Investment entities—and healthcare practices contemplating transactions with such entities—should consider the potential implications of AB 1415 on any potential market transactions that could be affected by the legislation.
The California State Assembly recently introduced Assembly Bill 1415, which would require hedge funds, private equity groups, venture capital groups and other investment entities to comply with the requirements and face potential enforcement under the California Health Care Quality and Affordability Act. The Act requires covered providers to lower healthcare costs, establishes reporting requirements for certain marketplace transactions and subjects covered providers to penalties for violations. Investment entities—and healthcare practices contemplating transactions with such entities—should consider the potential implications of AB 1415 on any potential market transactions that could be affected by the legislation.
The California Health Care Quality and Affordability Act
The Act was passed in 2022 in response to rising healthcare costs, with the purpose of tasking a single entity, the Office of Health Care Affordability (OHCA), part of the Department of Health Care Access and Information, with developing a comprehensive strategy for reducing such costs. That strategy includes both analyzing the healthcare market for ways to reduce cost and for any material changes in the market as well as taking corresponding enforcement actions.
Concerning costs, OHCA’s main tasks include determining drivers of spending, identifying ways to increases price transparency and, most importantly, establishing annual cost targets. OHCA establishes both statewide cost targets and sector-specific cost targets. For example, last year, OHCA approved a statewide cost target of no more than 3 percent growth in healthcare annual spending for 2025; this target will start with a 3.5 percent target in 2025 and gradually decrease to 3 percent for 2029 and beyond. OHCA assesses “healthcare entities” (currently defined as any payer, provider or fully integrated delivery system) for compliance with cost targets and may assess the following enforcement actions against noncompliant entities, in the following order:
- Provide technical assistance to the entity to assist it with compliance.
- Require or compel public testimony by the healthcare entity regarding its failure to comply with the target.
- Require submission and implementation of performance improvement plans, including input from OHCA.
- Assess administrative penalties in amounts initially commensurate with the failure to meet the targets and in escalating amounts for repeated or continuing failure to meet the targets.
Concerning material changes in the market, the Act defines “material change” as “any change in ownership, operations, or governance for a health care entity, involving a material amount of assets of a health care entity.” Any entity about to undergo a material change must notify OHCA at least 90 days prior. Exempt from this requirement, however, are nonprofits, entities undergoing certain niche transactions and any healthcare provider that meets the statewide or certain sector-specific cost targets. Once an entity notifies OHCA, the agency will then analyze the proposed change to determine if it is likely to affect the healthcare market significantly and, if so, conduct a thorough investigation into and issue a public report on those effects.
If an investigation suggests that the material change may involve unfair methods of competition, anticompetitive behavior or anticompetitive effects, as construed by OHCA, the agency may refer its findings to the California attorney general for further review. OHCA can also sue for specific performance, injunctive relief and other equitable remedies to enforce these material change requirements, and OHCA is entitled to attorney’s fees and costs for such suits. Thus, given the enforcement actions for cost target noncompliance, the threat of referral to the state attorney general and the possibility of OHCA lawsuits, parties that fail to reduce healthcare costs or that contemplate anticompetitive behavior can face significant penalties for doing so.
Assembly Bill 1415
AB 1415 expands enforcement to address market consolidation and other concerns raised by the involvement of hedge funds, private equity groups, venture capital groups and other investment entities in the healthcare industry. It adds broad definitions for “health system” (to include any hospital system, any combination of hospitals and physician organizations or any combination of hospitals, physician organizations and healthcare service plans or insurers), “hedge fund,” “management services organization” and “private equity group,” and it modifies the existing definition of “provider” to include both health systems and any entity that owns, operates or controls a provider. Since “providers” are among the entities that must comply with the Act’s requirements, these changes bring the investment side of the healthcare industry within the ambit of the Act and share with those entities the responsibility for lowering healthcare costs and the penalties for anticompetitive conduct.
AB 1415 also alters Section 127507 of the Act, “Monitoring of cost trends; notice of material changes to agreements or transactions,” by creating an independent notice requirement for entities like hedge funds and private equity groups. Specifically, hedge funds, private equity groups and any newly created business entity that was created to enter into transactions with healthcare entities must notify OHCA of certain agreements or transactions between that entity and any healthcare entity (or its owner). The agreements or transactions covered by this requirement are those that involve selling or otherwise disposing of a material amount of the healthcare entity’s assets or that would transfer control, responsibility or governance of a material amount of the healthcare entity’s assets or operations. OHCA will treat such notices the same way it treats material change notices. Thus, these changes subject such entities to increased scrutiny for any transactions that potentially implicate anticompetition concerns.
Ramifications
This legislation potentially subjects hedge funds, venture groups and other investment vehicles to new transaction-related reporting requirements, heightened penalties for certain activities and potential fines for failing to lower healthcare costs sufficiently.
AB 1415 still must pass into law before that becomes the case, and there are indicators in both directions for whether or not it will. In September 2024, Governor Gavin Newsom vetoed a similar bill, Assembly Bill 3129, that would have subjected major investment entities to scrutiny similar to that described in AB 1415, but enforced by the California attorney general instead of OHCA. That veto may suggest that Governor Newsom will take similar action on AB 1415. On the other hand, Governor Newsom’s key concern with AB 3129 was that it would have removed certain transactions from OHCA’s purview. Further, the fact that the California State Assembly introduced a similar bill just five months after AB 3129’s veto suggests continued interest from the legislature in this issue, as does the fact that the California State Assembly recently introduced a related bill, Senate Bill 351, to limit the involvement of private equity groups or hedge funds in physician affairs and prohibit certain related transactions.
Therefore, hedge funds, private equity groups, venture capital groups and similar investment entities that AB 1415 would add to the Act, as well as any healthcare practices contemplating deals with such entities, should consider the potential implications of AB 1415 on any planned market transactions and prepare to alter their transactions accordingly if necessary.
For More Information
If you have any questions about this Alert, please contact Sean P. McConnell, Taylor Hertzler, any of the attorneys in our Antitrust and Competition Group or the attorney in the firm with whom you are regularly in contact.
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