Q&A: Healthcare attorney skeptical of California’s new private equity regulation
A proposed law in California that would further regulate private equity transactions in healthcare is sitting on the desk of Governor Gavin Newsom, who has until the end of September to sign it or send it back to the legislature.
In short, Assembly Bill 3129 gives the state Attorney General (AG) the authority to review and veto investments from private equity firms that are deemed to be disadvantageous to the public. The bill would cover hospitals, health systems, physician groups, long-term care facilities and other healthcare entities operating in the state.
John Saran, a healthcare attorney with Holland & Knight, has raised questions over the wording of the proposed law, calling it “redundant.” With most stakeholders expressing support for the bill, HealthExec sought a critical perspective from an attorney who specializes in healthcare transactions.
Editor’s Note: The following interview was edited for clarity and concision.
You sent a comment to HealthExec arguing that AB 3129 creates a redundant regulatory framework. Can you elaborate?
Saran: California put a transaction reporting law in place earlier this year through the Office of Health Care Affordability, and it oversees transactions closing after April 1. So, you already have an existing law that's fairly comprehensive, and it's been in effect for only five or six months. Now they’re adding an additional layer on top of it with AB 3129, before we know if the current regulation works. Granted, this additional layer does focus on private equity investment in healthcare, but there is already a California office that is charged with reviewing healthcare transactions.
AB 3129 would bring the oversight under the umbrella of the Office of the AG, is that the primary change?
Correct. And it doesn’t just give the AG oversight of private equity transactions—it's a much bigger scope in terms of the type of entities involved. The new law gives the AG oversight when a transaction meets certain thresholds, as to not overlap with the existing law.
California has had corporate-owned medical practices for decades. The California Medical Board has guidance, and folks in the marketplace generally know to follow it. On top of that, courts enforce the guidance. It's not like we have a scenario in California where you don't have an existing body of law to regulate these entities. So in my mind, adding the AG to the equation feels redundant.
(Editor’s Note: Holland & Knight released a report about these regulations that provides more context for Saran’s answer.)
What’s the concern, though? What is the negative outcome of adding more direct oversight from the AG?
An AG review process potentially affects deal making. It grants the AG powers that are usually reserved for the medical board or a dental board—those groups can already penalize a doctor's license for a breach of ethics. Now, the AG will potentially have the ability to enforce decisions reserved for medical boards and bring injunctions.
And there’s a fear the AG’s decisions could ultimately depend on the administration in power and be politically motivated?
Exactly—that is a fear out there. Third parties could bring complaints to the AG that spur an investigation. Typically it would be doctors who bring complaints to the state that would invalidate an arrangement or a transaction. If this new law passes, anyone can do it—associations, labor unions, all kinds of interested third parties. All they would have to potentially do is send a letter of concern to AG and then you could have an investigation.
Is there a legal framework in place that regulates the decision-making of the AG to ensure it’s in the best interest of the public?
There is. AB 3129 directs the AG what to look for using a public interest standard. They can’t just say ‘we don’t like this private equity company’ and use that as reasoning to block a transaction.
The potential benefits of this new California law to regulate private equity are well-established. In your opinion, what are the potential downsides the public may want to take into consideration?
There are a number of things. In short, the law could have the opposite effect of what it intends to do. Because if private equity leaves, someone is going to fill that void. AB 3129 could actually limit access to care or lead to increasing costs for patients, and ultimately create a situation where other industry stakeholders control the market.
On that note, existing healthcare businesses could also have issues raising capital to invest in technology, or to help offset some of the rising provider expenses and overall inflation. It may become more difficult for them to get access to capital needed to invest in growth, especially if they are an independent practice—and some doctors may even leave California as a result.
Another thing we need to think about is how this will impact the retirement plan of doctors. For some, the equity they have is all tied up in their businesses, and the law could negatively impact valuations for those looking to sell.
With everything that happened with Steward Health Care, the public pressure to see more regulations is not going to go away. In your mind, what would a good regulation look like that ensures a debacle like that doesn’t happen again?
That's a really interesting question. I am not a legislative expert and I don’t know if I have an answer for that. What I will say is, one end of the spectrum gets a lot of press and attention. Just like any issue, there are two sides here. And I think right now, one side—the negative side—is getting all the coverage. But there are a lot of positives of private equity investment, from upgrades to technology to expanded services for patients. I think we need to balance the conversation and talk about some of the benefits, so the public can get a more comprehensive picture of what’s happening.
Chad is an award-winning writer and editor with over 15 years of experience working in media. He has a decade-long professional background in healthcare, working as a writer and in public relations.