On September 28, 2024, California Governor Gavin Newsom vetoed Assembly Bill 3129, a proposed piece of legislation that would have imposed new stringent regulatory requirements on private equity groups and hedge funds regarding their investments in the healthcare sector within the state. The proposed bill required these investors to notify and obtain consent from the California Attorney General before proceeding with any transactions involving healthcare facilities, provider groups, and providers. Governor Newsom, who has been governor since 2019, explained his veto by pointing to the existing oversight functions of the existing Office of Health Care Affordability (OHCA), which he deemed sufficient in overseeing healthcare transactions that could significantly influence market competition or affordability. Although there remains a theoretical possibility for the California legislature to override the veto, such an outcome is unlikely.
Detailed Provisions of AB 3129
AB 3129 was a direct response to growing concerns about the impact of private equity on healthcare in California. In recent years, private equity and hedge fund investments have increased exponentially, sparking debate within the regulatory landscape. With California already having some of the most comprehensive healthcare regulations in the country, AB 3129 would have added another layer of scrutiny to financial transactions involving healthcare businesses.
The bill set forth a comprehensive framework that would regulate transactions between private equity groups or hedge funds and various healthcare entities. Specifically, it required these financial entities to submit written notice and obtain written consent from the Attorney General at least 90 days before finalizing any transaction. The scope of this requirement extended to any healthcare facility, provider, or provider group that has direct or indirect control relationships or affiliations with a payor, with some exceptions. AB 3129 also provided for the possibility of a waiver from these requirements if certain conditions were met, such as the economic non-viability of the healthcare entity involved over the previous three years and the necessity of the transaction to ensure continued healthcare access in the market concerned.
Additionally, the bill would empower the Attorney General to make decisions on these transactions based on their potential anticompetitive effects and their impact on community healthcare access, employing a defined public interest standard. Provisions were also made for disputes to be adjudicated by an administrative law judge within the Office of Administrative Hearings. The Attorney General was further authorized to develop regulations and contract with state agencies, experts, or consultants to implement these requirements.
Governor Newsom’s Veto
In his veto message, Governor Newsom argued that the existing OHCA already performs the critical function of reviewing healthcare transactions for their effects on market competition and affordability. The governor’s position is that the OHCA provides a sufficient regulatory framework and that layering additional oversight through AB 3129 could create unnecessary bureaucratic hurdles, potentially discouraging investment and slowing healthcare innovation. However, proponents of the bill argue that OHCA’s role is not comprehensive enough to monitor the specific risks associated with private equity’s increasing role in healthcare. They highlight concerns about the corporate takeover of physician practices and the possible prioritization of profits over patient care, which they believe AB 3129 was designed to address.
Governor Newsom’s veto of AB 3129 highlights the delicate balance California policymakers must strike between promoting healthcare investment and ensuring that financial interests do not undermine patient care. The bill’s rejection may indicate to private equity firms and hedge funds that California remains open to healthcare investments, albeit under the scrutiny of the OHCA. However, this outcome also raises questions about whether the current regulatory framework is enough to safeguard the public from the potential risks of profit-driven healthcare entities. With the growing influence of private equity in sectors like ambulatory surgery centers, telemedicine, and behavioral health, California’s healthcare market will likely face ongoing scrutiny from lawmakers and regulators.
California’s Unique Regulatory Landscape
California’s healthcare regulatory environment is already among the most complex in the United States. The state operates under a strict corporate practice of medicine (CPOM) doctrine, which prohibits corporations, including private equity-backed entities, from directly owning medical practices. Many firms have adopted the Physician Corporate Medical Service Organization (PC-MSO) model to navigate these rules. Under this model, the financial investors control non-clinical assets, while the Provider retains control over clinical decision-making.
The PC-MSO model has been a point of contention, as some lawmakers believe it allows investors to exercise control over clinical care, potentially compromising patient outcomes. AB 3129, focusing on private equity and hedge fund transactions, would have an additional regulatory barrier for investors utilizing this model. The vetoed bill specifically targeted transactions involving entities with direct or indirect control over healthcare delivery, aiming to prevent private equity from bypassing the state’s CPOM rules and regulatory oversight.
Role of the Office of Health Care Affordability
The OHCA, established in 2022, plays a crucial role in evaluating healthcare consolidation through cost and market impact reviews of mergers, acquisitions, or corporate affiliations involving health plans, hospitals, physician organizations, pharmacy benefit managers, and other healthcare entities. This office analyzes the transactions for their potential effects on market competition, adherence to state spending targets, and overall affordability. While OHCA does not have the authority to block a transaction directly, it acts as a regulatory body that can refer transactions to other state entities for deeper review. Under AB 3129, transactions involving private equity groups or hedge funds subject to AG review would have been exempt from OHCA’s oversight, delineating clear regulatory pathways.
Conclusion
The veto of AB 3129 marks a significant moment in the ongoing dialogue about private equity’s influence on the healthcare industry in California. The bill’s passage through the legislature highlights a marked concern among lawmakers regarding overseeing private equity and hedge fund activities in healthcare. It signals a potential shift toward greater scrutiny of investment activities, particularly those structured around Physician Corporate Medical Service Organization (PC-MSO) arrangements.
Given the complexities and stringent nature of California’s corporate practice of medicine laws, healthcare operators and investors utilizing the PC-MSO model are advised to undertake rigorous reviews of their operational structures and consult with knowledgeable healthcare attorneys to navigate the evolving regulatory landscape and ensure strict compliance moving forward.