New Bill Would Empower California AG to Curtail Healthcare Private Equity Transactions

Earlier this year, California Assembly Speaker Pro Tempore Jim Wood and Attorney General (AG) Rob Bonta sponsored and introduced California Assembly Bill (AB) 3129, which would subject a large swath of healthcare transactions and management arrangements involving private equity groups and hedge funds to new notice, review and approval requirements by the California AG. (See Holland & Knight's previous alert, "Private Equity Healthcare Transactions Under Scrutiny," March 14, 2024.) The bill seeks to empower the California AG, through several mechanisms involving both transaction approval, enforcement authorization and new statutory requirements for management services organizations (MSOs), to curtail what the sponsors deem to be "harmful transactions" in healthcare in California.¹

Since being initially heard in the Assembly Health and Judiciary Committee in March, AB 3129 has been amended to expand the scope of transactions subject to AG review beyond provider groups of physicians to now include dentists, mid-level providers, optometrists, pharmacists and licensed mental and behavioral health professionals. AB 3129 was subsequently passed in the California Assembly (50-16) on May 21, 2024, and now awaits deliberation this summer in the California Senate. If enacted, this legislation would require AG review and approval for transactions well beyond the scope of California's existing transaction review laws, including California's recently enacted Senate Bill (SB) 184. Notably, AB 3129 would reduce the transaction size threshold by revenue and headcount, impact MSOs and dental support organizations (DSO), as well cover additional healthcare sectors and provider types not currently subject to the notice requirements of SB 184. As of this writing, AB 3129 is sitting with the California Senate Health and Judiciary Committee.

Background and Comparison to California's Current Transaction Review Law (SB 184)

The stated purpose of AB 3129 is to address the increased costs and decreasing quality for consumers resulting from the purported anticompetitive consolidation of healthcare providers. On the surface, the proposed law is similar to California's existing transaction review law, SB 184, in the sense that both laws would require prior notice to a California government authority before consummating a transaction. Unlike California's existing law under SB 184, however, AB 3129 presumes that healthcare private equity transactions are harmful and subjects them to discretionary approval on a case-by-case basis by the California AG. SB 184, in contrast, does not create a governmental veto right over transactions; and while it permits the Office of Health Care Affordability (OHCA) to refer a particular transaction to the AG on occasion, such an event would be the exception, not the rule. There are a number of other significant differences between the current transaction review law found in SB 184 and the proposed legislation in AB 3129, including the following:

1. AB 3129 Would Have Law Enforcement Review All Covered Transactions (vs. Only When Referred)

• SB 184 transaction notices must be submitted to the OHCA, a government entity created by SB 184 under the California Department of Health Care Access and Information, which is charged with monitoring and understanding the underlying causes of California's healthcare costs, quality and access challenges. Although SB 184 does empower OHCA to conduct a cost and market impact review of a proposed transaction, the goal appears to be to enable OHCA to better understand the potential effects of a transaction and increase transparency. To date, OHCA has sought input from a broad range of sources from across the spectrum; its Advisory Committee, for instance, includes a diverse mix of practicing physicians, insurance executives, union leaders and CEOs.
• AB 3129 transaction notices are submitted to the California AG, the state's top law enforcement official in civil and criminal matters.

2. AB 3129 Would Presumptively Disallow All Covered Transactions (vs. Only Requiring Notice)

• SB 184 only requires notice of a transaction to OHCA; it does not empower OHCA with the authority to veto a proposed transaction or to modify the terms of a transaction. However, SB 184 does empower OHCA with the authority to conduct a cost and market impact review study (which could delay a potential transaction) and the ability to publish its findings to the public and potentially refer its findings to the California AG's office.
• AB 3129, by contrast, requires notice to and/or consent directly from the California AG and specifically empowers the California AG with the ability to veto or modify the terms of certain healthcare transactions involving private equity groups and hedge funds. In addition, AB 3129 further appears to be drafted to encourage the AG to deny or modify transactions. The AG must apply the "public interest standard" when making a determination whether to consent to a transaction and requires the AG act on a presumption that such a transaction involving private equity or hedge funds is not efficient. The "public interest standard" is also defined broadly 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."

3. AB 3129 Would Apply to Upstream and Indirect Changes of Control of Non-Clinical MSOs/DSOs (vs. Only Applying to Transactions Directly with Healthcare Entities)

• SB 184 notice is currently only triggered when certain healthcare entities are a party to a material transaction. In addition, transaction is further defined in the SB 184 regulations as generally occurring when the assets of a healthcare entity are purchased or acquired, as opposed to when the healthcare entity is purchasing or acquiring assets from a nonhealthcare entity. Thus, certain transactions that take place solely at or above the MSO/DSO entity level may not be impacted when the healthcare entity is not a party, as well as certain corporate restructuring or transaction that take place at a higher corporate level of an organization than the healthcare entity itself.
• By contrast, AB 3129 transactions requiring AG notice and/or consent are defined much more broadly and are triggered when there an acquisition or change of control in which an private equity or hedge fund investor directly or indirectly 1) purchases a material amount of assets or operations of a healthcare facility or provider or 2) there is a change in governance, control or sharing of control over healthcare services of a healthcare facility or provider by an investor – including an investor acquiring direct or indirect control over the operations of a healthcare facility or provider in whole or substantial part. Thus, AB 3129 likely would subject a number of transactions to scrutiny that would otherwise not trigger a notice in SB 184 as AB 3129 includes direct or indirect acquisitions, focuses on transactions involving the assets or operations of the healthcare provider or facility, and does not require that a healthcare provider or facility be a party to the transaction.

4. AB 3129 Would Apply to Dentists, Pharmacists, NPs, ODs, Mental Health Counselors and Others (vs. Only Applying to Facilities and Physicians)

• SB 184 currently requires certain healthcare entities that are parties to a material transaction to provide notice to OHCA. Generally, included in the definition of healthcare entities are licensed healthcare facilities such as hospitals, ambulatory surgery centers (ASC) and licensed clinic facilities, as well pharmacy benefit managers, certain third-party payers and, notably, physician organizations comprising more than 25 physicians. In addition, such healthcare entities must generally have more than $25 million in annual California revenue to qualify for having to provide notice. Notably, SB 184 also generally excludes transactions involving groups of providers – such as dentists, pharmacists, nurse practitioners, optometrists and licensed mental health counselors, as well as MSOs and DSOs – from the definition of healthcare entity.
• AB 3129 by contrast is much broader and requires California AG consent for a large swath of potential transactions involving private equity groups, hedge funds and any "provider group" composed of a combination as small as two of the following "licensed healthcare professionals": physicians, dentists, mid-level providers (i.e., nurse practitioners, physician assistants, etc.) optometrists, pharmacists, psychologists and certain licensed mental health professionals (excluding licensed clinical social workers and marriage and family counselors).
  • More specifically, a "provider group" required to provide notice and receive consent means 10 or more "licensed health professionals" (with any revenue amount) or two or more "licensed health professionals" with more than $10 million in annual revenue. It should be noted that certain transactions involving large physician groups of more than 25 physicians could potentially trigger notice and/or review under both SB 184 and the current version of AB 3129.
  • AG consent is also required under AB 3129 for certain transactions involving private equity, hedge funds and "health care facilities," which includes hospitals, ASCs, long-term care hospitals, labs or physician offices located outside of a hospital. This tracks with some of the same provider types as SB 184; however, AB 3129 currently does not include any revenue threshold for these types of transactions, unlike SB 184.
  • In addition, AG notice only (no consent required) under AB 3129 is required for acquisitions and changes of control involving 1) providers with two to nine licensed health professionals who also have more than $4 million and less than $10 million in annual California revenue or 2) certain nonphysician providers with more than $4 million in annual California revenue. Investors must only provide advance written notice to the AG, as consent is not required.

5. AB 3129 Proposes to Add New Substantive Requirements to California's Existing Corporate Practice of Medicine Laws and Non-Compete Laws (vs. Focusing Only on Transactions and Reporting)

• SB 184 does not purport to change existing substantive law regarding what is or is not allowed in arrangements between physicians and physician groups and MSOs.
• AB 3129, by contrast, purports to add new provisions regarding the corporate practice of medicine but only applies to private equity and hedge fund investors in their business arrangements with physicians and physician groups. As further detailed below, these proposed requirements would either be duplicative of current law or potentially change the law with broadly worded and or ambiguous language.

AB 3129's Proposed New (or Duplicative) Changes to California's Substantive Law

As noted above, AB 3129 proposes a number of substantive changes to existing California Corporate Practice of Medicine laws, but only for hedge funds and private equity investors. These changes include:

• AB 3129's broadly worded prohibition on "influencing" practices or referrals would prohibit influencing or entering into contracts on behalf of a physician practice/physician with any third party, influencing or setting rates for that practice with any third party or influencing or setting patient admission, referral or physician or psychiatrist availability policies.
  • This proposed language would depart from existing law in ways that may be unintended. California law already has well-developed patient referral laws and laws that prohibit interference with the practice of medicine, with appropriate exceptions that provide stakeholders with needed clarity. Because AB 3129's proposed change is so broadly worded on this subject, it would eliminate well-established exceptions and introduce ambiguity. For example, under AB 3129, private equity could not "influence" any contract whatsoever – regardless of subject matter – between a practice and any third party; on its face, this would prohibit even investments into a revenue cycle management company or healthcare technology company. It is also unclear what actions this language actually intends to prohibit that is not already prohibited by other California laws.
• With respect to post-employment non-competes, AB 3129 would ban any clause barring any provider in that practice from competing with that practice in the event of a termination or resignation of that provider from that practice.
  • This proposed post-employment non-compete ban is particularly surprising given that California already has a well-established ban on post-employment non‑competes. This proposed language is therefore either entirely duplicative or would eliminate longstanding exceptions under California law for partnerships and sales of business. It is unclear why this proposed substantive change to law is being proposed as part of AB 3129 and whether it is intended to change the law (or simply restate it, albeit imprecisely).
• In the areas of non-disparagement and non-disclosure, AB 3129 proposes to ban "any clause barring any provider in that practice … from disparaging, opining or commenting on that practice in any manner as to any issues involving quality of care, utilization of care, ethical or professional challenges in the practice of medicine, or revenue-increasing strategies employed by the investor."
  • By its terms, AB 3129 would permit physicians to make any comment, privately or publicly, and whether or not true, about nearly any matter having to do with their practice or employer, since the physician need only allege that the matter has a direct or indirect effect on their "professional challenges" in the practice. Notably, California law already prohibits MSOs from controlling matters of quality of care or utilization of care, and already permits physicians and whistleblowers to disclose potential violations of law. It is unclear, therefore, what this provision is intending to change from current law. It seems unlikely that it would intend to permit disclosure of trade secrets, for example, regarding a practice's chosen marketing campaign or how an MSO evaluates non-clinical staff for employment; yet, on its face, AB 3129 could be read to permit a physician to publicly say anything about an MSO's human resources processes even for computer technicians who provide IT support for a practice.

What's Next?

It is possible – and perhaps likely – that AB 3129 will see further changes and/or amendments as it moves through the legislative process. Notably, there still appears to be a number of questions regarding certain provisions, including 1) whether the definition of a "healthcare facility" will be limited or confined to certain licensed healthcare facilities, 2) what the specific threshold test would be for an acquisition involving a "material amount of the assets or operations" of a provider/healthcare facility and 3) whether AB 3129 will provide more detail on the breadth and type of information that the AG will require from the entities providing notice, as currently AB 3129 only states that AG notice must contain "sufficient information to evaluate the nature of the acquisition or change of control and for the AG to make a determination regarding whether the transaction meets the public interest standard and/or would have any anti-competitive effects." Thus, it is important to note that AB 3129 specifically references and allows for the AG to adopt regulations to implement and/or supplement the law's provisions that may be needed to provide more clarity and precision for providers and investors to be able to comply with the proposed law.

Conclusion

In its current form, AB 3129 would mark a significant departure from the tone and construct of California's current transaction regulatory regime under SB 184. In this sense, the proposed legislation is informative even if it does not pass. First, AB 3129 signals the growing appetite of law enforcement in California with respect to the Corporate Practice of Medicine. Existing and future investors and MSOs/DSOs should pay attention to the areas of focus highlighted by the proposed legislation – e.g., pressure over patient utilization. Second, the contrast between AB 3129's aggressive law enforcement focus, on the one hand, and SB 184's more evidence-based focus on monitoring and research, on the other hand, demonstrates that California to date has taken a more thoughtful and measured approach to addressing its understandable concerns over rising healthcare costs. This summer may be a litmus test for whether California stays the course with its existing legal approach or shifts into a different gear by pushing AB 3129 forward without modification.

For additional information, please contact the authors or another member of Holland & Knight's Healthcare & Life Sciences Team.

Notes

¹"Attorney General Bonta, Assembly Speaker pro Tempore Wood Introduce Legislation to Strengthen Review of Private Equity Healthcare Transactions and Abuses," State of California Department of Justice, Office of the Attorney General, Feb. 20, 2024.

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