California: Five Things to Know About AB 3129 | Foley & Lardner LLP

The California Legislature recently passed a bill targeting private equity and hedge fund transactions with healthcare providers. If enacted, AB 3129 would require a private equity group or hedge fund to notify and obtain the consent of the California Attorney General (AG) before entering into a transaction with certain types of California healthcare institutions and healthcare provider groups. The regulatory approval process set forth in AB 3129 is distinct from the Attorney General’s current authority to approve nonprofit healthcare transactions and the newly created transaction approval process governed by the California Office of Health Care Affordability. Below are five key takeaways for stakeholders about the potential impact of AB 3129.

1. AB 3129 is not yet law

The California Legislature passed AB 3129 at the end of the legislative session, and the bill has been sent to the Governor’s desk for consideration. The Governor has until the end of September to sign the bill. If signed, the Attorney General’s notice and consent process will apply to transactions that go into effect on or after January 1, 2025. If the bill becomes law, notice to the Attorney General must be provided at least 90 days before the transaction closes. Investors considering healthcare transactions in California in the immediate future will need to be aware of the potential impact of AB 3129 on the timing of transactions, and whether additional regulatory notice and approval will be required prior to closing.

2. Defined terms are important

As with most legal issues in healthcare regulation, defined terms matter. AB 3129 regulates certain types of transactions involving private equity and hedge fund investments with specific types of California healthcare entities, as defined in the bill. The bill requires a process of notice and consent from the attorney general for transactions involving certain licensed healthcare facilities, or a “provider group.” The provider group must meet certain revenue thresholds and be comprised of 10 or more specific types of licensed healthcare professionals to trigger the attorney general’s review. In contrast, notification from the attorney general—but not consent—is required for transactions involving a “provider” or “non-physician” provider, which meet certain revenue thresholds.

Additionally, the private equity group or hedge fund must be a party to a “transaction” involving a “significant amount of assets or operations” or a “change in control” of a health care facility, provider group, or provider. There are many ways for a private equity group or hedge fund to invest in or work with a health care entity, and the parties will need to analyze whether their specific arrangement requires notification under the bill.

3. There are clear exceptions

There are numerous exemptions to AB 3129’s notice and consent process, including several that were added in the days before it was passed by the legislature. AB 3129 does not apply to transactions between private equity groups or hedge funds and hospitals, or with dermatology practices. The Attorney General may grant an exemption for certain transactions with a private equity group or hedge fund if there is a substantial likelihood that the health care entity party to the transaction will face a bankruptcy or liquidation event. Notice and consent is also not required for transactions subject to review by the California Department of Managed Health Care or the Department of Insurance, certain transactions involving a county, the University of California, and for transactions with health care districts.

4. There are many unknowns

Although AB 3129 has been amended several times, several questions remain unanswered in the language of the current version of the bill. The bill only applies to provider groups, providers, and non-physician providers that meet certain “gross annual revenue” thresholds, but the bill does not provide a definition of that term or indicate whether it is limited to revenue generated for the provision of health care services in California. Since it remains unclear if and when the bill will be enacted, there may be timing issues for parties that are required to submit a 90-day pre-closing notice for transactions that expect to close shortly after the January 1, 2025, effective date. If the bill is enacted, regulations could be adopted in the coming months to clarify some of these unknowns.

5. Existing agreements may need to be revised

In addition to the notice and consent process, AB 3129 addresses several limitations on agreements between a private equity group or hedge fund and a medical, psychiatric or dental practice in California. For example, AB 3129 imposes limitations on the ability of a private equity group or hedge fund to interfere with the professional judgment of physicians, psychiatrists or dentists in making health care decisions or in controlling certain aspects of the practice. These limitations codify existing laws and guidelines regarding the prohibition on the corporate practice of medicine. AB 3129 also prohibits non-compete and non-disparagement clauses in management agreements between a private equity group or hedge fund and a medical, psychiatric or dental practice.

We will continue to monitor the progress of AB 3129 as it impacts healthcare transactions in California with private equity or hedge funds.

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