California Governor Vetoes Assembly Bill 3129: What's Next?

California Gov. Gavin Newsom on Sept. 28, 2024, vetoed Assembly Bill (AB) 3129, a law that would have required private equity and hedge funds – and in some cases, their platform companies – to obtain the California Attorney General's (AG) consent before closing certain healthcare transactions in California. It also would have added restrictions on arrangements between private equity sponsors, certain platform companies and medical/dental groups. Such restrictions would have affected certain elements of professional corporation/management structures that are commonplace in California and other states as a way to comply with the State's corporate practice of medicine restrictions. Holland & Knight previously outlined the bill in various alerts dating back to March 2024, including "Private Equity Healthcare Transactions Under Scrutiny," March 14, 2024; "Healthcare Private Equity Transactions Under Scrutiny: Midyear Review," Aug. 1, 2024; and "California Ends the Legislative Session with Expanded Reporting Requirements, Less Clarity," Sept. 12, 2024.

Gov. Newsom's justification for vetoing AB 3129 was its redundancy with the California Office of Health Care Affordability's (OHCA) existing regulatory framework, explaining that it would be "more appropriate for OHCA to oversee these consolidation issues as it is already doing much of this work." Further, OHCA has the ability to refer transactions to the AG, making this law redundant. Holland & Knight also recently reported that OHCA expanded its regulations to capture more transactions. Given these changes, industry stakeholders should now focus on how OHCA implements its regulations. Such stakeholders should also refresh themselves with the California Medical Board's guidance on the corporate practice of medicine and recent case law. Holland & Knight outlined an April 2024 California Corporate Practice of Medicine case in a previous alert, "California Court Decision Further Scrutinizes the Friendly PC Model – Now What?," June 24, 2024.

AB 3129's demise is particularly notable given the increased participation by industry stakeholders in the discourse for and against the bill. No other similar state healthcare transaction law received this level of attention.

National Landscape

Gov. Newsom's veto ends a summer in which six states (California, Oregon, Washington, Massachusetts, Minnesota and Connecticut) struggled to augment their existing regulatory frameworks that reviewed healthcare transactions and governed the corporate practice of medicine. (For more details, see Holland & Knight's previous alert, "Healthcare Private Equity Transactions Under Scrutiny: Midyear Review," Aug. 1, 2024.) This decision will inevitably affect the discussions on pending legislation and healthcare plans in other states this year and well into 2025. Notably, Pennsylvania and Indiana are pushing forward with attempts to pass similar healthcare transaction laws.

Pennsylvania

As previously reported, Pennsylvania currently has three different healthcare transaction review laws pending, each of which targets a different sector of the healthcare industry:

1. House Bill (HB) 2012 would require certain health systems and provider organizations to notify the Pennsylvania AG at least 90 days before entering certain material change transactions or agreements.
2. HB 2344 would require certain healthcare facilities and provider organizations to notify the Pennsylvania AG at least 120 days before a merger, acquisition or contracting affiliation, including arrangements involving out-of-state entities with at least $10 million in revenue from Pennsylvania patients.
3. Senate Bill (SB) 548 would require provider organizations and for-profit entities that own or operate hospitals, hospice agencies or nursing homes to notify the Pennsylvania AG at least 90 days before entering into certain material change transactions or agreements.

Under HB 2344 and SB 548, the Pennsylvania AG could enjoin the consummation of a transaction if the Pennsylvania AG determines such transaction is against the public interest.

While SB 548 has languished for more than a year, HB 2012 and HB 2344 are more recent proposals that mirror laws recently enacted or proposed in other states.

Indiana

Stakeholders should also monitor Indiana, where gubernatorial candidate Sen. Mike Braun (R-Ind.) released on Sept. 26, 2024, his Healthcare Plan for the state. A white paper tied to Braun's plan states that his plan would require "all private equity mergers and acquisitions in the healthcare industry to be approved by Indiana's Attorney General, regardless of their valuation." Earlier this year, Indiana enacted a broad law requiring certain healthcare entities with total assets of at least $10 million to notify the Indiana AG at least 90 days before consummating a transaction, but the Indiana AG does not have an approval or veto right for these transactions (i.e., this is a "notice only" law). Braun's proposal, like California AB 3129, would significantly expand the reach of Indiana's existing law while also expanding the AG's power to approve or deny certain transactions.

Conclusion

Whether some or all of AB 3129 will return in the coming years is unknown; Assembly Member Jim Wood, the author of the bill and creator of OHCA's existing law, announced in late 2023 that he would not seek reelection in 2024, and his term will end in December 2024. 

In addition, Gov. Newsom's veto of AB 3129 marks a significant milestone in the ongoing debate over the need for oversight of healthcare consolidation in the U.S. This development could hinder the momentum for similar legislation in other states, including Pennsylvania and Indiana. But, there could also be a reemergence of laws in 2025 from states such as Oregon or Connecticut that could draw industry participation on the same levels that were seen in California this year. Now, more than ever, having sophisticated legal counsel who is knowledgeable about this everchanging issue is imperative for industry stakeholders in this space.

For additional information or more detailed analyses, please contact our team of Holland & Knight attorneys and use HK Navigator to stay up-to-date on the latest developments in this space nationwide.

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.