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California Could See Regulatory Scrutiny of Post-COVID-19 Healthcare Transactions

July 07, 2020

If a proposed bill by the California Senate is passed, parties to certain post-pandemic healthcare transactions involving private equity groups, hedge funds, healthcare systems, facilities, and provider groups would need to plan for and obtain regulatory approval from the California attorney general.

What Is California Senate Bill 977 and When Would It Become Effective?

California Attorney General Xavier Becerra and Senator Bill Monning announced on May 13, 2020, that Senate Bill 977 (SB 977) passed out of the Senate Health Committee. SB 977, titled “Health care system consolidation: Attorney General approval and enforcement,” aims to regulate post-pandemic healthcare transactions by requiring approval from the California attorney general (AG) of certain affiliations or acquisitions involving private equity groups, hedge funds, healthcare systems, facilities, and provider groups.

If passed, parties to certain post-pandemic healthcare transactions would need to plan for and obtain regulatory approval from the AG. The proposed SB 977 would not apply to acquisitions or affiliations entered into before January 1, 2021, including subsequent renewals of certain affiliations.

How Would Healthcare Transactions in California Be Impacted and What Is the Purpose of This Legislation?

Under the current version of SB 977, a healthcare system, private equity group, or hedge fund must provide written notice to, and obtain the written consent of, the AG before entering into an affiliation or acquisition involving a healthcare facility or provider when the transaction value is more than $500,000.

The proposed SB 977 defines a healthcare facility as any place where health-related services are provided and defines a provider as an individual or group providing health-related services. Accordingly, the types of transactions that would be impacted by the proposed bill involve acquisitions of (1) hospitals, (2) other health facilities, (3) physicians, (4) clinics, (5) ambulatory surgery centers, and (6) laboratories.

The proposed SB 977 states that the AG cannot consent to an affiliation or acquisition between a healthcare system, private equity group, or hedge fund and a healthcare facility or provider, unless the healthcare system, private equity group, or hedge fund demonstrates that the affiliation or acquisition will result in a substantial likelihood of clinical integration or a substantial likelihood of increasing the availability and access of services to an underserved population.

Notwithstanding the foregoing, even if the applicable party is able to demonstrate that the affiliation or acquisition would result in a substantial likelihood of clinical integration or a substantial likelihood of an increase of the availability and access of services to an underserved population, the proposed bill authorizes the AG to deny consent to the affiliation or acquisition if there is a substantial likelihood of anticompetitive effects that outweigh the demonstrated benefits. The proposed SB 977 permits the AG to hold a public meeting to hear comments from interested parties before making a determination.

Would Any Healthcare Transactions Be Exempted Under California SB 977?

The current version of SB 977 contains a different process for a healthcare system that is acquiring or affiliating with a provider, group of providers, or healthcare facility for a transactional value of $500,000 or less or an academic medical center that is acquiring or affiliating with a provider, group of providers, or healthcare facility for any transactional value. With respect to these transactions, after the applicable party provides written notice to the AG, the AG is required to respond within 30 days, either not objecting to the transaction or raising concerns. If the AG does not respond within 30 days, the parties may proceed as if no objection was received.

Notably, while not entirely clear, it appears that the foregoing process does not apply to transactions of less than $500,000 involving a private equity group or a hedge fund. A part of the applicable provision makes a stray reference to private equity groups and hedge funds; however, the reference may be a drafting error.

The proposed SB 977 contains a waiver to the AG consent requirement for healthcare systems, private equity groups, and hedge funds located in defined rural areas. Under the current version of SB 977, an applicable party would make a request for a waiver in writing, and the AG may grant a waiver if one of the two following conditions exists: (1) the affiliation or acquisition would directly benefit consumers of healthcare services in the rural area by improving the access or availability of those services; or (2) the affiliation or acquisition is needed to improve the health, safety, and well-being of consumers of healthcare services in the rural area.

What Is the Likelihood That SB 977 Will Become Law as of January 1, 2021?

At this time, it is unclear whether SB 977 will ultimately pass and be signed into law by California Governor Gavin Newsom. Undoubtedly, a number of interested financial stakeholders in the healthcare industry, from for-profit and nonprofit healthcare systems to private equity and hedge funds, have gained extensive assets within California over the last several years, particularly in acquiring hospitals and medical practices, especially in ophthalmology, dermatology, and other “retail health” centric specialties.

In a June 23, 2020 bill analysis in support of SB 977, the AG argues that the coronavirus (COVID-19) pandemic has created enormous financial strain on hospitals and physician practices statewide, making these providers more susceptible to affiliation and acquisition attempts by large healthcare systems, private equity groups, and hedge funds. The AG further argues that if transactions are not regulated, they will result in large healthcare systems continuing to grow and utilizing abusive market practices to drive up prices and reduce access for patients. Opponents of SB 977 contend that it would strain access to the healthcare system by creating an extreme and burdensome process for transactions, including mergers and affiliations.

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Summer associate Jessie Totten contributed to this LawFlash.

Contacts

If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following:

Washington, DC
Michele L. Buenafe
Kathleen McDermott
Scott A. Memmott
Albert W. Shay
Howard J. Young
Danielle Elks
Jacob J. Harper
Ariel Landa-Seiersen
Joyce A. Cowan, Consultant

Houston
Donna S. Clark
Gregory N. Etzel
Susan Feigin Harris
B. Scott McBride
Sameer V. Mohan
Summer Swallow
Banee Pachuca
Sydney Reed
Kathleen P. Rubinstein, Senior Health Policy Analyst

Boston
Mark B. Stein

Chicago
Lauren Z. Groebe

Dallas
Janice Davis

Los Angeles
Brian M. Jazaeri

New York
Steve Navarro
Christina Melendi

Philadelphia
M. Erin Rodgers Schmidt
Barbara Shander

San Francisco
W. Reece Hirsch