California SB 977: Legislation Could Give Unprecedented Power to the California Attorney General to Delay or Block Certain Healthcare Transactions

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If signed into law, California Senate Bill 977 (SB 977) would significantly expand the California Attorney General’s (AG) ability to review and prohibit certain transactions by healthcare systems, academic medical centers (AMCs), private equity groups and hedge funds. The pending legislation aims to combat anticompetitive practices and over-consolidation in the healthcare industry, which can lead to higher prices for consumers.

SB 977 would create a process for AG review of certain types of acquisitions and change-of-control transactions, establish a multi-disciplinary Health Policy Advisory Board to analyze healthcare markets and assist the AG in reviewing the terms of healthcare transactions. It would also provide new enforcement tools for the AG to reduce anticompetitive behavior.

SB 977 passed the California Senate floor on June 26 and, as of today, the bill is under review by the California Assembly’s Health Committee and scheduled for a committee hearing on August 4. The bill must pass in the California Assembly before it can reach Governor Newsom’s desk to be signed into law.

Review Process for Healthcare Acquisitions and Change-of-Control Transactions

SB 977 provides for AG review and approval of certain acquisitions and change-of-control transactions involving healthcare facilities or providers. Currently, the California Corporate Code requires nonprofit corporations that operate or control health facilities or certain other facilities to seek approval from the AG before a sale of assets or transfer of control. (Cal. Corp. Code §§5914, 5920). The AG cannot consent to any such transaction in which the nonprofit seller restricts the type of services that may be provided at the facility that is the subject of the transaction. (Cal. Corp. Code §5917.5).

SB 977 would apply to healthcare system, private equity, hedge fund and AMC acquirers pursuing acquisitions and change-of-control transactions of varying amounts involving facility and provider targets.

If passed, SB 977 would apply to acquisitions and change-of-control transactions by healthcare systems, private equity groups, hedge funds and AMCs involving a “health care facility” or “provider,” each as broadly defined therein. Onerous notice requirements, which are described below, would apply to healthcare systems pursuing acquisitions and change-of-control transactions exceeding $500,000 in value and private equity groups and hedge funds pursuing transactions of any value.

Healthcare systems pursuing acquisitions and change-of-control transactions valued at $500,000 or less, and AMCs pursuing transactions of any value, would be subject to less onerous notice requirements. Of note, rural healthcare systems, private equity groups and hedge funds could request a waiver from the demonstrated benefit requirement described below.

Private equity, hedge fund and certain health system acquirers would need to describe a transaction’s potential impact on the healthcare market when seeking AG approval under SB 977.

The notice submitted by private equity groups, hedge funds and, for larger transactions, healthcare systems must contain sufficient information to determine the impact of the transaction to cost, quality of and access to healthcare, among other effects on the healthcare market.

SB 977 would require the AG to deny consent to acquisitions or change-of-control transactions by private equity groups and hedge funds and, for those transactions valued at more than $500,000, by healthcare systems where the acquirer cannot demonstrate that the transaction would result in a substantial likelihood of “clinical integration,” a substantial likelihood of increasing the availability of and access of services to an underserved population, or both. SB 977 defines “clinical integration” as a showing by the acquiring entity that there will be a likely reduction in costs to the benefit of consumer care and outcomes or an increase in the quality of care as a result of the transaction.

Notices regarding acquisitions and change-of-control transactions by healthcare systems with a transaction value of less than $500,000 and by AMCs for any transaction value would not be required to include information regarding the anticipated clinical integration.

SB 977 would give the AG broad discretion to bar transactions based on public interest concerns.

Even if a healthcare system, private equity group or hedge fund carries its burden of demonstrating such benefits, the AG would have the discretion to deny consent to the transaction based on public interest concerns if the AG were to find a substantial likelihood of anticompetitive effects that outweigh the benefits of anticipated clinical integration, increased services to an underserved population or both. Potential anticompetitive effects include higher prices, diminished quality, reduced choice, and diminished availability of and access to hospital and healthcare services.

Healthcare transactions could be stalled by information requests from the AG under SB 977.

Once written notice of a proposed transaction is submitted to the AG, the AG must notify the potential acquirer within 60 days (or, for healthcare system transactions valued at or less than $500,000 and AMC transactions subject to the law, within 30 days) (1) whether the transaction is cleared; (2) for rural acquirers, whether the AG will waive the approval requirements due to the needs of and anticipated direct benefits to rural communities; or (3) request more information about the transaction. If the AG requests additional information regarding the transaction, the AG review period is extended to the date that is 45 days following the AG’s certification that the parties to the transaction have substantially complied with all requests for additional information. The AG may also extend the review period by an additional 14 days if the AG decides to hold a public meeting regarding the transaction. If the AG does not respond to written notice of a proposed transaction within 60 days (or, for healthcare system transactions valued at or less than $500,000 and AMC transactions subject to the law, within 30 days), then the transaction may proceed.

The creation of the Health Policy Advisory Board under SB 977 could increase the AG’s capacity to review a larger volume of healthcare transactions.

SB 977 also requires the AG to establish a multi-disciplinary Health Policy Advisory Board for the purpose of evaluating and analyzing healthcare markets in California and providing recommendations to the AG. The Health Policy Advisory Board would, upon the request of the AG, review written information submitted to the AG regarding proposed acquisitions and change-of-control transactions. Following review, the Health Policy Advisory Board would provide the AG with written information regarding whether the AG should grant or deny consent to a transaction. SB 977 provides parties to an acquisition or change of control with an avenue to appeal a final adverse determination by the AG.

Additional Enforcement Tools: New Sanctions on Anticompetitive Practices in the Healthcare Industry

If passed in the California Assembly, SB 977 would significantly strengthen the AG’s ability to combat anticompetitive practices in the healthcare market and impose strict sanctions on those deemed to be in violation. These new measures sanction healthcare systems with substantial market power that engage in conduct tending to cause anticompetitive effects. In particular, healthcare systems with substantial market power that engage in coercive sales practices or exclusive dealing arrangements are presumed to be acting unlawfully.

As SB 977 is currently drafted, market power is determined based on market share: a healthcare system with at least 60% market share will have a rebuttable presumption of substantial market power, and a healthcare system with at least 75% market share will have a non-rebuttable presumption of substantial market power.

For healthcare systems in violation of these measures, SB 977 would impose civil penalties amounting to the greater of (1) twice the value of the gross gain to entity engaging in anticompetitive practices, (2) twice the gross loss to any other party to the transaction, or (3) $1,000,000. State relief could amount to three times the total damage sustained.

Potential Impact of SB 977

If signed into law, SB 977 would provide the AG with unprecedented oversight of healthcare market consolidation and the business practices of healthcare businesses in California. SB 977 would grant broad authority to AG Xavier Becerra to block many transactions that he, with input from the Health Policy Advisory Board, determines are not beneficial to state or local healthcare markets.

At a minimum, SB 977 will result in delays in the closing of many transactions that would not otherwise require governmental consents and approvals. California AG Xavier Becerra strongly supports the passage of SB 977, but the law faces significant opposition from many participants in the California healthcare community.

This alert describes SB 977 as amended through July 27, 2020. As of the date of this publication, SB 977 remains under review in the California Assembly’s Health Committee and a committee hearing is set for August 4. We will continue to monitor the progress of this bill.

The authors would like to thank summer law clerk Mary-Kathryn McKinney for her contributions to this content. Mary-Kathryn McKinney is a law student at the University of North Carolina School of Law and is not licensed to practice law.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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