California AB 3129 Targets the Health Facility Transactions Approval Process

BACKGROUND

California law currently requires nonprofit corporations operating or controlling certain health facilities to provide written notice to, and obtain consent of, the attorney general prior to entering into certain asset sales or change of control transactions. Additionally, California Senate Bill 184, which will take effect April 1, 2024, imposes a 90-day notice requirement to California’s Office of Health Care Affordability on healthcare entities for transactions involving the sale or transfer of control of a material amount of assets or operations. AB 3129 represents an extension and expansion of such requirements but applies solely to private equity groups and hedge funds affiliating with healthcare facilities and provider groups.

AB 3129 PROVISIONS

Notice Requirement

AB 3129 implements a 90-day prior notice requirement for any changes in control or acquisitions between private equity groups or hedge funds and a healthcare facility or provider group. The notice must contain sufficient information for the attorney general to determine whether the proposed transaction presents any anticompetitive effects or adversely affects the access or availability of healthcare services. The attorney general may extend the 90-day period by 45 days if it determines that additional information is necessary, the transaction is subsequently modified or the transaction involves a multifacility or multi-provider health system serving multiple communities. The attorney general may extend its review by 14 more days if it decides to hold a public meeting on the transaction.

Consent Requirement

In addition to the notice requirement, the attorney general’s consent would be required for proposed transactions between a private equity group or hedge fund and a healthcare facility or provider group, except for certain nonphysician transactions.

The attorney general would be authorized 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.” In making the determination, the attorney general would apply the public interest standard, which looks to 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.”

Waiver

The attorney general may waive the notice and consent requirements, within 60 days of receiving a waiver request, where all of the following conditions apply:

• The party makes a written waiver request including all information that the attorney general deems necessary.
• The party’s operating costs have exceeded its operating revenue in the relevant market for three or more years and the party cannot meet its debts.
• The party is at grave risk of immediate business failure and can demonstrate a substantial likelihood of chapter 11 bankruptcy absent the waiver.
• The party would be substantially unable to reorganize under a chapter 11 bankruptcy.
• The acquisition or change of control will ensure continued healthcare access in the relevant markets.
• The party has made commercially reasonable best efforts in good faith to elicit reasonable alternative offers that would pose a less severe danger to competition than the current transaction.

Reconsideration and Review

Within 10 days of the attorney general’s notice of decision, the parties may avail themselves of a reconsideration process to modify, amend or revoke the decision. The parties must provide some basis in new or different facts, circumstances or law and the attorney general must provide a reconsideration decision within 30 days.

Upon an unfavorable reconsideration decision, the parties may seek judicial review of the final determination. The superior court shall respond to such a request within 180 days of receipt of the petition.

Prohibitions on Certain Arrangements

AB 3129 would also prohibit private equity groups and hedge funds from controlling or directing physician or psychiatric practices. Specifically, the bill would prohibit, among other actions, private equity groups and hedge funds from influencing or entering into contracts on behalf of the practice or providers with any third party, influencing or setting rates for the practice or providers with any third party, or influencing or setting patient admission, referral or availability policies.

The bill would also prohibit the physician or psychiatric practices from entering into agreements with an entity controlled in part or in whole, directly or indirectly, by private equity groups and hedge funds under which the latter manages any of the affairs of the former in exchange for a fee (though it does not bar revenue sharing between the practice and private equity group or hedge fund).

The bill also prohibits the inclusion of any noncompetition provisions or non-disparagement provisions as it relates to quality of care, utilization of care, ethical or professional challenges, or revenue increasing strategies in contracts between physician or psychiatric practices and private equity groups or hedge funds.

Key Definitions

• “Acquisition” means any direct or indirect purchase, including (but not limited to) a “lease, transfer, exchange, option, receipt of a conveyance, creation of a joint venture, or any other manner of purchase” of a “material amount of the assets or operations” of a healthcare facility or provider.
• “Change of control” is found where the arrangement effects a change in governance or sharing of control over healthcare services or where the private equity group or hedge fund otherwise acquires direct or indirect control over the operations of the healthcare facility.
• “Healthcare facility” means any “facility, nonprofit or for-profit corporation, institution, clinic, place, or building where health-related physician, surgery, or laboratory services are provided.”
• “Hedge fund” means “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.”
• “Nonphysician providers” means a group of two or more individuals licensed under Division 2 of the California Business and Professions Code who do not “provide health-related physician, surgery, or laboratory services to consumers.” This definition would include a wide variety of ancillary providers, such as chiropractors, physical therapists, optometrists, etc.
• “Private equity group” means “an investor or group of investors who engage in the raising or returning of capital and who invests, develops, or disposes of specified assets.”
• “Provider” means a group of two to nine individuals, except provider groups, that “provide[] health-related physician, psychiatric, surgery, or laboratory services to consumers.”
• “Provider group” means a group of 10 or more providers that provide “health-related physician, psychiatric, surgery, or laboratory services to consumers” or a group of providers that generate an annual revenue of $10 million or more.

Of note, the above definitions do not apply to transactions entered into before January 1, 2025, including subsequent renewals, so long as there is not a “material change” in the corporate relationship of the transacting parties on or after January 1, 2025.

ANALYSIS

AB 3129 represents a continuation of the nationwide trend toward increased regulation over healthcare transactions. If passed, the bill would impose significant pre-closing requirements on private equity groups and hedge funds seeking to do business involving healthcare facilities or provider groups in the state of California.

The bill may be heard in committee as early as March 18, 2024. McDermott will continue to monitor the bill’s progression through the state legislature and provide updates.

KEY TAKEAWAYS

• Private equity groups and hedge funds would be required to submit a 90-day pre-closing written notice of any changes in control or acquisitions of healthcare facilities or provider groups.

• The attorney general would be able to grant, deny or impose conditions on such proposals.

• Any party would be able to request a reconsideration of the attorney general’s decision within 10 days of notice and, subsequently, may request a judicial review of the final determination on the reconsideration.

• Proposals involving nonphysician providers generating an annual revenue below $4 million or involving fewer than 10 providers or a group of providers generating an annual revenue below $10 million would not require consent of the attorney general but notice would still be required.
• AB 3129 would also prohibit many common management or administrative service arrangements between entities controlled directly or indirectly by private equity groups or hedge funds with physician or psychiatric practices.