Podcast - What’s Next After Gov. Gavin Newsom’s Veto in California?

John Saran: Well, this is another podcast edition of the Counsel That Cares. It's a podcast series brought to you by Holland & Knight's Healthcare & Life Sciences Team. This is John Saran, a partner in the Healthcare Transactions group. And I'm here with Rebecca Springer from Pitchbook, a lead healthcare analyst.

Rebecca Springer: Great to be here, John. Lots of exciting stuff going on in healthcare, private equity regulation. So, yeah, let's dive in.

John Saran: And I think it's good to note that we're actually live here at the Nashville Healthcare Sessions conference. It's the third day. And what we're talking about today is actually a bill. While we, I think we're sitting in one of the sessions listening to some great speakers. The legislature in Pennsylvania released an amended version of one of their state healthcare transaction laws that had been pending for several weeks. And it's notable because these laws have been the topic of a lot of discussions, especially with deal making, for the rest of the year and looking ahead in 2025. There was a — and, Rebecca, I'll ask you sort of the first question here — why was, just to set the stage for why this Pennsylvania bill is important, what happened in the last few weeks, in California, that was sort of a monumental decision?

Rebecca Springer: Yeah. So to rewind. California already has a healthcare review bill — the OHCA agency — that bill went live, so to speak, in April. But there is a bill in California, AB 3129, that the industry is tracking very closely that would have been very aggressive in its regulation of healthcare private equity transactions, giving the attorney general essentially an up or down vote on any transaction. And you can fill in the details on that, John. But this for the dealmaking community was a big deal, not only because California is a really big state. If you have a big platform, it probably has some sort of California presence. But because we've seen California be a leader in some of this state-level regulation, and so it was a key bellwether. And yeah, we got some big news — what was it, now, about a week ago — Gavin Newsom vetoed the bill.

John Saran: Right. And I remember that it's even coming around Labor Day weekend when the California legislature passed the bill and it went to Governor Newsom's desk. I think it caught a lot of our clients, private equity sponsors, investment bankers, strategics, flat footed. Right. I think it was really a coin flip over the summer as to whether it would go or not go, and it was passed and everyone's phone is ringing off the hook. We would be having a different discussion today if it had been signed. The veto cited redundancy. So, as Rebecca mentioned, right, they just put in the law in April. OHCA has been working very hard reviewing a lot of transactions already. I think they have about seven transactions that they've reviewed. And ultimately, you know, the governor said, look, let them do their job. You know, we'll see sort of what they find  and then, you know, kind of go from there. The bill also actually had some provisions that covered the corporate practice of medicine. I think you can apply the same redundancy standard to that. California has a very extensive corporate practice regime. It is actively enforced. There was a case in April where a court actually enforced corporate practice, so I think that redundancy theme could be applied to both sides of those bills. But I think it's important sort of the reasoning, because as we look ahead, I think, right, this decision will affect, and we're seeing in this Pennsylvania bill, right, other states and sort of how they consider what they need to do. States that like Pennsylvania that don't have a bill, it's a little bit different than other states that have bills, right, and were looking to augment their frameworks. This year there were six states total that tried to bulk up their laws and all that.

Rebecca Springer: That already had review laws on the books.

John Saran: And they tried to increase the review thresholds or add certain private equity-related provisions, and none of those bills passed. You mentioned Indiana did pass a reporting statute, but that was where the trend was going already. And then the California veto happened and we're seeing the effects of it in this amended bill.

Rebecca Springer: So I don't think a lot of folks in the deal community have been following Pennsylvania's sort of legislative journey on this as closely as California's, right. Like, I'm not having conversations regularly with folks who are not attorneys about Pennsylvania. So maybe kind of break down what that Pennsylvania bill is and how it's been changed.

John Saran: Sure. I mean, so actually, Pennsylvania's been thinking about these laws for almost two years now. They tried last year and were unable to pass a statute. This year that had, you know, there were three pending bills that covered different things or different sectors of the healthcare industry. And this one, the one that we're talking about, is HB 2344, and an amended version of the bill came online on Monday and it focused only on healthcare facilities. So if you think about it, right, you have healthcare facilities, physician practices, there's foreign manufacturers, there's many different sectors of parts of the healthcare industry, but this one focused only on healthcare facilities. Those are transactions between — so think of a hospital buying another hospital, or hospitals merging together, or hospital integrating with ASCs. It was clear from this, right, rather than having a wide net capturing everything, in Pennsylvania, they only wanted to look at healthcare facilities. And look, they have a few, I think, five voting days left until the November elections. They have until the end of November to pass it. We'll see where it goes. But that limited scope, in addition to a few other parameters that they changed, show, I think, the effects of the California veto. It shows the effects of industry participation on both sides, right, Not just against but also for. And they also, I think, recognized, you know, some of the reasoning in Governor Newsom's veto, right. Give these agencies time to review the transactions, think about it, look at the trends and make informed policy decisions. This bill actually has a four-year sunset, so it automatically, right, will expire and be... Unless the legislature reinstates it or goes in a different direction.

Rebecca Springer: And that's a new feature.

John Saran: That's a new feature. I mean, it's, we haven't seen it in some of the other bills to date. And we also haven't seen a directive for the agency to complete a report. You know, what did they find in their reviews? And that requirement is there after three years.  So right before it expires, they have to submit a report showing the of the effects of it.

Rebecca Springer: And presumably this was for the purposes of making the bill more bipartisan, more palatable to the business community. There's clearly some work being done there. And I think the narrow scope of this is interesting because, of course, the vast majority of private equity healthcare transactions, even within the provider category, are not facility-based. They're, you know, physician practice management and behavioral health and so on. So if they're targeting the sort of hospital skilled nursing set, that's a very narrow piece of this industry.

John Saran: Yeah. I mean, private equity is not mentioned in the bill at all. So it's not even listed, right. So it's more of a general, you know, healthcare transaction review bill, which if you look at some of the early laws that came out in the space across the other states, they didn't mention private equity, that that is more recent in terms of the focus, especially with the California AB 3129 and some of the other, you know, bills this summer that didn't pass. So this is sort of a return to just a more general focus on the industry.

Rebecca Springer: Right? Which, and we've had antitrust scrutiny of hospital mergers since time immemorial.

John Saran: And just to say it right, it's all healthcare facilities, so it's not just hospitals. Hospitals, obviously, right. There's a lot of news today, right, about hospitals out there, but it's all facilities. So think of ambulatory surgery center, skilled nursing facilities, hospices, I think anything, right, that is like a brick and mortar that has a license is likely going to be picked up by this.

Rebecca Springer: What other states should we be looking at? Oregon?

John Saran: So, look, I mean, Oregon has had a set of laws they've been implementing for two years now, I think they reviewed a few dozen transactions. They are well underway in sort of what they've been doing, all their decisions are public. And you can... We haven't seen a general trend where they're only targeting certain players in the market. And look, they also recognized the need to look at this over an extended period of time. So with Oregon's framework, there's an initial review, then there's a one-year follow up, three-year follow up and a five-year follow up. So they recognize, right, that you have to look at it over a significant period of time to see, right. Because initially there might not be effects, right, for that consolidation in the market. But then maybe after three years, it could. So they have a much more, I would say, a much more streamlined framework that they've been implementing at this point.

Rebecca Springer: And do you think that the bill that they looked at that was going to be fairly aggressive, unregulated in corporate practice and MSO structures is going to come back?

John Saran: Yes, I think, and we've, I think it's safe to say that it will be sort of back on the docket next year. I know the industry is participating in that as well on both sides of it. I think it'll be interesting to see not just with that bill, but with other similar, you know, similar bills that come up in '25. Do folks take a hard look at the Governor Newsom's veto and say, is this redundant? Right. Just using Oregon as an example, they have corporate practice, they have statutes, at least on the dental side, that expressly say what a management company can or can't do. Why do you need more? Right. I think that's the basic question that I think folks need to ask and be able to answer if they want to proceed with these types of legislation, is looking at what happened in California.

Rebecca Springer: So you really see California as a signpost that there may be a shift in how states are thinking about these laws.

John Saran: I think it's a fair question, right. OHA is reviewing transactions involving physician practices and dental practices. And they're looking at them over a five-year period. Right. So you could apply the same logic, right? Let OHA do its job in reviewing those transactions. They are aware of the narratives out there regarding private equity. They are aware of the narratives out there, and they say it in their documents, you know, for DSOs and MSOs. So they are looking, they are looking at the data already. Why, you know, essentially that's the question, why is more needed?

Rebecca Springer: Be interesting to talk about what we think the effect is going to be on deal activity, deal sentiment, right. Zooming out for a second, the increased media scrutiny, headline risk and then regulatory risk around provider transactions has taken some of the bigger firms out of the direct care provision market, right. So I think there have been trickle down effects. If California had gone through, I think you would have probably seen a rush of deals trying to get across the finish line by January, but that's not the case now. What else are you thinking about in terms of where deal sentiment is headed on the back of some of these decisions?

John Saran: So I think the outlook for next year is definitely more positive now, right? I mean, I was thinking about this, and a month ago, right, I think even before, you know, the rates came down, there was uncertainty regarding that.

Rebecca Springer: There is. We were already starting to accelerate about midpoint this year.

John Saran: Yeah. So it, in the course of a few weeks, I think outlook changed positively, and my hope with what we're seeing here in Pennsylvania and sort of recognition by the states of not implementing broad sweeping antitrust reviews on transactions, right, it hopefully, it — not hopefully, but I think it sort of validates some of the things that I was saying coming out of the veto, that it's going to be harder for these states to pass those types of legislations, which should bring down, I think, the temperature and some of the anxiety and fears on these types of laws. And that's the thing, like, you know, these laws drop and sometimes there's a reaction of fear and anxiety like the unknown. Right? They don't know what these are. These agencies are going to stop our transactions because they don't like us, right. We spoke — like there was a panel yesterday with the FTC and they said, look, there's no like secret plan in the, you know, and out there does kind of stop these deals. Right. We have very well-known parameters that are out there. Follow those parameters, and you will get your deal done. And they quoted yesterday, right, only 1 percent of transactions are actually sort of snagged up. And I think the same goes with the states. I think there's only been one across all the states that have been reviewing these transactions nationally, like national transactions, and there's only been one or two transactions that hit roadblocks, significant roadblocks, and there were unique reasons for that. Look, there's a path ahead here. I know it took some time for folks in the industry, I mean, Holland & Knight, we've been on top of this, like we have a practice, we know how to grapple with these laws. But it took some time for us to become aware of this, understand how to navigate them, but we'll still be able to get deals done.

Rebecca Springer: Yeah. We are right now, right. And yeah, I think look, like rewinding back to, was it March when the tri-agency request for information was put out and some of the rhetoric and the documentation that they put out was fairly strong, and then you had things going on in California and you didn't know whether it's going to be a domino effect. You know, from the dealmakers' perspective, you can see why there was a lot of trepidation. But, you know, it sounds like we're kind of settling into a place of being able to move forward. These are sort of controllable risks. You sort of, you know, do your diligence, put in your paperwork and move forward.

John Saran: And I think on multiple panels we heard today involving current and former federal officials, they all said that those RFIs and those types of, you know, requests for information, are meant to actually gather information, right. If they wanted to, you know, they have the tool, as they said, they have the tools necessary to subpoena and get the critical information, right, that could, you know, sink your organization if they wanted to. But this is actually like a genuine, you know, request for information. But I understand that that sort of that concern is out there. And they actually addressed it in this Pennsylvania amended bill. One of the provisions that was added in this latest version said any information that you submit to the AG cannot, for purposes of reviewing a transaction, for reporting a transaction, cannot be used for prosecution for other sort of unrelated reasons. Because that was I mean, that's been... I've heard a lot of folks out there make those statements. You have these wide nets, you're collecting all this information, right. An agency could then pass it off to a medical board or dental board or another enforcement agency, right. And then that could be used for some other enforcement action. And I think they recognize that those concerns are out there, and they put that directly in the bill.

Rebecca Springer: Really interesting. Well, the sentiment I think, at this conference has been a lot more positive than, I don't know, like last year, J.P. Morgan [conference], the mood was pretty, pretty grim, right. So it'll be interesting to see what next year holds.

John Saran: Yeah. And I, but I think we, I think we can be sure that there will be more of these state laws. I think they're going to be a lot more limited. And there's going to be, I think, participation from the industry on both sides of it. I think the California AB 3129 really increased that across the board. I hadn't seen it for the other states. There's already some states like Indiana thinking of potentially adding to their framework. Some of the candidates for governor put out a health plan covering that. So there could be, you know, copycat states for AB 3129, but it didn't pass. Right. So they would be sort of going out.

Rebecca Springer: So you think this sort of pre-deal review process is something that may spread to additional states.

John Saran: Yeah, for private equity-backed transactions. But I think it's going be a lot harder to get support for that with California not proceeding down that path. Because it seems like the states are returning to more of that sort of more, you know, comprehensive look at the industry, not just focusing on private equity. Right. I think you told me the other day it's only 4 percent of, right.

Rebecca Springer: Right. Well, less than 4 percent. So the proportion of healthcare providers in the U.S. that are private equity-backed by revenue, we estimate at 3.3 percent.

John Saran: Right. So why make sweeping policy, right, that potentially could burden —  you have limited resources, right? Why do that? So it'll be interesting. I just want to thank you for joining me. And, you know, well, it'll be interesting to see where this all goes. But I think it's — you can see, like I said, I think you can really see in this bill or the effects of the broader trends, which is great.

Rebecca Springer: Yeah.

John Saran: Hopefully we'll be talking soon and certainly keep you in mind when the next state comes down the pipe. But I think good things are ahead.

Rebecca Springer: Yeah. Appreciate your detailed perspective on this. And there's a lot to keep track of across all of these different state processes. And it's helpful to understand some of the nuance here and where we might be headed going forward.

John Saran: All right. Well, thank you, Rebecca.

Rebecca Springer: All right. Thanks.