Power Play: California May Require Attorney General Approval for Transactions Involving Health Systems, Private Equity Groups, or Hedge Funds

Foley & Lardner LLPCalifornia Senate Bill 977 (SB-977), entitled “Health care system consolidation: Attorney General approval and enforcement,” is set for a June 9 hearing before the Senate Appropriations Committee. The bill has two main components: (i) prior approval of certain health care transactions; and (ii) new prohibitions on anti-competitive behavior by health systems. As noted below, the bill is opposed by the California Medical Association, California Hospital Association, Scripps Health, Sutter Health, and United Hospital Association, among others.

Prior Approval

Through the prior approval provisions of SB-977, the bill imposes on health systems general, private equity groups, and hedge funds a requirement that is similar to but more stringent than what is already in place for nonprofit corporations in California. 

First, SB-977 requires health care systems, private equity groups, and hedge funds to provide written notice to, and obtain written consent from, the California Attorney General prior to an affiliation or acquisition between the health care system and a health care facility or provider, or between the private equity group or hedge fund and a health care facility or provider. 

When does SB-977 apply?Different rules and standards will apply based on whether the proposed transaction value is over $500,000. Waivers may be requested when the filing party is located in a rural area.

Following notice, for transactions over $500,000, the Attorney General will have 60 days to take action (e.g., approve, request additional information, etc.) or to request additional information or extend the timeline. A public hearing may be required. In practice, the current Attorney General review process typically takes significantly longer than the timeframes set forth by statute. Notably, the Attorney General’s decision may be based on a recommendation by a Health Policy Advisory Board that would be created as a result of SB-977 and would include representatives from health care systems, health care providers, health plans, employers, and unions, among others (each of whom is bound by a conflict of interest standard based on the reasonable foreseeability of a material financial effect).

Attorney General ActionsCompetition

In addition to the prior approval requirement, SB-977 sets forth new restrictions on market power, authorizing the Attorney General to bring civil actions for violations (the greater of $1,000,000 or twice the gross gain to the health care system or gross loss to any other party). It also requires a court, in the event of a suit on this subject matter, to impose monetary relief for the state in the amount of three times the total damage sustained, costs including attorneys’ fees, and interest.

Status

There is strong Democratic support for the bill, including the California Attorney General, the California Labor Federation, Health Access California, and Western Center on Law and Poverty.  Opposition has been presented by the California Chamber of Commerce, the California Medical Association, California Hospital Association, Scripps Health, Sutter Health, and United Hospital Association. 

If passed, the legislation would impact transactions beginning January 1, 2021.

A Cross-Country Look

California has become increasingly concerned with the market power of health care systems, focused on the twin aims of cost and quality. In the past year, the Attorney General has reached landmark settlements imposing injunctive relief and requiring hundreds of millions in payments by health systems. SB-977 would very significantly increase the Attorney General’s jurisdiction over health care systems, actually allowing the Attorney General to prohibit certain types of acquisitions and affiliations. The California Hospital Association has stated that SB-977 would strain access to health care systems by creating an overly burdensome process for transactions. 

As a point of comparison, proposed California legislation compares dramatically with other States’ such as Massachusetts. The Massachusetts Health Policy Commission (MHP) has jurisdiction over health care transactions, but differs in many key respects including:

  1. MHP review is not triggered by private equity, hedge fund, or other investor activity, which is purely financial, but by deals involving hospital systems or between and among other types of health providers of a certain size that is material to the market;
  2. MHP has the right to assess the impact of a deal on healthcare pricing, and if material price increases above certain benchmarks are foreseen, to refer the matter to the Attorney General where the Attorney General may assess anti-competitive, market power aspects of the deal. MHP cannot approve or disapprove a deal.
  3. MHP has significant financial thresholds (e.g., $25 million in revenue) to limit review to market-shaping deals.
  4. Attorney General approval is generally focused on nonprofits selling tax exempt assets and market power as opposed to the source of financing for transactions.

Apart from traditional Attorney General jurisdiction, where previously tax exempt assets are being sold and Attorney General review is typical, the SB-977, if passed, could have a material impact on access to needed capital for struggling systems and put California at a disadvantage when compared to other States whose providers are partnering with various investors. The legislation does not discriminate between control transactions, working capital matters or other typical financing arrangements. Finally, the standards for consent (e.g., access to services) are not easily turned into simple objective metrics that fit all deal sizes and will chill potential private equity or hedge fund backing of transactions in California out of the gates.

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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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