California Bill on Health Care System Consolidation Passes Senate Health Committee Vote

Firm Publication

On June 26, the California Senate Health Committee passed Assembly Bill 3129 (Bill), which was further amended on June 27 and re-referred to the Committee on Judiciary. The following is a summary of the material changes made in the June 27 version as compared with the prior version we analyzed on June 14.

Notice and Consent Requirement – Health Care Facilities, Provider Groups, Providers, and Commonly-Controlled or Affiliates of Payors

Private equity groups (PEGs) and hedge funds (HFs) would have to provide at least 90 days prior written notice to and obtain consent from the California Attorney General (AG) for any transaction with:

  1. A health care facility.
  2. A provider group.
  3. A provider if the PEG or HF has been involved, directly or indirectly, in a transaction involving a health care facility, provider group, provider, or related health care services within the past seven years.
  4. Any health care facility, provider group, or provider under common control or affiliated with a payor if the PEG or HF has been involved, directly or indirectly, in a transaction involving a health care facility, provider group, or provider.

The current version revised the definition of “hedge fund” to exclude entities that solely provide or manage debt financing secured in whole or in part by the assets of a health care facility, including, but not limited to, banks and credit unions, commercial real estate lenders, bond underwriters, and trustees.

The current version revised the Bill by removing the separate definition of “acquisition” and included a definition of “transaction,” which would mean the direct or indirect acquisition in any manner, including, but not limited to, lease, transfer, exchange, option, receipt of conveyance, creation of a joint venture, or any other manner of purchase, by a PEG or HF 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 goes on to define what a transaction involving a “material amount of the assets or operations” means, which would occur if the transaction affects more than 15% of the market value or ownership of the health care facility, provider group, or provider or if the transaction involves a hospital; and includes 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, even if less than 15% of the market value or ownership of the health care facility, provider group, or provider is affected. The definition of “transaction” also would carve out 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.

The definition of “change of control” was amended to state that a transfer would include, but not be limited to, an arrangement, written or oral, that alters voting control of, responsibility for, or control of the governing body of the health care facility, provider group, or provider.

Additionally, the definition of “provider group” was amended to increase the dollar threshold of annual gross revenue to $25 million (up from $10 million).

The revised version of the Bill would exempt notice to and consent from the AG for transactions or agreements between a health care service plan and another payor that is not under common control or affiliated with a health care facility, provider group, or provider, subject to review by the Director of the Department of Managed Health Care.

As the AG is required to apply the “public interest standard” when considering whether to consent or not (or conditionally consent to) to a transaction, the updated Bill includes the following factors as part of this analysis:

  • Protecting competitive and accessible health care markets for prices, quality, choice, accessibility, and availability of all health care services for local communities, regions, or the state as a whole.
  • Protecting competitive and accessible health care markets includes considering the substantial risk of lessening competition in horizontal, vertical, or related markets.
  • The substantial risk of anticompetitive effects from increased leverage or the ability to tie.
  • The substantial risk of foreclosing competitors in the same or related markets.
  • The substantial risk of decreased access or services in local markets.
  • Any other negative effects from the transaction. Negative effects may involve the substantial risk of increases in prices or costs, decreases in quality, or the lessening of access to or availability of services.
  • Any benefits from the transaction that are specific to the transaction. Benefits from the transaction may include price or cost decreases directly passed to patients, improvements in access or availability of services in the community, or capital improvements that will benefit local community care if that financing cannot be reasonably obtained elsewhere.
  • Any views from local communities on the transaction.
  • Any other factors the AG determines to be a public benefit.

The AG would be able to, in the public interest, take into account any other negative or positive effects of the transaction.

There are other extensive procedural and due process terms associated with the notice and consent provision that were amended in this version.

Notice Requirement – Nonphysician Providers and Providers

PEGs and HFs would have to provide advance written notice to the AG before a transaction between a PEG and HF and:

  1. Nonphysician provider if the nonphysician provider has gross annual revenue of more than $4 million; or
  2. Provider if the provider has gross annual revenue between $4 million and $25 million (up from $10 million), and the parties are not subject to the notice and consent requirements set out above.

Gross annual revenue is not defined.

Prohibited Arrangements

The current version of the Bill builds upon and amends the four prohibited categories of arrangements with physicians, psychiatrists, and dentists.

One. The current text expands upon the first category by delineating specific arrangements that are prohibited. PEGs or HFs involved in any manner with a physician, psychiatric, or dental practice doing business in California (including as an investor or owner of the assets of such practice) would not be able to do any of the following:

(1) Interfere with the professional judgment of physicians, psychiatrists, or dentists in making health care decisions, including any of the following:

  • Determining what diagnostic tests are appropriate for a particular condition.
  • Determining the need for referrals to, or consultation with, another physician, psychiatrist, dentist, or licensed health professional.
  • Being responsible for the ultimate overall care of the patient, including treatment options available to the patient.
  • Determining how many patients a physician, psychiatrist, or dentist shall see in a given period of time or how many hours a physician, psychiatrist, or dentist shall work.

(2) Exercise control over or be delegated the power to do any of the following:

  • Owning or otherwise determining the content of patient medical records.
  • Selecting, hiring, or firing physicians, psychiatrists, dentists, allied health staff, and medical assistants based, in whole or in part, on clinical competency or proficiency.
  • Setting the parameters under which a physician, psychiatrist, dentist, or physician, psychiatric, or dental practice shall enter into contractual relationships with third-party payers.
  • Setting the parameters under which a physician, psychiatrist, or dentist shall enter into contractual relationships with other physicians, psychiatrists, or dentists for the delivery of care.
  • Making decisions regarding coding and billing procedures for patient care services.
  • Approving the selection of medical equipment and medical supplies for the physician, psychiatric, or dental practice.

Two. Similarly, the current text of the Bill states that a PEG or HF (or an entity controlled directly or indirectly, in whole or in part, by a PEG or HF) cannot enter an agreement or arrangement with a physician, psychiatric, or dental practice doing business in California if the agreement or the arrangement would enable the person or entity to interfere with the professional judgment of physicians, psychiatrists, or dentists in making health care decisions (see the list above) or exercise control or be delegated powers (see the list above).

Three. The current text removes the prohibition against collecting a fee in exchange for furnishing business or management services to a physician, psychiatric, or dental practice doing business in California. Instead, a PEG or HF, or an entity controlled directly or indirectly, in whole or in part, by a PEG or HF, would not be able to enter into an agreement or arrangement with a physician, psychiatric, or dental practice doing business in California if the agreement or arrangement would enable the person or entity to interfere with the professional judgment of physicians, psychiatrists, or dentists in making health care decisions set out in category one, or exercise control over or be delegated powers set out in category one.

Four. The current text adds dental practices and the practice of dentistry as part of the fourth category of prohibited arrangements. Any contract involving the management of a physician, psychiatric, or dental practice doing business in California by, or the sale of real estate or other assets owned by a physician, psychiatric, or dental practice doing business in California to, a PEG or HF (or any entity controlled directly or indirectly, in whole or in part, by a PEG or HF), would not be able to explicitly or implicitly include any clause barring any provider in that practice from competing with that practice in the event of a termination or resignation of that provider from that practice, or from disparaging, opining, or commenting on that practice in any manner as to any issues involving quality of care, utilization of care, ethical or professional challenges in the practice of medicine or dentistry, or revenue-increasing strategies employed by the PEG or HF. Any such explicit or implicit contractual clauses would be void, unenforceable, and against public policy.

Current State of Play

As we noted in our prior publication, the notice and consent requirements would not apply to 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 PEG or HF and a health care facility, provider group, or provider on or after January 1, 2025. However, the requirements of the Bill that prohibit certain arrangements would arguably apply to arrangements currently in effect.

The Bill now states that it would not narrow, abrogate, or otherwise alter the bar on the corporate practice of medicine or dentistry as set out in the Business and Professions Code, the Corporations Code or any other applicable state or federal law.

If you have any questions about the Bill or how it might impact your business in California, please contact the authors.

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Firm Publication

On June 26, the California Senate Health Committee passed Assembly Bill 3129 (Bill), which was further amended on June 27 and re-referred to the Committee on Judiciary. The following is a summary of the material changes made in the June 27 version as compared with the prior version we analyzed on June 14.

Notice and Consent Requirement – Health Care Facilities, Provider Groups, Providers, and Commonly-Controlled or Affiliates of Payors

Private equity groups (PEGs) and hedge funds (HFs) would have to provide at least 90 days prior written notice to and obtain consent from the California Attorney General (AG) for any transaction with:

  1. A health care facility.
  2. A provider group.
  3. A provider if the PEG or HF has been involved, directly or indirectly, in a transaction involving a health care facility, provider group, provider, or related health care services within the past seven years.
  4. Any health care facility, provider group, or provider under common control or affiliated with a payor if the PEG or HF has been involved, directly or indirectly, in a transaction involving a health care facility, provider group, or provider.

The current version revised the definition of “hedge fund” to exclude entities that solely provide or manage debt financing secured in whole or in part by the assets of a health care facility, including, but not limited to, banks and credit unions, commercial real estate lenders, bond underwriters, and trustees.

The current version revised the Bill by removing the separate definition of “acquisition” and included a definition of “transaction,” which would mean the direct or indirect acquisition in any manner, including, but not limited to, lease, transfer, exchange, option, receipt of conveyance, creation of a joint venture, or any other manner of purchase, by a PEG or HF 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 goes on to define what a transaction involving a “material amount of the assets or operations” means, which would occur if the transaction affects more than 15% of the market value or ownership of the health care facility, provider group, or provider or if the transaction involves a hospital; and includes 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, even if less than 15% of the market value or ownership of the health care facility, provider group, or provider is affected. The definition of “transaction” also would carve out 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.

The definition of “change of control” was amended to state that a transfer would include, but not be limited to, an arrangement, written or oral, that alters voting control of, responsibility for, or control of the governing body of the health care facility, provider group, or provider.

Additionally, the definition of “provider group” was amended to increase the dollar threshold of annual gross revenue to $25 million (up from $10 million).

The revised version of the Bill would exempt notice to and consent from the AG for transactions or agreements between a health care service plan and another payor that is not under common control or affiliated with a health care facility, provider group, or provider, subject to review by the Director of the Department of Managed Health Care.

As the AG is required to apply the “public interest standard” when considering whether to consent or not (or conditionally consent to) to a transaction, the updated Bill includes the following factors as part of this analysis:

  • Protecting competitive and accessible health care markets for prices, quality, choice, accessibility, and availability of all health care services for local communities, regions, or the state as a whole.
  • Protecting competitive and accessible health care markets includes considering the substantial risk of lessening competition in horizontal, vertical, or related markets.
  • The substantial risk of anticompetitive effects from increased leverage or the ability to tie.
  • The substantial risk of foreclosing competitors in the same or related markets.
  • The substantial risk of decreased access or services in local markets.
  • Any other negative effects from the transaction. Negative effects may involve the substantial risk of increases in prices or costs, decreases in quality, or the lessening of access to or availability of services.
  • Any benefits from the transaction that are specific to the transaction. Benefits from the transaction may include price or cost decreases directly passed to patients, improvements in access or availability of services in the community, or capital improvements that will benefit local community care if that financing cannot be reasonably obtained elsewhere.
  • Any views from local communities on the transaction.
  • Any other factors the AG determines to be a public benefit.

The AG would be able to, in the public interest, take into account any other negative or positive effects of the transaction.

There are other extensive procedural and due process terms associated with the notice and consent provision that were amended in this version.

Notice Requirement – Nonphysician Providers and Providers

PEGs and HFs would have to provide advance written notice to the AG before a transaction between a PEG and HF and:

  1. Nonphysician provider if the nonphysician provider has gross annual revenue of more than $4 million; or
  2. Provider if the provider has gross annual revenue between $4 million and $25 million (up from $10 million), and the parties are not subject to the notice and consent requirements set out above.

Gross annual revenue is not defined.

Prohibited Arrangements

The current version of the Bill builds upon and amends the four prohibited categories of arrangements with physicians, psychiatrists, and dentists.

One. The current text expands upon the first category by delineating specific arrangements that are prohibited. PEGs or HFs involved in any manner with a physician, psychiatric, or dental practice doing business in California (including as an investor or owner of the assets of such practice) would not be able to do any of the following:

(1) Interfere with the professional judgment of physicians, psychiatrists, or dentists in making health care decisions, including any of the following:

  • Determining what diagnostic tests are appropriate for a particular condition.
  • Determining the need for referrals to, or consultation with, another physician, psychiatrist, dentist, or licensed health professional.
  • Being responsible for the ultimate overall care of the patient, including treatment options available to the patient.
  • Determining how many patients a physician, psychiatrist, or dentist shall see in a given period of time or how many hours a physician, psychiatrist, or dentist shall work.

(2) Exercise control over or be delegated the power to do any of the following:

  • Owning or otherwise determining the content of patient medical records.
  • Selecting, hiring, or firing physicians, psychiatrists, dentists, allied health staff, and medical assistants based, in whole or in part, on clinical competency or proficiency.
  • Setting the parameters under which a physician, psychiatrist, dentist, or physician, psychiatric, or dental practice shall enter into contractual relationships with third-party payers.
  • Setting the parameters under which a physician, psychiatrist, or dentist shall enter into contractual relationships with other physicians, psychiatrists, or dentists for the delivery of care.
  • Making decisions regarding coding and billing procedures for patient care services.
  • Approving the selection of medical equipment and medical supplies for the physician, psychiatric, or dental practice.

Two. Similarly, the current text of the Bill states that a PEG or HF (or an entity controlled directly or indirectly, in whole or in part, by a PEG or HF) cannot enter an agreement or arrangement with a physician, psychiatric, or dental practice doing business in California if the agreement or the arrangement would enable the person or entity to interfere with the professional judgment of physicians, psychiatrists, or dentists in making health care decisions (see the list above) or exercise control or be delegated powers (see the list above).

Three. The current text removes the prohibition against collecting a fee in exchange for furnishing business or management services to a physician, psychiatric, or dental practice doing business in California. Instead, a PEG or HF, or an entity controlled directly or indirectly, in whole or in part, by a PEG or HF, would not be able to enter into an agreement or arrangement with a physician, psychiatric, or dental practice doing business in California if the agreement or arrangement would enable the person or entity to interfere with the professional judgment of physicians, psychiatrists, or dentists in making health care decisions set out in category one, or exercise control over or be delegated powers set out in category one.

Four. The current text adds dental practices and the practice of dentistry as part of the fourth category of prohibited arrangements. Any contract involving the management of a physician, psychiatric, or dental practice doing business in California by, or the sale of real estate or other assets owned by a physician, psychiatric, or dental practice doing business in California to, a PEG or HF (or any entity controlled directly or indirectly, in whole or in part, by a PEG or HF), would not be able to explicitly or implicitly include any clause barring any provider in that practice from competing with that practice in the event of a termination or resignation of that provider from that practice, or from disparaging, opining, or commenting on that practice in any manner as to any issues involving quality of care, utilization of care, ethical or professional challenges in the practice of medicine or dentistry, or revenue-increasing strategies employed by the PEG or HF. Any such explicit or implicit contractual clauses would be void, unenforceable, and against public policy.

Current State of Play

As we noted in our prior publication, the notice and consent requirements would not apply to 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 PEG or HF and a health care facility, provider group, or provider on or after January 1, 2025. However, the requirements of the Bill that prohibit certain arrangements would arguably apply to arrangements currently in effect.

The Bill now states that it would not narrow, abrogate, or otherwise alter the bar on the corporate practice of medicine or dentistry as set out in the Business and Professions Code, the Corporations Code or any other applicable state or federal law.

If you have any questions about the Bill or how it might impact your business in California, please contact the authors.

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