Events concerned in or contemplating well being care transactions in California have been targeted on navigating the brand new guidelines set by California’s Workplace of Well being Care Affordability (OHCA),[1] and newly proposed laws may current extra challenges in consummating sure well being care transactions, significantly these involving personal fairness. Launched in February 2024, California’s Meeting Invoice 3129 seeks to curb consolidation within the well being care business allegedly pushed by personal fairness corporations and hedge funds. As summarized in better element under, the invoice would require that these events acquire prior written consent from California’s Lawyer Basic (AG) earlier than an acquisition or change of management of many varieties of well being care companies and belongings.
Context and Legislative Historical past
If enacted, the legislation would influence transactions entered into on or after January 1, 2025. Nonetheless, passage of the proposed laws is on no account assured. AB 3129 should cross out of the Judiciary Committee and survive an Meeting vote earlier than transferring by way of an identical course of within the California Senate. All of this should happen earlier than the legislative session closes on the finish of August.
Placing apart the creation of OHCA by way of the passage of SB 184 in 2022, earlier payments which have equally tried to control well being care consolidation, resembling AB 2080 (the Well being Care Consolidation and Contracting Equity Act of 2022), haven’t handed. Nonetheless, AB 2080 proposed a wider scope of entities and transactions requiring AG consent, and would have gone additional to ban quite a few provisions in well being care agreements deemed to be anticompetitive. Members of the California legislature could possibly be extra amenable to AB 3129’s narrower scope.
The last word destiny of AB 3129 shall be clearer by early July, when the legislature is tasked with passing this 12 months’s price range invoice earlier than the beginning of its summer season recess.
Who Would Be Required to File and Acquire Approval from the State?
The invoice targets “personal fairness teams” and “hedge funds” that instantly or not directly purchase a fabric quantity of, or set up a change in governance or sharing of management over, well being care belongings. The change of management can happen by way of a variety of preparations, together with partnerships and joint ventures.
Personal fairness teams are outlined to incorporate any “investor or group of traders who interact within the elevating or returning of capital and who invests, develops, or disposes of specified belongings,” whereas hedge funds embody any pool of funds managed by traders, together with personal restricted partnerships, to earn funding returns. These definitions as presently drafted seem to cowl a variety of funding methods and approaches, together with enterprise capital investments.
Which Well being Care Property are Coated?
AB 3129’s prior approval requirement would apply when the aforementioned traders purchase management of a well being care facility or supplier group doing no less than a “substantial half” of their enterprise in California. The invoice broadly defines “well being care facility” to incorporate any “nonprofit or for-profit company, establishment, clinic, place, or constructing the place health-related doctor, surgical procedure, or laboratory companies are supplied,” resembling inpatient and outpatient facilities, long-term care amenities, and even labs. Coated supplier teams embody all teams of 10 or extra licensed well being professionals (LHPs) or teams of 2-9 LHPs with $10 million or extra in annual income.
Personal fairness teams and hedge funds that enter into an in any other case coated transaction with suppliers consisting of 2-9 LHPs that earn between $4 and $10 million in annual income can be required to inform the AG, however the transaction is just not topic to approval. The identical is true for teams of two or extra nonphysician LHPs that earn greater than $4 million yearly.
Whereas not expressly contemplated by the invoice textual content, sure well being care entity constructions may fall beneath the scope of AB 3129, relying on operational particulars. For instance, Program of All-Inclusive Look after the Aged (PACE) organizations, which beneath Medicare and Medicaid present complete well being care companies to aged sufferers, may fall inside the definition of well being care facility because of the requirement that they function no less than one care heart providing main care companies. It stays to be seen whether or not the legislative textual content shall be modified additional to make clear whether or not extra particular well being care strains of enterprise are included inside the scope of the legislation.
Submitting Timing & Burden
Events partaking in coated transactions can be required to file an software for AG approval similtaneously some other state or federal transaction notifications, or in any other case no less than 90 days previous to the change of management. These concurrent notifications embody the not too long ago enacted value and market influence evaluation (CMIR) reporting regime administered by OHCA and the federal HSR submitting, and some other pre-transaction notification necessities relevant to the well being care asset.
The precise type of the submitting and record of required data and documentation is just not but delineated, however minimally would require enough data for the AG to evaluate whether or not the transaction might have anticompetitive results or considerably have an effect on entry to well being care, and is usually within the public curiosity. The AG might request supplemental data and will impose a corresponding extra 45-day ready interval, and will deny or impose circumstances on the proposed transaction following its evaluation.
Failing Agency Exemption
In step with the acknowledged aim to enhance well being care entry and competitors, the invoice supplies an exemption from the required discover and approval the place the well being care asset is financially unviable with out the transaction. A celebration might apply for a waiver provided that 1) the asset’s prices have exceeded its income for the earlier three years or it can not meet its money owed, and a couple of) there’s a substantial danger of quick failure or chapter.
Pleasant PC and CPOM Implications
Moreover, the proposed laws would have a major influence on a contracting construction many PE and different traders and stakeholders make the most of to hold out investments whereas navigating California’s prohibition on the company apply of medication (CPOM)—the “Pleasant PC-MSO Mannequin.” This mannequin can take completely different varieties, however primarily entails a PE or lay person-controlled administration companies group (MSO) contracting to carry out administrative companies for a well being care apply in return for a administration price, whereas additionally having sure rights relating to the flexibility to designate successor possession of the apply upon the incidence of sure triggering occasions. As presently drafted, § 1190.40(b) of the invoice may render the Pleasant PC-MSO Mannequin unviable (or no less than harder to make use of) by prohibiting any doctor apply from contracting with any entity managed “by a personal fairness group or hedge fund wherein that non-public fairness group or hedge fund manages any of the affairs of the doctor…apply in trade for a price.”
Planning Forward
Whereas the passage of AB 3129—and its last kind—are removed from sure, events considering affected transactions ought to start factoring potential enactment into their timelines. Investor consolidation of well being care belongings has been a sizzling subject amongst state and federal enforcement companies alike,[2] and there may be good cause to consider that ought to AB 3129 be enacted, California would scrutinize all required filings carefully.
FOOTNOTES
[1] See our weblog collection on SB 184, OHCA and its CMIR laws, obtainable at:
[2] https://www.sheppardhealthlaw.com/2024/03/articles/federal-trade-commission/the-ftc-hosts-workshop-on-private-equity-in-health-care/
