On Sept. 28, 2024, Gov. Gavin Newsom vetoed California Assembly Bill 3129 (A.B. 3129), which would have required private equity funds and hedge funds to obtain consent before entering into certain healthcare transactions. The closely monitored legislative effort behind A.B. 3129 intended to provide the California Attorney General authority to review transactions beginning Jan. 1, 2025. Had Gov. Newsom signed A.B. 3129 into law, certain investments in a healthcare facility, provider, or provider group, or one affiliated with a payor doing business in California, would have required the California Attorney General’s approval.
Gov. Newsom noted in his veto message that California had already enacted legislation to establish the California Office of Health Care Affordability (OHCA), which he believed “would be more appropriate…to oversee these consolidation issues.” Previous alerts discussing OHCA and California’s healthcare transaction notice program that began earlier this year are available here and here.
While private equity and hedge fund investors will not need to obtain the California Attorney General’s approval to close transactions with this veto, such investments may still be subject to pre-transaction notice while OHCA conducts its cost and market impact reviews.
A.B. 3129’s Proposed Restrictions
Attorney General Notification and Consent
A.B. 3129 could have had a broad effect on California private equity and hedge fund investments in healthcare companies. The legislation would have required that parties subject to A.B. 3129 notify the California Attorney General at least 90 days before the closing of a transaction (or earlier if the parties had earlier deadlines to report to any other government agency). Thereafter, the parties would only have been allowed to close the proposed transaction if the Attorney General gave approval for the transaction. A.B. 3129 instructed the Attorney General to consider whether the transaction was in the “public interest,” including protecting competitive and accessible healthcare markets for prices, quality, choice, accessibility and availability of all healthcare services for local communities, regions and the state.
Transactions proposed to be encapsulated by A.B. 3129 included healthcare transactions involving a private equity group or hedge fund and certain healthcare providers including:
- Healthcare facilities (other than hospitals), including clinics; outpatient facilities; ambulatory surgical centers or accredited outpatient settings; clinical laboratories; or imaging facilities.
- Provider groups, including organizations with physicians; dentists; optometrists; pharmacists; nonphysician mental health professionals; physician assistants; and/or advanced practice registered nurses. A.B. 3129 would have allowed transactions with provider groups with fewer than 10 licensed health professionals to avoid such notice and consent process only if revenue did not exceed a certain limit and the transaction involved an investor that had not previously reported under the bill.
- Entities that control, are controlled by, are under common control of, or are otherwise affiliated with a payor including third party administrators.
A.B. 3129 proposed that, in addition to the 90 days prior to the transaction, the Attorney General would have authority to extend the review period by 45 days if necessary to obtain additional information. An additional 14-day review period could be added if a public meeting was held, as well as a potential pause if other state or federal agencies had pending reviews. After these periods, the transaction could have moved forward if the Attorney General had not rejected it, but the Attorney General could still have challenged the transaction thereafter.
Restrictions on Practice Management Activities
Aside from the transaction notice and approval requirements, A.B. 3129 also would have codified certain language regarding practice management companies and the state’s corporate practice of medicine doctrine. Specifically, A.B. 3129 prohibited private equity groups and hedge funds from interfering with the professional judgment of physicians, psychiatrists or dentists in making healthcare decisions, among other things. The Medical Board of California provides guidance on certain activities that the agency considers the corporate practice of medicine. A.B. 3129 would have codified elements of this guidance and would have also constrained restrictive covenants and non-disparagement provisions in management services agreements, real estate purchase agreements, and asset purchase agreements between physician or psychiatric practices and private equity groups and hedge funds.
OHCA Notice in the Absence of A.B. 3129
Housed within the Department of Health Care Access and Information, OHCA began receiving transaction notices earlier this year. Certain healthcare transactions (excluding specific carveouts such as those involving durable medical equipment providers, pharmacies, home health agencies and dental practices) closing on or after April 1, 2024, are subject to OHCA’s 90-day advance notice requirements. After the notice, within 60 days of receipt, OHCA’s eight-member board determines whether it will conduct a cost and market impact review. Transactions may not proceed without either the completion of a cost and market impact review or receipt of a review waiver. If OHCA conducts a review, it will produce a preliminary report and allow for comment from the public and the parties.
Generally, OHCA is charged with analyzing total healthcare expenditures, analyzing healthcare market spending trends and drivers, and creating a state strategy to control healthcare costs, improving healthcare affordability for consumers and enforce cost targets. While transactions cannot proceed until it completes a board-determined review, OHCA does not otherwise have an approval right over transactions. In other words, California law requires healthcare transaction filings to OHCA on cost and market impact, but OHCA does not have authority to stop the transaction (although other California agencies could in certain circumstances, e.g., anticompetitive effects where the Attorney General seeks to stop the transaction due to antitrust rules).
OHCA will continue to receive such notices and review transactions in the absence of A.B. 3129, including transactions involving private equity and hedge fund investors.
Conclusion
With Gov. Newsom’s comments that OHCA is the appropriate office for further review of proposed healthcare transactions, future legislative efforts may scrutinize private equity and hedge fund investments but utilize a different review mechanism. That said, A.B. 3129’s lead sponsor, Assemblymember Jim Wood (D-Eureka), who had introduced similar legislation in past Assembly sessions and who was the original author of OHCA, plans to retire at the end of this year. Therefore, such legislative efforts in future are difficult to predict.
McGuireWoods’ consulting services and integrated healthcare transactions teams — which bring together regulatory, corporate and antitrust expertise — have significant experience navigating state healthcare filings. In addition, our lawyers closely track guidance and developments in this area for purposes of providing clients with informed strategic advice, from considering the regulatory burden associated with acquiring individual targets to achieving approval by state regulators.
