California Considers Changes to Healthcare Investment Legislation and OHCA Review Rules

This month, California lawmakers made progress on amending AB 3129, a bill proposing to give the California Attorney General (“AG”) the authority to approve certain private equity and hedge fund investments in the healthcare industry, as well as provisions governing the California Office of Health Care Affordability (“OHCA”) review process. Notably, the changes to AB 3129 include removing the prohibition on management services agreements between certain healthcare practices and private equity or hedge fund-backed providers and companies, while the OHCA proposes to expand the notice requirements to healthcare entities that are “subject” to, but not necessarily a party to, a material change transaction.

AB3129

The California Senate Health Committee passed AB 3129 on June 26, 2024 after two rounds of amendments, and the California Senate Judiciary Committee passed the bill with amendments on July 2, 2024. The California Senate Appropriations Committee will consider the bill on August 5, 2024. As currently proposed, AB 3129 would: (1) require notification to and potential approval by the Attorney General prior to a change of control or acquisition between certain health care practices and providers and private equity groups or hedge funds, and (2) restrict the ability of private equity firms or hedge funds to exercise certain powers over medical, psychiatric, and dental practices.¹

The current draft bill includes the following key changes compared to the original draft bill:

Health care transactions subject to review by the Attorney General pursuant to AB 3129 will be exempt from review by the OHCA.
A “hedge fund” would include “entities that exclusively provide or manage debt financing secured in whole or in part by the assets of a health care facility, including, but not limited to, banks and credit unions, commercial real estate lenders, bond underwriters, and trustees.”
The annual gross revenue threshold for a “supplier group” has been increased from $10,000,000 to $25,000,000.
The scope of the AG’s control has been expanded to include “a lease, assignment, exchange, option, receipt of a conveyance, formation of a joint venture, or any other manner of purchase by a private equity group or hedge fund of a material amount of assets or operations or a change in control of a health care facility, provider group, or supplier doing business in this state.” A transaction involves a “material amount of assets or operations” if it affects more than fifteen percent of the market value or ownership interest of the health care facility, provider group, or supplier.
AB 3129 excludes the pledging of assets to secure debt obligations from the scope of review.
Transactions subject to review by the Department of Managed Health Care will be exempt from review by the Attorney General.
Transactions between private equity groups and providers with revenues below the $25,000,000 threshold will continue to be subject to notification to and approval by the Attorney General if the private equity group was involved in a transaction involving a health care facility, provider group, provider of services, or related health care services within the last seven years.
A private equity group or hedge fund will be able to seek review of the attorney general’s preliminary decision through an evidentiary hearing before an administrative judge (“Administrative Judge”).The ALJ would issue a statement of decision within 60 days of receiving the written hearing brief, and the AG would issue a final determination within 45 days of receiving the statement of decision. If the AG disapproved or conditionally approved the transaction, the private equity group or hedge fund could seek judicial review of the determination in a higher court.
AB 3129 lists elements of medical, psychiatric and dental practices that private equity groups and hedge funds will not be able to influence, including interfering with the professional judgment of physicians, psychiatrists or dentists in determining appropriate diagnostic tests, the need for referrals, overall patient care and the number of patients a physician must see in a given period of time. The bill also lists elements of practice management that private equity groups and hedge funds cannot control, including ownership of medical records, hiring and firing of specialists and staff, setting the parameters of relationships with payers and other health care professionals, billing and coding procedures, and approving the selection of medical equipment and supplies.
AB 3129 amended to remove the prohibition on medical, psychiatric, and dental practices from entering into management agreements with entities backed by a private equity group or hedge fund in exchange for compensation

Proposed Updates to OHCA Regulations

On June 26, 2024, the Health Care Affordability Board (the “Board”) announced proposed changes to the OHCA regulations governing the notification and review of certain health care transactions. The OHCA regulations currently require health care entities that are parties to certain material change transactions to notify the OHCA at least 90 days prior to the proposed closing date of the transaction.² Among other changes, the Board’s proposed amendments would expand the notice requirements to healthcare entities that are “subject to” a material change transaction, even if they are not a party to the transaction. Being “subject to” the transaction would mean that the transaction “concerns the assets, control, responsibility, management, or operations of a healthcare entity, in whole or in part.” The proposed amendments can be found here . The Board currently plans to publish a notice of emergency rulemaking on the amendments on August 6, 2024, and then submit the amendments to the Office of Administrative Law (“OAL”) on August 21, 2024. The Board expects the OAL to approve the amendments by September 3, 2024.

Takeaways

The updates to AB 3129 and the OHCA indicate a continuing trend toward expanding regulatory oversight of health care transactions in California. While the proposed changes discussed above have not yet become effective, members and potential investors in the California health care industry should continue to monitor these changes to anticipate potential impacts on their practices in the future.