California Bill Would Require State Review of Private Equity Deals in Healthcare | MedPage Today
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| Private Equity Sees a Lot to Like in Health Care - California's AB3129 Says Woah |
Summary on AB 3129 which Would Regulate Private Equity in Health Care in California
1. California Bill AB 3129:
- Proposed by Attorney General Rob Bonta and Assembly Speaker pro Tempore Jim Wood
- Aims to increase oversight of private equity and hedge fund investments in healthcare
- Requires notification to the Attorney General's office and consent for certain healthcare business acquisitions
2. Scope and Requirements:
- Applies to clinics, physician groups, nursing homes, testing labs, outpatient facilities, etc.
- Excludes for-profit hospital sales (due to hospital industry lobbying)
- 90-day notice period before transactions, which can be extended
- AG can grant, deny, or impose conditions on transactions
3. Motivation and Context:
- Responds to growing private equity involvement in healthcare ($1 trillion in the past decade nationally)
- Aims to address concerns about higher prices, lower quality care, and reduced access to services
- Follows similar initiatives in other states (Connecticut, Minnesota, Massachusetts)
4. Support and Opposition:
- Supported by consumer advocates, labor unions, and the California Medical Association
- Opposed by the hospital association, California Chamber of Commerce, and private equity groups
- Opponents argue it could discourage needed investment in healthcare
5. Existing Regulations and Concerns:
- Reinforces laws preventing non-physicians from employing doctors or directing their activities
- Addresses concerns about debt-financed acquisitions and asset sales in healthcare
6. Potential Impact:
- Could affect a wide range of medical businesses and transactions
- Aims to prevent anticompetitive practices and maintain healthcare access
- May have a chilling effect on private equity investment in California healthcare
7. Timeline and Status:
- Introduced in 2024
- Final vote could come soon if moved forward by a state Senate committee
The bill represents a significant attempt to regulate private equity involvement in healthcare, balancing concerns about quality and access against arguments for investment and efficiency.
California Bill Would Require State Review of Private Equity Deals in Healthcare | MedPage Today
— Consumer advocates and labor unions are enthusiastic about the plans, but hospitals are not
August 18, 2024
A bill pending in California's legislature to ratchet up oversight of private equity investments in healthcare is receiving enthusiastic backing from consumer advocates, labor unions, and the California Medical Association, but drawing heavy fire from hospitals concerned about losing a potential funding source.
The legislation, sponsored by Attorney General Rob Bonta, would requireopens in a new tab or window private equity groups and hedge funds to notify his office of planned purchases of many types of healthcare businesses and obtain its consent. It also reinforces state laws that bar nonphysicians from directly employing doctors or directing their activities, which is a primary reason for the doctor association's support.
Private equity firms raise money from institutional investors such as pension funds and typically acquire companies they believe can be run more profitably. Then they look to boost earnings and sell the assets for multiples of what they paid for them.
That can be good for future retirees and sometimes for mismanaged companies that need a capital infusion and a new direction. But critics say the profit-first approach isn't good for healthcare. Private equity deals in the sector are coming under increased scrutiny around the country amid mounting evidence that they often lead to higher prices, lower-quality care, and reduced access to core health services.
Opponents of the bill, led by the state's hospital association, the California Chamber of Commerce, and a national private equity advocacy group, say it would discourage much-needed investment. The hospital industry has already persuaded lawmakers to exempt sales of for-profit hospitals from the proposed law.
"We preferred not to make that amendment," Bonta said in an interview. "But we still have a strong bill that provides very important protections."
The legislation would still apply to a broad swath of medical businesses, including clinics, physician groups, nursing homes, testing labs, and outpatient facilities, among others. Nonprofit hospital deals are already subject to the attorney general's review.
A final vote on the bill could come this month if a state Senate committee moves it forward.
Nationally, private equity investors have spent $1 trillionopens in a new tab or window on healthcare acquisitions in the past decade, according to a report by The Commonwealth Fund. Physician practices have been especially attractive to them, with transactions growing sixfoldopens in a new tab or window in a decade and often leading to significant price increases. Other types of outpatient services, as well as clinics, have also been targets.
Medical News from Around the Web
In California, the value of private equity healthcare deals grew more than twentyfoldopens in a new tab or window from 2005 to 2021, from less than $1 billion to $20 billion, according to the California Health Care Foundation. Private equity firms are tracking the pending legislation closely but so far haven't slowed investment in California, according to a new reportopens in a new tab or window from the research firm PitchBook.
Multiple studies, as well as a series of reports by KFF Health Newsopens in a new tab or window, have documented some of the difficulties created by private equity in healthcare.
Research published last Decemberopens in a new tab or window in JAMA showed a larger likelihood of adverse events such as patient infections and falls at private equity hospitals compared with others. Analysts say more research is needed on how patient care is being affected but that the impact on cost is clear.
"We can be almost certain that after a private equity acquisition, we're going to be paying more for the same thing or for something that's gotten worse," said Kristof Stremikis, director of Market Analysis and Insight at the California Health Care Foundation.
Most private equity deals in healthcare are below the $119.5 million threshold that triggers a requirement to notifyopens in a new tab or window federal regulators, so they often slide under the government radar. The Federal Trade Commission is stepping up scrutiny, and last year it suedopens in a new tab or window a private equity-backed anesthesia group for anticompetitive practices in Texas.
Lawmakers in several other states, including Connecticut, Minnesota, and Massachusetts, have proposed legislation that would subject private equity deals to greater transparency.
Not all private equity firms are bad operators, said Assembly member Jim Wood, a Democrat from Healdsburg, but review is essential: "If you are a good entity, you shouldn't fear this."
The bill would require the attorney general to examine proposed transactions to determine their impact on the quality and accessibility of care, as well as on regional competition and prices.
Critics note that private equity deals are often financed with debt that is then owed by the acquired company. In many cases, private equity groups sell off real estateopens in a new tab or window to generate immediate returns for investors and the new owners of the property then charge the acquired company rent.
That was a factor in the financial collapse of Steward Health Care, a multistate hospital system that was owned by the private equity firm Cerberus Capital Management from 2010 to 2020, according to a reportopens in a new tab or window by the Private Equity Stakeholder Project, a nonprofit that supports the California bill. Steward filed for Chapter 11 bankruptcy in May. "Almost all of the most distressed U.S. healthcare companies are owned by private equity firms," according to another studyopens in a new tab or window by the group.
Opponents of the legislation argue it would dampen much-needed investment in an industry with soaring operating costs. "Our concern is that it will cut off funding that can improve healthcare," said Ned Wigglesworth, a spokesperson for Californians to Protect Community Health Careopens in a new tab or window, a coalition of groups fighting the legislation. The prospect of having to submit to a lengthy review by the attorney general, he said, would create "a chilling effect on private funders."
Proponents of private equity investment point to what they say are notable successes in California healthcare.
Children's Choice Dental Care, for example, said in a letteropens in a new tab or window to state senators that it logs over 227,000 dental visits annually, mostly with children on Medi-Cal, the health insurance program for low-income Californians. "We have been able to expand to 25 locations, because we have been able to access capital from a private equity firm," the group wrote.
Ivy Fertility, with clinics in California and eight other states, said in a letteropens in a new tab or window to state senators that private investment has expanded its ability to provide fertility treatments at a time when demand for them is increasing.
Researchers note that private equity investors are hardly alone when it comes to healthcare profiteering, which extends even to nonprofits. Sutter Healthopens in a new tab or window, a major nonprofit hospital chain, for example, settled for $575 millionopens in a new tab or window in a lawsuit broughtopens in a new tab or window by then-Attorney General Xavier Becerra, for unfair contracting and pricing.
"It's helpful to look at ownership classes like private equity, but at the end of the day we should look at behavior, and anyone can do the things that private equity firms do," said Christopher Cai, MD, a physician and health policy researcher at Harvard Medical School. He added, though, that private equity investors are "more likely to engage in financially risky or purely profit-driven behavior."
KFF Health Newsopens in a new tab or window is a national newsroom that produces in-depth journalism about health issues and is one of the core operating programs at KFF -- an independent source of health policy research, polling, and journalism. Learn more about KFFopens in a new tab or window.
California Bill (AB-3129) Targets Private Equity and Hedge Fund Health Care Transactions
California Attorney General Rob Bonta (AG) and Assembly Speaker pro Tempore Jim Wood recently introduced legislation (AB-3129) that would authorize the AG to review private equity group and hedge fund health care transactions. The proposed legislation’s stated intention is to address price increases and lower quality of and decreased accessibility to services associated with private equity acquisitions of certain health care entities, including physician practices. This article provides an overview of the proposed bill, an analysis of the key issues raised by the proposed legislation, and suggestions for next steps for those potentially affected by the proposal.
Overview of AB-3129
Notice and Timeframe. The proposed bill would require private equity groups and hedge funds to provide the AG notice at least 90 days prior to entering into a change of control or an acquisition with a health care facility or provider group on or after January 1, 2025. The AG could extend the 90-day period by 45 days and would have the power to stay the review period if certain conditions were met, including a determination by the AG to hold a public meeting. Additionally, transactions between private equity groups or hedge funds and nonphysician providers or providers that meet certain annual revenue thresholds would require notice but would not be subject to consent by the AG.
Review of Transactions and Consent. The AG would have the power to grant, deny, or impose conditions on a transaction if the transaction could have a substantial likelihood of anticompetitive effects or could create a significant effect on the access or availability of health care services. The parties to the transaction may request reconsideration. If the AG gives conditional consent or denies consent to the change of control or acquisition, the parties may seek judicial review.
Waiver. The proposed bill would authorize the AG to waive the notice and consent requirements if the party makes a written waiver request demonstrating that certain conditions exist, including that the party’s operating costs have exceeded its operating revenue for three or more years, the party cannot meet its debts, the party is at grave risk of immediate business failure, there is a substantial likelihood of a Chapter 11 bankruptcy filing but the party would be substantially unable to successfully reorganize thereunder, the acquisition or change of control will ensure continued access to health care in the relevant market, and the party made “commercially reasonable best efforts in good faith” to elicit alternative offers. The AG would have 60 days to grant or deny the waiver request.
Prohibition of Certain Management Services Relationships. The proposed bill would prohibit physician and psychiatric practices from entering into any agreements or arrangements with any entity controlled in whole or part, directly or indirectly, by private equity groups or hedge funds for the management of any of the affairs of the physician or psychiatric practice in exchange for a fee. Additionally, the proposed legislation would prohibit a private equity group or hedge fund from influencing or entering into contracts on behalf of a practice with any third party, influencing or setting rates for the practice, or influencing or setting patient admission, referral, or provider availability policies.
Key Issues Raised by AB-3129
The AG Review Process Is Unnecessary. As we discussed in a previous post, California recently enacted legislation (SB-184) intended to address concerns regarding consolidation in California’s health care markets and how such consolidation may impact cost, access, and affordability of health care for patients. The stated purpose of the proposed legislation is to address the same issues regarding health care costs, access, and affordability through a parallel review process by the AG. Also, pursuant to SB-184 and the cost and market impact review regulations (CMIR Regulations), California’s Office of Health Care Affordability (OHCA) has the authority to refer any covered health care transaction to the AG for further review of unfair methods of competition, anticompetitive behavior, or anticompetitive effects. Thus, adding an additional process allowing the AG to review the same health care transactions for the purpose of addressing the same issues in parallel with the CMIR review process is unnecessary, costly, and burdensome on health care providers.
Additionally, the proposed prohibitions of management services relationships between physician and psychiatric practices and private equity groups and hedge funds are unnecessary. Existing California law prohibits the corporate practice of medicine, which includes a prohibition of the ownership of physician practices by unlicensed individuals and entities and a prohibition of unlicensed individuals and entities from making decisions that are the practice of medicine. According to the Medical Board of California, decisions relating to influencing or entering into contracts on behalf of a practice with third-party payers, setting rates, patient admission, referral, and provider availability are the practice of medicine and must be made by a physician licensed in the State of California. Because existing law already bans the corporate practice of medicine, the proposed restrictions on management services relationships are unnecessary.
The AG Review Process Is Premature. The proposed AG review process is premature. The OHCA is in its initial stage of reviewing and gathering data about health care transactions that may impact cost, access, and affordability of health care for patients in California. On January 2, 2024, less than two months before the introduction of AB-3129, the OHCA began accepting notices of covered health care transactions for transactions closing on or after April 1, 2024. The proposed legislation would impose duplicative requirements on health care entities before the OHCA has had sufficient time to review a meaningful number of transactions and collect information regarding the impact of the transactions on cost, access, and affordability of health care for patients in California. Further, the OHCA is set to begin collecting health care data on September 1, 2024, beginning with payers and fully integrated systems. With this data, the OHCA can analyze factors that contribute to increased health care costs in the state. This data will allow legislators to make informed decisions regarding reducing the costs of health care. Additionally, the OHCA has the power to address cost increases and is currently establishing health care cost targets, which will be enforceable through a variety of mechanisms, including financial penalties. For these reasons, the AG review process proposed by AB-3129 is premature.
The Standards for the AG Review Process and Definitions Are Broad and Unclear. Pursuant to AB-3129, the standards that the AG will use to decide whether to consent to, deny, or impose conditions on a health care transaction are broad and unclear. Pursuant to the proposed legislation, the AG will make a determination based on whether the AG believes that the transaction “may have a substantial likelihood of anticompetitive effects” or “may create a significant effect on the access or availability of health care services to the affected community.” Further, the AG will consider the “public interest” when deciding whether a transaction can move forward. The “public interest” is broadly defined as “being in the interests of the public in protecting competitive and accessible health care markets for prices, quality, choice, accessibility, and availability of all health care services for local communities, regions, or the state as a whole.”
These broad standards raise important questions such as:
- How will the AG measure a “substantial likelihood”?
- What constitutes a “significant effect”?
- What specific and measurable criteria will the AG use to determine what affects the “public interest”?
These broad and unclear standards without any specific or measurable criteria would give the AG the power to deny or impose conditions on most investments by private equity or hedge funds in health care facilities and providers.
Additionally, the definitions of “health care facility,” “hedge fund,” “nonphysician provider,” and “private equity group” are overly broad and imprecise. For example, the definition of “health care facility” includes “treatment center[s],” which could extend the reach of this bill to non-medical substance use disorder facilities, which are not considered health care facilities in many other contexts. Such broad definitions could have unintended consequences and chill investment in health care facilities and providers. “Hedge fund” is defined to mean a pool of funds by investors, including a pool of funds managed or controlled by private limited partnerships, if those investors or the management of that pool employ investment strategies of any kind to earn a return on that pool of funds. This definition is broad enough to capture just about any investment vehicle, including index funds deployed by nonprofit retirement services providers. “Private equity group” is similarly broadly defined to capture any type of investor or group of investors who engage in the raising or returning of capital and who invest, develop, or dispose of specified assets, which could capture standard medical equipment financing companies – a key source of capital support for medical practices and clinics.
Throwing the Baby Out with the Bathwater. For every well-publicized private equity-backed failure, there are hundreds of companies backed by private equity that have been providing beneficial support and resources to health care facilities and provider groups for years. The delivery of health care increasingly has become more complex and private equity and hedge funds can provide much needed administrative, financial, and clinical support services both directly to health providers and to the myriad of companies that provide administrative and technical support to these providers. Such support frees health care providers to focus on the delivery of care to patients. Private equity and hedge fund investment in health care facilities and in the service providers that support them allows for upgrades to electronic health record systems, the purchase of new equipment, development of new technologies, the provision of telehealth services, and improvements in billing systems, staffing, and other administrative support services that help physicians and other health care providers focus on patient care. The proposed bill mandates scrutiny, costs, and delays on a broad swath of California businesses and services with little demonstration of value, and could upend long established arrangements between health care providers and administrative and management service companies necessary to support the provision of healthcare.
Next Steps
Public Comment. We suggest that interested parties submit comments to the author of the bill directly, or through their counsel or trade associations.
Continued Monitoring. The proposed bill may be heard in committee on March 18. We will continue to monitor this bill as it works its way through the legislative process.
Attorney General Bonta, Assembly Speaker pro Tempore Wood Introduce Legislation to Strengthen Review of Private Equity Healthcare Transactions and Abuses
AB 3129 will strengthen state prohibitions against private equity group abuses in healthcare
OAKLAND – California Attorney General Rob Bonta and Assembly Speaker pro Tempore Jim Wood (D-Healdsburg) today introduced AB 3129 authorizing the Attorney General to grant, deny, or impose conditions to a change of control or an acquisition between a private equity group or hedge fund and a healthcare facility or provider group. Private-equity ownership in the healthcare industry has more than doubled in the last decade, often leading to higher healthcare costs, poor quality, and less access to care. Private equity operation of healthcare providers has harmed patients and undermined the financial viability of providers. Aggressive profiteering by private equity owned hospitals and nursing homes cannot justify these harms.
“At the California Department of Justice, we believe that the healthcare system should serve patients. Yet, too often, private equity has served corporate profiteers by maximizing their profits at the expense of access, quality, and affordability of healthcare for Californians,” said Attorney General Rob Bonta. “Today’s legislation not only curtails harmful transactions but also stops practices that undermine the practice of medicine.”
“A majority of studies show that health care consolidations are not lowering costs for anyone but the entities consolidating, including those acquired by private equity or hedge funds,” said Assembly Speaker pro Tempore Jim Wood. “We are often led to believe that these consolidations will save money and that it’s good for consumers, but what we are actually seeing in health care is that it reduces competition and results in higher corporate and shareholder profits. I also have real concerns about how these consolidations have the potential to reduce or limit access to certain health care services, like reproductive care.”
To safeguard fair competition and root out anticompetitive practices by dominant corporations in the healthcare industry, AB 3129 would authorize Attorney General oversight of private equity and hedge fund acquisitions of healthcare facilities and provider groups to ensure these acquisitions are in the public interest. AB 3129 will also reinforce the existing bar on the corporate practice of medicine, including the bar on the interference of private equity groups or hedge funds in the treatment of patients. Without proper enforcement predatory practices will continue to consolidate our healthcare system, driving up prices, reducing quality of care, and restricting access for patients.
A copy of the legislation can be found here.
AB 3129, as amended, Wood. Health care system consolidation.
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