Events concerned in or contemplating well being care transactions in California have been centered on navigating the brand new guidelines set by California’s Workplace of Well being Care Affordability (OHCA),[1] and newly proposed laws might current extra challenges in consummating sure well being care transactions, significantly these involving non-public fairness. Launched in February 2024, California’s Meeting Invoice 3129 seeks to curb consolidation within the well being care business allegedly pushed by non-public fairness companies and hedge funds. As summarized in higher element beneath, the invoice would require that these events acquire prior written consent from California’s Lawyer Normal (AG) earlier than an acquisition or change of management of many sorts of well being care companies and property.
Context and Legislative Historical past
If enacted, the regulation would affect transactions entered into on or after January 1, 2025. Nonetheless, passage of the proposed laws is on no account assured. AB 3129 should go out of the Judiciary Committee and survive an Meeting vote earlier than shifting via 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 via the passage of SB 184 in 2022, earlier payments which have equally tried to control well being care consolidation, equivalent to 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 may very well be extra amenable to AB 3129’s narrower scope.
The last word destiny of AB 3129 will probably be clearer by early July, when the legislature is tasked with passing this 12 months’s funds invoice earlier than the beginning of its summer time recess.
Who Would Be Required to File and Receive Approval from the State?
The invoice targets “non-public fairness teams” and “hedge funds” that straight or not directly purchase a fabric quantity of, or set up a change in governance or sharing of management over, well being care property. The change of management can happen via a variety of preparations, together with partnerships and joint ventures.
Personal fairness teams are outlined to incorporate any “investor or group of traders who have interaction within the elevating or returning of capital and who invests, develops, or disposes of specified property,” whereas hedge funds embrace any pool of funds managed by traders, together with non-public restricted partnerships, to earn funding returns. These definitions as at present drafted seem to cowl a variety of funding methods and approaches, together with enterprise capital investments.
Which Well being Care Belongings 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 at the least 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 providers are supplied,” equivalent to inpatient and outpatient facilities, long-term care services, and even labs. Coated supplier teams embrace 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 isn’t 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 might also 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 providers to aged sufferers, might fall throughout the definition of well being care facility as a result of requirement that they function at the least one care middle providing major care providers. It stays to be seen whether or not the legislative textual content will probably be modified additional to make clear whether or not extra particular well being care traces of enterprise are included throughout the scope of the regulation.
Submitting Timing & Burden
Events participating 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 at the least 90 days previous to the change of management. These concurrent notifications embrace the not too long ago enacted value and market affect evaluate (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 checklist of required data and documentation isn’t but delineated, however minimally would require adequate 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 situations on the proposed transaction following its evaluate.
Failing Agency Exemption
In line with the said aim to enhance well being care entry and competitors, the invoice offers an exemption from the mandatory 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’t meet its money owed, and a couple of) there’s a substantial danger of fast failure or chapter.
Pleasant PC and CPOM Implications
Moreover, the proposed laws would have a big affect 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 observe of drugs (CPOM)—the “Pleasant PC-MSO Mannequin.” This mannequin can take completely different types, however basically entails a PE or lay person-controlled administration providers group (MSO) contracting to carry out administrative providers for a well being care observe in return for a administration price, whereas additionally having sure rights relating to the power to designate successor possession of the observe upon the prevalence of sure triggering occasions. As at present drafted, § 1190.40(b) of the invoice might render the Pleasant PC-MSO Mannequin unviable (or at the least harder to make use of) by prohibiting any doctor observe from contracting with any entity managed “by a non-public fairness group or hedge fund by which that non-public fairness group or hedge fund manages any of the affairs of the doctor…observe in trade for a price.”
Planning Forward
Whereas the passage of AB 3129—and its closing kind—are removed from sure, events considering affected transactions ought to start factoring potential enactment into their timelines. Investor consolidation of well being care property has been a sizzling matter amongst state and federal enforcement companies alike,[2] and there’s good purpose to imagine that ought to AB 3129 be enacted, California would scrutinize all required filings intently.
FOOTNOTES
[1] See our weblog collection on SB 184, OHCA and its CMIR rules, obtainable at:
[2] https://www.sheppardhealthlaw.com/2024/03/articles/federal-trade-commission/the-ftc-hosts-workshop-on-private-equity-in-health-care/