds. As summarized in detail below, this bill would require these parties to obtain prior written consent from the California Attorney General (AG) prior to acquisitions or change of control of many types of health care operations and assets. You will be asked to obtain consent.
Background and legislative history
If passed, this legislation would affect transactions entered into after January 1, 2025. However, passage of the bill is not guaranteed. AB 3129 must pass the Judiciary Committee and a vote in the Assembly before going through a similar process in the California Senate. All of this must be completed before Parliament adjourns at the end of August.
Aside from the creation of OHCA with the passage of SB 184 in 2022, previous bills that similarly sought to regulate health care integration, such as AB 2080 (Health Care Integration and Contractual Integrity Act of 2022), have not passed. However, AB 2080 proposed a broader range of entities and transactions that would require the AG's consent and went further to prohibit numerous provisions in healthcare contracts that are deemed anti-competitive. Probably. California lawmakers may follow AB 3129's narrower scope.
The ultimate fate of AB 3129 will be known by early July, when Congress is mandated to pass this year's budget before going into summer recess.
Who needs to apply to the state for approval?
The bill targets “private equity groups” and “hedge funds” that have directly or indirectly acquired large amounts of medical assets or established changes in governance or shared control. Changes in control can occur through a wide variety of arrangements, including partnerships and joint ventures.
private equity group It is defined to include “an investor or group of investors engaged in raising or returning capital and investing, developing, or disposing of specified assets.” Hedge fund Includes any pool of funds managed by investors, including private limited partnerships, to generate investment returns. These definitions, as currently drafted, appear to cover a wide range of investment strategies and approaches, including venture capital investments.
Which healthcare assets are covered?
AB 3129's pre-approval requirements apply if the aforementioned investor acquires a controlling interest in a health care facility or health care provider group that conducts at least a “substantial portion” of its operations in California. The bill defines “health care facility” to mean “a nonprofit or for-profit corporation, facility, clinic, place, or building in which health-related physician, surgical, or laboratory services are provided,” such as an inpatient center or an outpatient center. It is broadly defined as including: long-term care facilities, and even research labs. Eligible health care provider groups include a group of 10 or more licensed health professionals (LHPs) with annual revenues of $10 million or more, or from 2 to 9 LHPs. Contains all groups.
Private equity groups and hedge funds that have separate covered transactions with providers consisting of two to nine LHPs with annual revenues between $4 million and $10 million will be required to notify the AG. , this transaction is not subject to approval. The same is true for his group of LHPs other than the two or more physicians whose annual salaries exceed his $4 million.
Although not explicitly considered in the bill's text, certain health care entity structures may also fall within the scope of AB 3129, depending on operational details. For example, Program of Comprehensive Care for the Elderly (PACE) organizations that provide comprehensive medical services to geriatric patients under Medicare and Medicaid must operate at least one facility and therefore fall within the definition of a medical facility. There is a possibility. A care center that provides primary care services. It remains to be seen whether the legislative text will be further amended to clarify whether more specific health care operations fall within the scope of the law.
Timing and burden of filing
Parties engaged in a covered transaction must file an AG approval application concurrently with any other state or federal transaction notification or at least 90 days prior to the change in control. These concurrent notifications include the recently enacted Cost and Market Impact Review (CMIR) reporting regime administered by the OHCA and federal HSR filings, as well as other pre-transaction notification requirements applicable to healthcare assets.
The exact format of the submission and the list of required information and documents have not yet been detailed, but the AG will not be able to determine whether the transaction could have an anti-competitive impact or materially affect access to healthcare. At a minimum, sufficient information is required and available to the public to assess whether it has a significant impact. interest. The AG may request supplemental information, impose a corresponding additional 45-day waiting period, and may reject or impose conditions on the proposed transaction after consideration.
Confirmed exemption failure
Consistent with the stated goal of improving access and competition in health care, the bill provides for exemptions from required notifications and approvals when health care assets are not economically viable without a transaction. . Parties can apply for exemption only if 1) the cost of the property exceeds the previous three years' income or the property cannot service its debts, and 2) there is a significant risk of immediate insolvency or bankruptcy.
Impact on Friendly PC and CPOM
Additionally, the proposed bill would address the contractual structures that many PEs and other investors and stakeholders utilize to make investments while circumventing California's prohibition on practicing medical practices (CPOMs), i.e. This will have a significant impact on the “friendly PC-MSO model”. This model can take a variety of forms, but essentially involves a PE or layman management services organization (MSO) who enters into a contract to perform management services for a medical practice in exchange for a management fee, while also providing a designated You also have certain rights regarding your ability to: The acquisition of ownership by a successor to a business upon the occurrence of a specific triggering event. As currently drafted, §1190.40(b) of the bill would prohibit physician practices from “contracting with entities controlled by private equity groups or hedge funds, thereby increasing the – could make the MSO model unfeasible (or at least more difficult to adopt). The private equity group or hedge fund would manage the doctor's practice and provide medical care in exchange for a fee. ”
plan ahead
While the passage of AB 3129 and its final form is by no means certain, parties considering affected transactions should begin factoring the possibility of enactment into their schedules. Consolidation of medical assets by investors is a hot topic among state and federal enforcement agencies alike.[2] And there is good reason to believe that if AB 3129 is enacted, California will closely scrutinize all required filings.
footnote
[1] Read our blog series on SB 184, OHCA, and its CMIR regulations.
[2] https://www.sheppardhealthlaw.com/2024/03/articles/federal-trade-commission/the-ftc-hosts-workshop-on-private-equity-in-health-care/
