Private Equity Healthcare Transactions Under Scrutiny

From the West Coast Healthcare Desk is an ongoing series of Holland & Knight Healthcare Blog articles and alerts focused on healthcare industry developments and points of interest in the West Coast healthcare marketplace. Holland & Knight's nationally ranked healthcare practice has been focused on healthcare compliance, transactional, reimbursement and operational trends that have often started in California before spreading nationwide – managed care and various capitated and quality-based reimbursement models being the most obvious examples. With the growth of the firm's West Coast-based healthcare team serving regional for-profit and not-for-profit healthcare providers, suppliers and complex integrated payer/provider networks, Holland & Knight is able to provide timely insight into the developments and trends that will impact the healthcare sector both regionally and nationally into the future.

Stay tuned for more West Coast-focused healthcare news and analysis to come.

California Assemblymember and chair of the Assembly Health Committee Jim Wood introduced Assembly Bill (AB) 3129, which will be heard in committee on March 18, 2024. The bill, introduced in February 2024, targets healthcare transactions involving private equity groups and hedge funds and, if enacted, would require private equity groups and hedge funds to receive consent from the California attorney general before transacting with healthcare facilities or provider groups. As currently written, the bill would also prohibit some management services arrangements between private equity groups/hedge funds and physician practices. This bill is just one of many signals that the level of scrutiny applicable to private equity healthcare transactions in California – as is true in other states – continues to grow. (See Holland & Knight's previous alerts, "Antitrust Enforcers Reaffirm Focus on Private Equity in Healthcare at Public Workshop," March 7, 2024, and "Federal Bankruptcy Court Stays Envision Healthcare Litigation in California: Case Impacts Corporate Practice of Medicine, Private Equity Healthcare and 'Friendly PC' Model," Aug. 3, 2023.)

AB 3129 Summary

If enacted, AB 3129 would impose a 90-day prior notice requirement for acquisitions or changes in control between private equity or hedge funds and healthcare facilities or provider groups. Specifically, this will apply to 1) healthcare facilities and provider groups and 2) nonphysician providers with an annual revenue of less than $4 million and providers with annual revenue between $4 million and $10 million. The notice must include sufficient information for the attorney general to determine whether the proposed transaction will adversely affect the access or availability of healthcare services within the impacted community. The attorney general may extend the 90-day period by 45 days if additional information is necessary, the transaction is modified or it involves a multi-facility or multi-provider health system that serves multiple communities. The attorney general may extend its review by 14 more days to hold a public meeting regarding the transaction. The attorney general must also consent to the transaction prior to closing. The bill would authorize the attorney general to grant, deny or impose conditions on the transaction if the transaction would 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."

As proposed, AB 3129 allows parties to the transaction to request that the attorney general waive the notice and consent requirements. Within 60 days of receiving a waiver request, the attorney general is required to respond to the request. The bill outlines six factors that are considered for each waiver request:

• whether the operating costs have exceed operating revenue for three or more years and the provider cannot satisfy its debts
• whether the provider is at grave risk of immediate business failure and is facing Chapter 11 bankruptcy
• whether the party would be substantially unable to reorganize under Chapter 11 bankruptcy
• whether the transaction will ensure continued healthcare access
• whether the provider has made commercially reasonable best efforts to elicit alternative offers in good faith
• whether the written request includes all necessary information

The attorney general will issue a notice of decision regarding its consent, or lack thereof, or its waiver. The parties to the transaction will have 10 days to request reconsideration, and the reconsideration decision must be given within 30 days. That final determination will be subject to judicial review.

Another critical part of AB 3129 is its prohibition on specific arrangements. The bill prohibits private equity groups and hedge funds from influencing or entering into contracts with any third party on behalf of physician or psychiatry practices or providers. It also prohibits private equity and hedge funds from influencing or setting rates with any third party, or influencing or setting patient admission, referral or availability policies. Further, AB 3129 prohibits physician or psychiatric practices from contracting with private equity groups or hedge funds for management services in exchange for a fee. Finally, physician and psychiatric providers in these transactions are prohibited from agreeing to noncompete and nondisparagement clauses related to quality of care, utilization of care, ethics, professional responsibility or revenue increasing strategies.

An Additional Tool for the Attorney General to Curtail Private Equity Interests in Healthcare

AB 3129 is another step in California's increasing efforts to oversee and regulate private equity and for-profit healthcare transactions. Effective Jan. 1, 2018, California law requires any public benefit corporation that operates or controls a healthcare facility to provide written notice to the attorney general and obtain consent prior to any sale or transfer of ownership or control of a material amount of the assets of the corporation to a for-profit corporation or entity or to a mutual benefit corporation or entity. Cal. Corp. Code § 5914.

More recently, the California Health Care Quality and Affordability Act (SB 184, June 30, 2022) and its implementing regulations established the California Office of Healthcare Affordability (OHCA) to oversee and contain healthcare spending in California. (See Holland & Knight's previous alert, "Baby HSRs: States Are Modeling Laws After Federal Act to Investigate More Transactions," Oct. 2, 2023.) Pursuant to SB 184, parties to a covered transaction must notify the OHCA at least 90 days prior to entering into the transaction. OHCA is obligated to conduct a cost and market impact review (CMIR) or provide a written waiver thereto if the transaction at issue is "likely to have a risk of a significant impact on market competition, the state's ability to meet cost targets, or costs for purchasers and consumers." Although SB 184 and AB 3129 appear similar, they vary significantly in that the OHCA does not have the authority to block a transaction that the attorney general has. In this way, AB 3129 doubles down on the state's suspicion that private equity adversely impacts healthcare costs and quality in California.

California is not alone in its decision to now turn its focus to private equity healthcare transactions either. Indiana's Senate Bill 9 is proposed legislation that would require healthcare entities and private equity groups entering into transactions to notify the Office of the Attorney General 90 days before undergoing a merger or acquisition with a value of at least $10 million. Minnesota's HF 4206 is proposed legislation that would prohibit private equity companies or real estate investment trusts from acquiring or increasing direct or indirect ownership interest in a provider or acquiring or increasing any operational or financial control over a provider. Likewise, this national trend has recently caught the attention of the FTC. Its recent request for public comment on the issue and its virtual workshop on March 5, 2024, signaled a sweeping change in healthcare transactions in the near future.

What's Next?

As AB 3129 wends its way through the legislative process, stakeholders in the California healthcare marketplace will undoubtedly make their voices heard as to the hurdles that AB 3129 presents to private equity investment in California. For example, concerns have already been raised regarding AB 3129's proposed prohibition against management services relationships between physician and psychiatric practices and private equity groups and hedge funds. To the extent that the prohibition is designed to curtail the ability of private equity interests to intrude into the physician/patient relationship and the practice of medicine, it has been argued that California's longstanding prohibition against the corporate practice of medicine already serves this purpose and renders the management services agreement prohibition duplicative and unnecessary.

In addition to the above, some have argued that SB 184 is designed to address many of the same issues raised in AB 3129. While SB 184 is in its infancy, the impact that SB 184 will have on the role of private equity in the California healthcare marketplace is unknown. Therefore, AB 3129 has been described as a premature solution to a problem that may not exist or may be sufficiently addressed by SB 184.

Lastly, the COVID-19 public health emergency revealed significant shortfalls in healthcare access, specifically in marginalized urban and rural communities throughout California. It has been noted that private equity investment in healthcare can have a positive impact on the proliferation of healthcare access. Private equity investment can fund growth and development in electronic healthcare record systems, telehealth technologies and administrative support services that allow small and mid-sized healthcare practices to focus on the provision of patient care services instead of the ever-increasing administrative burden and complexity of healthcare practice operations.

Though AB 3129 has not been enacted and has yet to be introduced in committee, it is clear that the legislature will be focusing on these issues in the coming months. Holland & Knight will continue to monitor AB 3129 and other legislative proposals impacting healthcare in California. For additional information, please contact the authors or another member of Holland & Knight's Healthcare & Life Sciences Team.

Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem, and it should not be substituted for legal advice, which relies on a specific factual analysis. Moreover, the laws of each jurisdiction are different and are constantly changing. This information is not intended to create, and receipt of it does not constitute, an attorney-client relationship. If you have specific questions regarding a particular fact situation, we urge you to consult the authors of this publication, your Holland & Knight representative or other competent legal counsel.