State passes law granting attorney general more authority to review private equity healthcare deals

The California State Legislature on Aug. 31 passed a bill that would grant local authorities more power to review private equity acquisitions of healthcare entities. 

Assembly Bill 3129 moves to Gov. Gavin Newsom’s desk for consideration, sponsor and California Rep. Jim Wood noted in a Sept. 4 announcement. If finalized, the bill would grant the attorney general power to approve or reject ownership changes between private equity firms/hedge funds and healthcare facilities or provider groups. 

Wood noted that annual private equity investment in healthcare reached $83 billion three years ago, with $20 billion spent in California alone. However, these transactions have faced little scrutiny to ensure they are in the public’s best interest, he contends, often “flying totally under the radar.”

“When we look across the nation, we see private equity’s interest in healthcare growing by leaps and bounds, and I want California to be the leader to ensure that patients are getting the quality care they need at an affordable price,” the Healdsburg Democrat said in a statement issued Wednesday. “Just like any other circumstances, if acquisitions result in anticompetitive behavior, the consequences are often higher costs and lesser quality—caring for patients cannot suffer either of those outcomes.” 

The bill’s definition of a healthcare facility includes imaging centers, clinical laboratories, clinics, ambulatory surgery centers and other outpatient settings. Meanwhile, the term “provider group” means a collection of 10 or more licensed healthcare professionals or a group of 2 to 9 that generates gross annual revenue of $25 million or more. The law does not apply to a medical group practice, professional medical corporations or medical partnerships composed of nine or fewer physicians that generated revenue under that threshold. AB 3129 also excludes transactions with for-profit hospitals and dermatology practices. There are additional carveouts for certain deals involving health plans, insurance companies, counties, healthcare districts and the University of California, according to law firm McDermott Will & Emery. 

“If AB 3129 is signed into law, private equity-backed management services organizations should review their corporate structures and the agreements they have in place with physician, psychiatric or dental practices to ensure they remain compliant with all applicable law,” the firm said in a Sept. 4 summary of the bill. 

Radiology Partners and RadNet Inc.—two large radiology service providers that are based in California—declined to comment on the legislation. Along with Rad Partners, other private equity-backed imaging providers with a presence in the state include Rayus Radiology and SimonMed Imaging. 

The bill also reinforces the bar on the corporate practice of medicine, Wood noted. This provides a “fundamental protection against the public danger that medical care could be subject to commercial exploitation through the influence of private equity groups or hedge funds.” Additionally, AB 3129 prohibits private equity groups or hedge funds from interfering with the professional judgment of physicians, psychiatrists or dentists making healthcare decisions. 

Federal Trade Commission Chair Lina M. Khan has voiced support for AB 3129, as has Health Access California. The latter is a consumer advocacy organization fighting to ensure that healthcare remains affordable and equitable in the state. Health Access California contends that private equity firms and hedge funds prioritize short-term profit for their investors. Often, they take control of an entity, restructure and resell it within three to seven years. The process often can involve “asset stripping,” reducing or replacing staff, selling property and limiting services provided. As they gain market power through acquisitions, PE-backed players may raise prices and reduce the quality of care amid decreased competition, HAC charged.  

“We know oversight protects patients in California—our attorney general has had some of this power for 30 years. But healthcare corporations have been fighting every step of this bill, because they don’t want to be open about what a private equity takeover may mean for Californians,” Katie Van Deynze, policy advocate for Health Access California, said in a statement issued Sept. 3. “We’ve seen enough to know, when private equity takes over, bad things tend to happen: They treat it like a business asset, squeezing out what profit they can, which can leave a wake of debt, cuts to services and closures behind. We urge the governor to sign AB 3129, ensuring that certain private equity deals are in the best interest of patients and the public.”

A coalition of business interests last month urged the state assembly to reject the bill. Those opposing it have included the California Chamber of Commerce, California Association of Health Facilities, California Urgent Care Association, the National Venture Capital Association, and private equity-backed psychiatry provider Mindpath Health. 

“AB 3129 threatens the private investment and partnerships that are helping drive innovation and expand access to care,” the coalition said in an Aug. 21 letter to the state Senate. “Private investment has helped dental practices expand access to care to more underserved children; helped thousands of physicians by providing administrative and back-office support; enabled access to reproductive treatment with greater convenience and support; and funded outpatient clinics, oncology clinics, long-term care, urgent care, dental care, behavioral health, and other medical care that have strengthened our health system and improved patients’ lives.”

Newsom has until Sept. 30 to act on the legislation.