California Moves to Regulate Private Equity involvement in the Management of Physician Practice Groups

May 13, 2024

 

The California legislature is debating proposed legislation (Assembly Bill 3129) that would significantly increase the California Attorney General’s powers to review and, in some circumstances, prevent private equity groups and hedge funds from investing in California hospitals, physician practices and the like. In order to become law, AB 3129 must secure approval in both houses of the legislature and be signed by the Governor by September 30, 2024. If enacted, AB 3129 will be effective on January 1, 2025.

While much has been written about the investment restrictions that AB 3129 would impose, little focus has been given to the statute’s extensive, and potentially prohibitive, regulation of the role that Management Services Organizations (MSO) that have PE or hedge fund backing play in working with physicians groups. In the current climate, these MSOs can freely contract with providers to manage a clinical practice, in exchange for a reasonable, fair market value, fee. MSOs cannot have any influence on the clinical decision making for the managed practice, but otherwise the parties are free to contract as they see fit. MSOs often own the non-clinical assets of the practice. They typically support the practice by negotiating contract terms including third-party reimbursement. This arrangement is often referred to as the “friendly PC-MSO model.”  This widely used structure exists to facilitate professional management of sophisticated clinical practices, without running afoul of California’s Corporate Practice of Medicine restrictions.

AB 3129 could dramatically change, and potentially eradicate, this productive approach. Section 1190.40(b) says that doctors “shall not enter into any agreement or arrangement” with a company controlled “in part or in whole, directly or indirectly” by a private equity group or a hedge fund where the PE or hedge fund “manages any of the affairs of the physician . . . practice in exchange for a fee.” Subsection (a) extends the prohibitions, bluntly stating that a PE or a hedge fund that is involved “in any manner,” including as an investor in the practice or as an investor in, or owner of, its assets shall not “control or direct the practice.” This provision specifically prevents the PE from “influencing” the terms of physician contracts with third parties, or the rates that the practice would charge third-parties under these contracts.

The terms “private equity group” and “hedge fund” encompass a broad class of investors. The statute defines a PE as “an investor or group of investors who engage in the raising or returning of capital and who invests, develops, or disposes of specified assets.” A “hedge fund” means “a pool of funds managed by investors for the purpose of earning a return on those funds, regardless of the strategies used to manage the funds. Hedge funds include, but are not limited to, a pool of funds managed or controlled by private limited partnerships.” Section 1190(a)(4), (9).

AB 3129 gives the California Attorney General broad enforcement and remedial authority, including the right to seek injunctive relief and the right to recover attorney’s fees and costs incurred in enforcing this statute.  

AB 3129’s passage is by no means guaranteed. Many powerful groups oppose the statute, including the California Hospital Association and the California Chamber of Commerce.  Supporters include the California Medical Association, California Health Access and a number of powerful unions. Although not directly related, Steward Health Care’s massive financial problems, recent bankruptcy filing, and the negative press its PE investor has received, cannot be helping the cause of market-based and sensibly regulated PE investment in clinical practices.  

If you are contemplating establishing a new California MSO agreement, or negotiating the terms of an existing contract, it may behoove you to complete this process before December 31, 2024, in the chance that AB 3129 becomes law next year. 

Mann Legal has a great deal of experience in these matters and would be pleased to advise. Find us at www.mannlegalteam.com.  

Mann Legal provides this information as a service to clients and other friends for educational purposes only. It should not be construed or relied on as legal advice or to create a lawyer-client relationship. Readers should not act upon this information without seeking advice from professional advisers.

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¹A “private equity group” does not include “natural persons or other entities that contribute or promise to contribute funds to the private equity group, but otherwise do not participate in the management of the private equity group, or in any change in control of the private equity group or the group’s assets.”  Similarly, a “hedge fund” does not include “natural persons or other entities that contribute, or promise to contribute, funds to the hedge fund, but otherwise do not participate in the management of the hedge fund or the fund’s assets, or in any change in control of the hedge fund or the fund’s assets.” Id.