Governor Newsom Vetoes AB-3129 Bill Which Would Have Increased Oversight of Healthcare Transactions Involving Private Equity and Hedge Funds
On September 28, 2024, Governor Gavin Newsom vetoed Assembly Bill (AB) 3129. The landmark bill would have added restrictions around how private equity groups (PEGs) and hedge funds could participate in the ownership and management of California healthcare facilities. Introduced by Assemblymember Jim Wood and Attorney General (AG) Rob Bonta this past February, supporters of the bill had been optimistic about the bill's potential impact on healthcare consumers and on the broader healthcare market.
In this month's California Legislative Beat, we examine how this bill could have changed healthcare transactions in California, why the Governor vetoed it, reactions to the veto, and what this move may mean for the future of investor transactions in California's healthcare space.
Background on AB-3129 and Why It Would Have Been Important
In March 2024, the Source provided a comprehensive look into what AB-3129 said and highlighted the key criticisms and arguments in support of the bill. Overall, AB-3129 would have expanded requirements for the AG to approve healthcare transactions between PEGs or hedge funds and healthcare facilities or provider groups for both for-profit and non-profit healthcare entities. The bill would have required PEGs and hedge funds to obtain written consent from the AG at least 90 days prior to the acquisitions or changes of control of healthcare facilities, provider groups, and other providers. The AG would have been required to assess the transactions based on the acquiring party’s financial stature to operate in the market of interest for three or more years while ensuring that the change in control would continue to maintain healthcare access to the local community.
The bill would have also implicated California’s existing corporate practice of medicine (CPOM) restrictions by limiting arrangements between PEG sponsors, certain platform companies, and medical/dental groups. CPOM laws restrict the unlicensed practice of medicine and bar unlicensed lay entities from owning or controlling medical practices, which often poses a barrier to PEGs and hedge fund investors from acquiring control over healthcare-related professional corporations. To circumvent these policies, many PEGs and other investors have often acquired indirect control of a healthcare company by appointing a licensed, "friendly" physician to be the majority shareholder or owner of the healthcare professional corporation. Once installed, investors execute a series of agreements with the friendly physician, including long-term management service agreements (MSAs) and equity transfer restriction agreements, which effectively limit the physician’s ability to sell, transfer, or exchange their ownership of the healthcare professional corporation without the consent of the investor.
AB-3129 would have expressly limited the ability of PEGs and hedge funds to engage in these types of agreements by prohibiting both parties from being involved with the control of physician and psychiatric practices, essentially invalidating the friendly PC model. If signed, the law would have prohibited physicians and the heads of psychiatric practices from entering into any agreements that would allow PEGs or hedge funds to influence contracts entered on behalf of the practice, influence or set rates paid to the practice by any third party, or influence patient admission, referral, or physician availability policies.
In the present national environment, PEG and hedge fund investments in health care have become a highly scrutinized topic due to their alleged adverse effects on price and quality. If it had been enacted, AB-3129 could have made California one of the first states in America to provide preventative and reasonable initial review processes prefaced on protecting healthcare consumers.
Why AB-3129 Was Vetoed
After issuing the veto, Governor Newsom released a statement on September 28 explaining his decision not to sign the bill. In summary, Governor Newsom stated that he believed that it was inappropriate to shift the review of PEG and hedge fund transactions in healthcare to the AG because of the presence of the Office of Healthcare Affordability (OHCA) – a state office that was established in 2022 to review and evaluate health care consolidation transactions. While AB-3129 was initially seen as a potential extension of the authority given to OHCA, Governor Newsom argued that transactional reviews already fell under and should continue to fall under OHCA’s review purview. He did acknowledge that OHCA currently had no power to block transactions but stated that OHCA could still coordinate with other state entities, including the AG, to further review and scrutinize these types of transactions. His statement did not provide any specific mentions of the effects on CPOM and stops to the friendly PC model, but ultimately appeared to hinge on a desire to maintain OHCA as the state’s preeminent review authority on health care transactions.
Reactions to the Veto
Following Governor Newsom’s veto announcement, several parties put out statements responding to his action. Assemblyman Jim Wood, who promulgated the bill and is in his last term in the California Assembly, issued a statement on his website expressing disappointment by the Governor’s decision. The Assemblyman, who has tried to pass similar bills in past terms, argued that the existing scope of OHCA's review authority made it ineffective at pre-emptively preventing the negative consequences of anti-competitive health care transactions. Perhaps to further strengthen his point, Assemblyman Wood also used his statement to draw attention to how the bill even warranted a letter of support from the U.S. Federal Trade Commission's Chair, Lina Khan. Even though he is leaving politics for now, the Assemblyman expressed optimism that the state would move towards preventing predatory healthcare transactions in the future.
Meanwhile, industry sources celebrated and expressed support for the Governor’s veto. Some heralded AB-3129’s failure as a big win for PEGs, hedge funds, and "healthcare industry stakeholders" while recognizing that the move by the Governor appeared to signal that healthcare transaction oversight would continue to fall firmly within OHCA’s portfolio. Meanwhile, others praised effective lobbying from industry insiders, resulting in the bill's contents being diluted a mere two weeks before the bill originally passed the Senate and landed on the Governor's desk. Specifically, the Senate amended the bill to exempt hospital acquisitions from notice and consent requirements and excluded dermatology groups from the definition of “group practice.” The bill was also amended to squarely align with existing California CPOM prohibitions.
The Future of Healthcare Transactions Involving Private Equity and Hedge Funds
Governor Newsom’s AB-3129 veto comes on the helms of an increasing annual percentage of bill blocks by the Governor since 2021. This year, the Governor vetoed about 16% of the 1,200 bills that passed the Assembly and Senate. While the Assembly and Senate can override vetoes by a two-thirds vote, this has not happened in over 40 years. Governors may also become law without their signature, but this is also a rare occurrence. Generally, lawmakers will just attempt to push a similar but amended bill that considers the Governor's veto message the following year, but it remains to be seen who will champion such a bill forward with Assemblyman Jim Wood ending his position.
Some worry that interest in regulating PEG and hedge fund-associated healthcare transactions may be weaning in a year where six states tried to augment their existing transactional oversight rules. Oregon, Washington, Massachusetts, Minnesota, and Connecticut also considered changes this past year that would have strengthened the review of healthcare transactions and CPOM, but with limited success.
While there have been murmurs that states are becoming weary of the expenses and infrastructure required to facilitate pre-transaction review processes, it appears that these recent losses for regulation may just be coming from a more vocal and sophisticated opposition from the industry. AB-3129, in particular, faced escalated and distinct attention, criticism, and discourse from industry stakeholders like business groups and health providers in a manner that did not match any other state healthcare transaction. The industry continues to contend that PEG and hedge funds often provide necessary administrative, financial, and clinical support in an increasingly complex and expensive healthcare environment that requires costly staff support and equipment and technology updates.
Nevertheless, other states such as Indiana and Pennsylvania are pressing ahead with substantial pieces of legislation. In Pennsylvania, legislators have been attempting to put forth a three-prong attack on change of control transactions in the healthcare industry. As introduced, HB-2012 sought to require AG approval over certain material healthcare change transactions and agreements, while HB-2344 would have required certain healthcare facilities and organizations to also notify the AG prior to entering mergers, acquisitions and contracts involving out-of-state entities with at least $10 million in revenue from in-state patients. Finally, SB-548 would have required provider organizations and for-profit entities with ownership or operation stakes in hospitals, hospice agencies, and nursing homes to notify the AG before entering material change transactions and agreements. As the Pennsylvania legislature is in session until November 30, the language of all three of these bills could change at any time. In Indiana, Senator Mike Braun recently released a white paper stating his vision to require that all PEG-related healthcare mergers and acquisitions be approved by the AG, regardless of the transaction’s valuation. This would expand the state’s existing laws, which require certain healthcare entities with assets over $10 million to provide notice to the AG of the transaction. However, it should be noted that the AG currently does not have approval or veto rights of these transactions.
Many throughout the country continue to be weary of the industry’s assertions and the downstream effects of rapid return investments in the healthcare sector. Labor unions, medical groups, and patient advocacy groups continue to advocate for mitigating and regulating PEGs and hedge funds in the healthcare industry. They worry that PEGs and hedge fund investments are increasing healthcare costs while lowering quality healthcare, creating monopolies, and decreasing overall access to care.
As states review pre-transaction notice filings and continue to collect information on approved healthcare transactions through entities like OHCA, the actual impact of outside investments on the cost, quality, and access of healthcare in California and beyond will only become clearer. While the 2024 legislative year did not prove to be successful for transaction review, we predict that regulations on healthcare transactions and CPOM restrictions will only continue to be an increasingly hot topic both within California and across the country as both parties become more sophisticated and vocal with their beliefs.