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• Date: September11th 2024
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California’s AB 3129 Passes in California Legislature

Assembly Bill 3129 (“AB 3129”), a bill intended to increase oversight over PE and hedge fund investments in health care and reinforce prohibitions on the corporate practice of medicine, passed in the California legislature on Saturday, August 31, 2024. California Governor Gavin Newsom has until September 30, 2024 to sign or veto the bill. Supporters of the bill have been vocal about their criticism of the impact of PE on health care as it relates to cost, quality, and access to care. Since being introduced in February 2024 by Assembly Speaker Pro Tempore Jim Wood and California Attorney General Rob Bonta, the bill has received significant pushback from a variety of PE industry and health care industry stakeholders and has undergone a series of amendments – generally helpful to PE and hedge funds – in both the California Assembly and California Senate. Governor Newsom’s office has declined to provide any comments on the bill to date.

If signed into law by Governor Newsom, AB 3129 would increase scrutiny of PE and hedge fund health care investments in California and impact considerations for PE investors in structuring management relationships with California professional practices. The bill reflects a growing nationwide movement targeted at private equity investments in health care (see Indiana Health Care Transaction Law Alert). Connecticut and Minnesota also have introduced legislation aimed at overseeing private equity investments in health care (see Navigating Emerging State Regulation of Health Care Map), and there are several anti-PE bills under consideration at the federal level.¹

AB 3129 contains two fundamental components: an AG review process, and restrictions on management relationships. We discuss each in turn below.

1. AG Review Process

AB 3129 requires parties to provide notice to and/or obtain consent from the AG of certain health care “transactions” involving PE groups or hedge funds. Review requirements differ depending on the specific types of entities involved in the transaction, and the revenue of such entities.

Entities Subject to Review

Under the bill, PE groups or hedge funds entering into transactions with a (i) health care facility, (ii) provider group, or (iii) provider are subject to AG notice and/or consent requirements. The terms “private equity group” and “hedge fund” are broadly defined as follows:

• “Private equity group” means investor(s) who primarily engage in the raising or returning of capital and who invest, develop, or dispose of specified assets.
• “Hedge fund” means a pool of funds managed by investors for the purpose of earning a return on those funds (e.g., a pool of funds managed or controlled by private limited partnerships).

These definitions do not include persons that contribute funds to a PE group or hedge fund, but that otherwise do not participate in the management or change of control of the fund or assets.

The bill defines the other relevant parties to a transaction as follows:

• “Health care facility” means a place where services are provided by non-dental, licensed health professionals, that is not a hospital (e.g., non-hospital health facilities, clinics, outpatient settings, ambulatory surgical centers (“ASCs”), clinical laboratories, and imaging centers).
• “Provider group” means a group of 10 or more licensed health professionals, or a group of two to nine licensed health professionals that generated gross annual revenue of at least twenty-five million dollars ($25,000,000). A provider group explicitly does not include any combination of licensed health professionals if the primary purpose of the group is to deliver dermatology services.
  • “Licensed health professional” is defined to include physicians and surgeons, dentists, optometrists, pharmacists, nonphysician mental health professionals, physician assistants, and advanced practice registered nurses.
• “Provider” means a group of two to nine licensed health professionals, except for a provider group.

Transactions Subject to Review

AB 3129 defines “transaction” broadly to mean the direct or indirect acquisition in any manner (e.g., lease, transfer, exchange, option, receipt of conveyance, creation of a joint venture) or any other manner of purchase by a PE group or hedge fund of a “material amount of the assets or operations,” or a “change of control” of a health care facility, provider group or provider doing business in California.

• The bill provides that a transaction involves a “material amount of the assets or operations” if the transaction affects more than 15% of the market value or ownership of the relevant health care entity.
  • The bill also provides that a transaction that vests rights significant enough to constitute a change in control, including, but not limited to, supermajority rights, veto rights, exclusivity provisions, and similar provisions, involves a “material amount of the assets or operations” even if less than 15% of the market value or ownership shares of the relevant health care entity is affected.
• A “change of control” is defined to include any arrangement in which a PE group or hedge fund establishes a change in governance or sharing of control over health care services provided by a health care facility, provider group or provider, or in which a PE group or hedge fund otherwise assumes direct or indirect control over the operations of such entities. The term does not include a relevant materiality threshold.

Exempted Transactions

Certain categories of transactions, listed below, are exempted from the AG review provisions. Many of these exemptions were added in later Senate amendments to the bill, due to pressure from various lobbying groups.

1. Prior Transactions. Transactions entered into prior to January 1, 2025, including subsequent renewals, as long as those transactions do not involve a material change in the corporate relationship between the PE group or hedge fund and a health care facility, provider group, or provider on or after January 1, 2025.
2. Certain Regulated Transactions. Transactions or agreements involving a health care service plan or health insurer that are already subject to certain review processes for cost impact or market consolidation by other state agencies.
3. County, Health District and University of California Transactions. Certain transactions involving a county, health district or University of California entity and a PE group or hedge fund. These transactions may have other requirements.
4. Security Agreements. The pledge of assets solely to secure a debt obligation, including, but not limited to, security agreements, deeds of trust, indentures, financing statements, and liens.
5. Emergency Waiver. Transactions for which the parties have made a written waiver request to the AG demonstrating grave risk of immediate failure and a substantial likelihood of filing for bankruptcy absent the waiver, among other criteria. The AG will grant or deny the waiver request within 45 days.

We additionally note (as discussed above) that, to the extent that a transaction is subject to review by the AG under AB 3129, it will not be required to submit a filing to the Office of Health Care Affordability under OHCA’s separate transaction review process.

Notice and/or Approval Requirements

AB 3129 contemplates two separate AG review processes, depending on the entities involved in the transaction at issue: (i) notice to and consent from the AG; or (ii) notice only.

Notice and Consent: The bill initially only required PE groups and hedge funds to provide ninety (90)-day pre-closing notice to, and obtain consent from, the AG prior to entering into transactions with a health care facility or provider group. Subsequent versions of the bill clarified that the following transactions will additionally be captured:

• Transactions between a PE group or hedge fund and a provider, if the PE group or hedge fund has been involved in a transaction involving a health care facility, provider group, provider, or related health care services within the past seven years;
• Transactions between a PE group or hedge fund and any health care facility, provider group or provider described in the bullet above that directly or indirectly controls, is controlled by, is under common control of or affiliated with a payor, if the PE group or hedge fund has been involved in a transaction involving a health care facility, provider group or provider.
• Transfers by a health district of a health care facility, provider group or provider to a PE group or hedge fund to the AG, if referred by the health district.

Notice Only: PE groups and hedge funds must provide ninety (90)-day pre-closing notice only to the AG of a transaction with either (i) a nonphysician provider³ with an annual revenue of at least four million dollars ($4,000,000); or (ii) a provider or group of fewer than 10 providers that provides physician, psychiatric, surgery or lab services with annual revenue between four million dollars ($4,000,000) and twenty-five million dollars ($25,000,000).

Review Process & Timing

For the above-described transactions requiring notice and consent from the AG, the AG may decide to consent to, give conditional consent to, or not consent to such transaction. The AG will make such determination based on the “public interest standard,” which is defined broadly as being in the interests of the public in protecting competitive accessible health care markets for prices, quality, choice, accessibility and availability of health care services, and “any other factors that the Attorney General determines to be a public benefit.”

The AG will have an initial ninety (90)-day period to issue a written determination with its decision, and may extend such period (i) an additional forty-five (45) days if the AG finds it necessary to obtain additional information (among other reasons), (ii) an additional fourteen (14) days if the AG decides to hold a public meeting, or (iii) indefinitely, upon notice to the parties, pending any review by another state or federal agency that has also been notified. Upon expiration of the relevant time periods, the PE group or hedge fund may close the transaction and does not need to receive explicit consent from the AG.

If the AG issues a written determination that the PE group or hedge fund disagrees with, the PE group or hedge fund may elect to participate in an evidentiary hearing before an administrative law judge to review the AG’s findings.

2. Management Relationships

AB 3129 also seeks to impose certain restrictions on the relationship between PE groups or hedge funds and physician, psychiatric and dental practices, in an effort to reinforce prohibitions on the corporate practice of medicine and corporate practice of dentistry. We outline relevant restrictions below:

• CPOM/CPOD Restrictions: The bill would prohibit PE groups or hedge funds involved with physician, psychiatric or dental practices from:
  • Interfering with the professional judgment of physicians, psychiatrists or dentists in making health care decisions, including being responsible for the ultimate care of patients; or determining appropriate diagnostic tests, the need for referrals to licensed health professionals, or how many hours a licensed health professional will work or patients such individuals will see.
  • Exercising control over or being delegated the power to own or determine the content of patient medical records; make hiring or firing decisions for licensed health professionals, allied health staff or medical assistants based on clinical competency; set parameters under which licensed health professionals will enter into contractual relationships with third-party payers or each other; make coding and billing decisions; or approve the selection of medical equipment.

  The bill clarifies that a PE group or hedge fund, or an entity controlled “directly” by a PE group or hedge fund may not enter into an agreement or arrangement with any physician, psychiatric or dental practice if it would enable any of the above actions.

• Non-Compete/Non-Disparagement: The bill also includes restrictions on non-competes and non-disparagement clauses in contracts involving the management of a physician, psychiatric or dental practice by, or the sale of real estate owned by such practices to, a PE group or hedge fund (or any entity controlled directly or indirectly, in whole or in part, by a PE group or hedge fund). Such contracts may not explicitly or implicitly include any clause barring a provider in that professional practice from competing with the practice in the event of termination or resignation, or from disparaging or commenting on the practice in any manner involving issues of quality or utilization of care, ethical or professional challenges in medicine, dentistry or revenue-increasing strategies employed by the PE group or hedge fund. The August 15, 2024 amendment of the bill clarified that this provision is not meant to impact the validity of an otherwise enforceable business non-compete agreement, but is rather aimed at regulating employee non-compete agreements.

We note that AB 3129’s restrictions on management relationships have been amended a number of times. Prior versions of the bill included far broader restrictions. For example, in previous iterations of the bill, the CPOM/CPOD restrictions described above broadly prohibited PE groups and hedge funds from exercising “control” or direction over a practice, rather than including specific instances of prohibited conduct. In addition, the bill included a provision that would have prohibited physician, psychiatric and dental practices from entering into any agreement or arrangement with a PE group, hedge fund, or an entity controlled by such entities, for the “furnishing of business or management services in exchange for a fee that is passed through by that practice directly or indirectly to a payor, purchaser of physician, psychiatric, or dental services, or patient.” This provision raised concerns that friendly PC structures and MSO/DSO arrangements would need to be significantly altered to comply with such restrictions. After receiving significant pushback, legislators removed this provision from the bill on June 27, 2024.

Implications

If signed into law by Governor Newsom, AB 3129 would go into effect on January 1, 2025. PE groups and hedge funds should carefully examine their health care investments in the state and the potential impacts of the bill on their current operations and future transactions in California, including potential exits from any current investments.