New California Bill Would Require Preapproval and Restrict Private Healthcare Deals

On February 16, 2024, California Attorney General Rob Bonta and Assembly Speaker pro tempore Jim Wood introduced AB 3129, which would continue California’s trend of expanding state oversight over transactions involving healthcare providers and entities. For transactions entered into on or after January 1, 2025, AB 3129 would require at least a 90-day notice and Attorney General approval of changes of control and acquisitions of healthcare facilities and provider groups by private equity groups or hedge funds. The bill would allow the Attorney General, as part of such consent process, to deny or impose conditions on the transaction if it “may 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.” In making that determination, the Attorney General would apply a “public interest” standard, defined in terms of the “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.”

The proposed legislation also would prohibit private equity groups or hedge funds from controlling or directing certain aspects of physician or psychiatric practices and prohibit entities directly or indirectly controlled by a private equity group or hedge fund from managing physician or psychiatric practices for certain fees. Examples of conduct that would be prohibited include contracting on behalf of, rate setting for, or influencing admission, referral, or availability policies of physician or psychiatric practices. The bill explicitly notes that revenue sharing is not prohibited, although other restrictions could potentially apply to such arrangements. These prohibitions would potentially be effective upon enactment.

AB 3129 proposes definitions for certain key terms, including the following:

• “Hedge fund”: “a pool of funds by investors, including a pool of funds managed or controlled by private limited partnerships, if those investors or the management of that pool or private limited partnership employ investment strategies of any kind to earn a return on that pool of funds.”
• “Private equity group”: “an investor or group of investors who engage in the raising or returning of capital and who invests, develops, or disposes of specified assets.”
• “Health care facility”: “a facility, nonprofit or for-profit corporation, institution, clinic, place, or building where health-related physician, surgery, or laboratory services are provided, including, but not limited to, a hospital, clinic, long-term health care facility, ambulatory surgery center, treatment center, or laboratory or physician office located outside of a hospital.”
• “Provider”: “any group of two to nine individuals, except for a provider group, that provides health-related physician, psychiatric, surgery, or laboratory services to consumers.”
• “Provider group”: “ a group of providers of 10 or more providers that provide health-related physician, psychiatric, surgery, or laboratory services to consumers or a group of providers of two to nine individuals that provide health-related physician, psychiatric, surgery, or laboratory services to consumers that generate annual revenue of ten million dollars ($10,000,000) or more. This definition includes licensed health care providers such as dentists, optometrists, and pharmacists who provide health-related surgery or laboratory services within the scope of their practice as licensees under the Business and Professions Code.”

The notice and consent provisions of the bill would apply to the following transactions:

1. direct and indirect purchases of a material amount of assets and operations of a healthcare facility or provider;
2. changes in voting control of a healthcare facility or provider; or
3. direct and indirect changes in control over the healthcare services or operations of a healthcare facility or provider.

Importantly, only written notice would only be required for transactions involving nonphysician providers with an annual revenue of more than $4 million or physician providers with an annual revenue between $4 million and $10 million — Attorney General consent would be not required. The Attorney General could also grant a waiver request under certain conditions (such as financial distress or showing that the transaction would ensure continued healthcare access), and transactions involving physician or nonphysician providers with annual revenue of less than $4 million are wholly exempt.

Where applicable, the written notice must be provided to the Attorney General at the same time that any other state or federal agency is notified of the transaction and otherwise at least 90 days before the change occurs. After receipt of all information needed to evaluate the request has been submitted, the Attorney General has 60 days to grant, deny, or impose conditions on the transaction before granting consent and may also extend the 90-day period for an additional 45 days under certain circumstances. 

The bill reflects California’s increasing efforts to oversee and regulate healthcare transactions, as the state recently enacted broad a healthcare transaction review law and a notice-and-consent law for nonprofit healthcare entities. If enacted, the bill could pose significant limitations, delays, or uncertainties on financial sponsors and their portfolio companies on their acquisition or divestiture of provider practices as well as common control and economic arrangements with their current or future investments. The bill also follows a slew of legislation proposed in other states, as discussed in our alerts here and here. 

If you are interested in participating in the legislative process or have questions about the potential implications of this legislation, please contact the Sidley lawyer with whom you usually work with or one of our team members listed below.