Governor nixes bill on private equity in California healthcare

On Aug. 31, 2024, California's legislature passed Assembly Bill 3129 ("AB 3129"), a closely watched bill that would have (1) required parties to certain private equity- and hedge fund-backed healthcare transactions to notify and receive consent from California's Attorney General (the "CA AG"), and (2) restricted private equity groups and hedge funds from engaging in certain activities with respect to management of healthcare practices. Less than a month later, California Governor Gavin Newsom vetoed AB 3129. While the veto is a victory for private equity and hedge fund participants in the healthcare space, parties to healthcare transactions involving California entities need to be aware that other notice regimes, namely the California Health Care Quality and Affordability Act (pertaining to healthcare entities above certain annual revenue thresholds and specifically referenced by Gov. Newsom in his explanation of the veto) and California Corporate Code Section 14700 et seq. (pertaining to retail pharmacies and grocery stores with pharmacy operations), may still apply. Additional details on the bill and the impact it would have had are below.

Bill summary and applicability

Under AB 3129, transactions meeting certain criteria would have required approval by the CA AG before becoming effective. This approval process would have been mandatory for any transaction in which a private equity group or hedge fund directly or indirectly either (1) acquired 15 percent or more of the market value or ownership shares of certain healthcare entities, or (2) obtained rights significant enough to constitute a change in control of such healthcare entities, such as supermajority, veto, or exclusivity rights. The requirement would have applied to acquisitions of groups of licensed healthcare providers and healthcare facilities other than hospitals and contained only narrow exceptions.

Significant lead time for notice and attorney general review would have been required

The proposed bill would have required significant lead time for notice filings and governmental review. The acquiring private equity group or hedge fund would have been required to submit notice to the CA AG at least 90 days prior to closing. Further, the bill would have given the CA AG the authority to extend its review period by 45 days to obtain additional information from transaction parties and by 14 days to hold a public meeting.

Attorney general authority to consent to transactions would have been broad

At the end of the 90-day period (and any applicable extensions), the CA AG could have consented to, not consented to, or conditionally consented to the transaction, "depending on the Attorney General's determination of whether the transaction may (1) have [had] a substantial likelihood of anticompetitive effects, including a substantial risk of lessening competition or of tending to create a monopoly, or (2) may [have created] a significant effect on the access or availability of health care services to the affected community." The standard of review would have been broad: The CA AG was to apply the "public interest standard," defined as being in 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." After the CA AG issued its determination, a private equity group or hedge fund that submitted the notice could have moved for an evidentiary hearing, which could have taken up to 105 days before the CA AG's issuance of a new determination.

Practice management restrictions would have been implemented

AB 3129 is notable in that it would have prohibited private equity funds and hedge funds from performing certain functions on behalf of healthcare providers, strengthening California's already restrictive corporate practice of medicine doctrine. The vetoed bill provided that private equity funds and hedge funds, including management services organizations ("MSOs") that they directly control, would not have been allowed to interfere with the professional judgment of physicians, psychiatrists, or dentists in making healthcare decisions, including by determining what diagnostic tests are appropriate, determining the need for referrals, or by establishing hours or patient visit requirements for such providers. In addition, AB 3129 would have also restricted private equity- and hedge fund-controlled entities from owning medical records, making certain employment decisions regarding clinical personnel, controlling contracting with providers and third-party payers, and making coding and billing decisions. Finally, the bill would have prohibited MSO contract provisions imposing non-compete and non-disparagement restrictions on providers who no longer work for an MSO-managed provider.

Gov. Newsom's veto of the bill

In a one-page letter, Gov. Newsom explained that his veto was based on concerns over redundancy with the California Health Care Quality and Affordability Act, which created the California Office of Health Care Affordability ("OHCA"). Gov. Newsom explained, as did many critics of the bill prior to its passage, that OHCA already has existing authority to review and evaluate health care transactions in California. Further, Gov. Newsom explained that OHCA is "already doing much of [the] work" that the bill would have mandated.

Thus, while the failure of AB 3129 represents a victory for private equity and hedge fund participants in the healthcare space, as Gov. Newsom made clear in his explanation of the veto, parties to healthcare transactions involving California entities need to remain vigilant and analyze whether transactions may be reportable under the California Health Care Quality and Affordability Act (pertaining to healthcare entities above certain annual revenue thresholds) and California Corporate Code § 14700 et seq. (pertaining to retail pharmacies and grocery stores with pharmacy operations). 

Additional detail on these two California regimes can be found here:

https://www.goodwinlaw.com/en/resource/state-healthcare-transaction-notification-laws/california