California Governor vetoes further legislative efforts to restrict healthcare investments and management relationships

On September 28, 2024, California Governor Gavin Newsom vetoed AB 3129, which would have required qualifying private equity groups, hedge funds, and any associated portfolio companies to notify and obtain written consent from the California Attorney General (the AG) at least 90 days before closing healthcare transactions with certain healthcare facilities or providers.

AB 3129 details

AB 3129 proposed explicit measures to bar qualifying private equity groups and hedge funds from exerting control or otherwise interfering with the professional judgment of certain licensed healthcare professionals, potentially going beyond and threatening common professional entity/management structures currently used in the state, and nationwide, to comply with corporate practice of medicine (CPOM) restrictions.

Specifically, AB 3129 proposed two separate review processes by the AG depending on the transaction at issue. Under one process, qualifying private equity groups or hedge funds were required to provide advance written notice to the AG before completing a transaction with nonphysician providers or a provider group of one to nine providers in cases where the nonphysician provider and/or provider group met certain gross annual revenue minimums.

Under a second, separate process, qualifying private equity groups or hedge funds were required to obtain written consent from the AG before finalizing a transaction with a healthcare facility or provider group. AB 3129 defined “healthcare facilities” to include clinics, outpatient settings, ambulatory surgical centers, and clinical laboratories, but excluded hospitals. Provider groups included either (i) ten or more licensed health professionals or (ii) nine or fewer licensed health professionals that met specified gross annual revenues. Licensed health professionals that primarily provided dermatology services, however, were excluded. A triggering transaction broadly included any direct or indirect acquisition, such as any lease; transfer; exchange; option; creation of a joint venture by a private equity group or hedge fund of a material amount of the assets or operations; or a change of control of a healthcare facility, provider group, or provider.

AB 3129 also sought to introduce new legislation targeting the CPOM doctrine by expressly prohibiting private equity groups or hedge funds involved with a physician, psychiatric, or dental practice from interfering with the professional judgment of these professionals in making healthcare decisions and otherwise exercising control over the content of medical records; the selection, hiring, or firing of professionals; setting the parameters for contractual relationships with third-party payors; making decisions regarding billing and coding procedures; and approving the selection of medical equipment and supplies.

Additionally, AB 3129 also prohibited the inclusion of non-compete or non-disparagement provisions in management contracts or contracts for the sale of real estate or other assets between a physician, psychiatric, or dental practice and a private equity group or hedge fund.

Governor Newsom’s veto of AB 3129 recognizes existing OHCA review process

AB 3129 is part of a California, and nationwide, trend toward increased state regulatory review measures aimed at curtailing the investment of institutional capital into the healthcare industry over concerns that consolidation may lead to anti-competitive practices and may result in patient profiteering being prioritized over patient safety.

Prior to the proposal of AB 3129, in June 2022, Governor Newsom signed into law SB 184, or the California Healthcare Quality and Affordability Act (the Act), which, among other things, created the California Office of Health Care Affordability (OHCA). Under the Act, the OHCA is tasked with monitoring trends in the healthcare market and examining certain healthcare transactions. Subsequently, in December 2023, the California Office of Administrative Law approved final regulations requiring healthcare entities to notify OHCA in advance of material change transactions.

Interestingly, in vetoing AB 3129, Governor Newsom noted that the OHCA “was created as the responsible state entity to review proposed health care transactions, and it would [therefore] be more appropriate for the OHCA to oversee these consolidation issues.” By citing existing healthcare transaction review processes, Governor Newsom’s veto delineates limits on the type of sweeping review process proposed in AB 3129 and recognizes the sufficiency of existing oversight by OHCA without a distinct review process by the AG. Governor Newsom further noted, that “[w]hile OHCA itself cannot block a proposed transaction, it can coordinate with other state entities, including referring transactions for further review to the AG.”

Further, with respect to CPOM restrictions included in AB 3129, California already has a comprehensive set of laws, professional licensing boards, and enforcement mechanisms in place to prevent corporations from controlling or interfering with the professional judgment and clinical care rendered by healthcare providers. Thus, while AB 3129 itself signals a continued effort by some to review healthcare transactions and restrain management relationships in the state, the veto of AB 3129, as well as legislative updates in other states, indicate that there may be limits to state regulation of healthcare transactions and sensitivity to the duplication of existing processes.

As Governor Newsom vetoed AB 3129, the legislation will not go into effect and the existing OHCA review process will continue as the mechanism for California to review healthcare transactions. Under this process, 90 days’ prior notice to and review by OHCA is required for qualifying material change transactions involving healthcare entities, which broadly include a range of health facilities, provider organizations, and health insurers. However, dentists, drug manufacturers, certain management services organizations, home health agencies and durable medical equipment suppliers are excluded.

Material change transactions may include, by way of example, transactions involving: (i) the sale, transfer, lease, exchange, option, or other disposition of 25 percent or more of the total California assets of the healthcare entity, or (ii) the acquisition of a healthcare entity by another entity if the acquiring entity has finalized a similar transaction in the last ten years with a healthcare entity that provides the same or related healthcare services.

Implications for the healthcare industry and nationwide trends

Even though AB 3129 did not become law, it is instructive as it highlights a continued nationwide trend toward increased state regulatory review of healthcare transactions.

Apart from California, in the 2023-2024 legislative session, several states proposed legislation to require review of healthcare transactions. Ultimately, the success of these proposed measures was mixed. Certain states that previously maintained no healthcare transaction review laws enacted new legislation requiring review of certain healthcare transactions, including Indiana and New Mexico. Meanwhile, other states proposed, but failed to pass, new legislation to institute healthcare transaction review processes, such as Pennsylvania and North Carolina. Therefore, in these states, no healthcare transaction review processes currently exist. In states that have existing healthcare transaction review laws, several states, similar to California, failed to pass proposed legislation to change or update their laws, including Washington, Minnesota, Massachusetts, and Connecticut.

Many state legislatures have shown a clear interest in enacting new laws designed to further regulate healthcare transactions. While some of these measures may have failed to pass, it is likely that future versions of these bills will be introduced in subsequent legislative sessions, despite indications that there are limits to the expansion of excessive regulation. Further, California and other state regulators may increasingly focus on enforcing existing restrictions, such as the CPOM doctrine and transaction review laws, in order to address perceived infringements by corporate interests in healthcare. This growing regulatory interest in corporate involvement in healthcare may also lead state regulators to more closely scrutinize healthcare provider ownership and management disclosures required by other regulatory agencies.

Moving forward stakeholders are strongly encouraged to monitor legislative initiatives in order to evaluate sweeping and duplicative legislative proposals, such as AB 3129, and, if warranted, to work with lawmakers to pass more measured, focused processes that complement existing laws. Additionally, participants will need to make their voices heard on healthcare transaction review legislation, for which they may consider developing a lobbying and government affairs strategy. In addition to these efforts, participants are encouraged to continue to consider existing healthcare transaction review laws and, as early as possible in a deal process, assess and evaluate the statutory review factors that may impact the transaction, including timelines, cost, competition, and availability of healthcare services.

If you have any questions about AB 3129, healthcare transaction review laws, corporate practice of medicine or other professions, or related matters, please contact your DLA Piper relationship partner, the authors of this alert, or any member of our Healthcare industry group.