CALIFORNIA’S LEGISLATURE PASSES AB 3129 REGULATING PRIVATE EQUITY AND HEDGE FUND INVESTMENT IN – AND MANAGEMENT OF – HEALTHCARE FACILITIES AND PROVIDERS

September 3, 2024

Elizabeth Mann, Managing Partner

California’s legislature passed Assembly Bill 3129 on August 31, 2024. Governor Newsom has 30 days to veto or sign the new law.  If signed, the statute becomes effective on January 1, 2025.This law 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 healthcare facilities, physician practices and the like. 

This law is designed to give the AG’s office tools to determine whether proposed transactions will “have a substantial likelihood of anticompetitive effects and [to articulate] what mitigation measures could be adopted to avoid this result.” The law requires PE firms and hedge funds to obtain prior written consent from the AG’s office before closing a transaction that involves a material investment in, or a change of control of, a healthcare facility or provider group that is doing business in California. The investor is required to file an application with the AG at least 90 days in advance of closing a covered transaction. The AG may request supplemental information and may impose an additional 45-day waiting period.  The AG has the power to deny or to impose conditions on the proposed transaction following its review. 

The Los Angeles Times published an article today discussing the retirement of John Baackes, the CEO of L.A. Care, a very large Medi-Cal plan with more than 2.6 million members.  In discussing how to better serve vulnerable populations, Mr. Baackes weighed in on PE investments, stating:

“I think particularly the safety-net providers might have to say there can be no for-profit or private equity investors in that area. I’m not against capitalism. I just think if you’re going to make that money on a system that’s underfunded in the first place, something is being lost.”

The bill broadly defines “health care facility” to include any “nonprofit or for-profit corporation, institution, clinic, place, or building where health-related physician, surgery, or laboratory services are provided,” such as inpatient and outpatient centers, long-term care facilities, and even labs. Covered provider groups include all groups of 10 or more licensed health professionals or groups of 2-9 professionals with $25 million or more in annual revenue.

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.” 

The statute also extensively regulates 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. The new law 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.” The law provides 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 statute gives the AG the power to seek to enjoin covered transactions and the right to recover attorney’s fees and costs incurred in enforcing this statute.  

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