California Senate Bill (SB) 977, if passed, would broaden the type of healthcare transactions that require California Attorney General (AG) review and approval. SB 977 would require that a healthcare system, private equity group or hedge fund provide written notice to, and obtain the written consent of, the AG prior to any acquisition of or affiliation with a healthcare facility or provider.

IN DEPTH

The bill defines a healthcare system as an entity that includes or owns two or more hospitals in multiple counties or three or more hospitals in one county. Acquisitions include direct or indirect purchases of any manner, including but not limited to leases, transfers (including but not limited to, any arrangement, written or oral, that alters voting control of, responsibility for, or control of the governing body of the provider), exchanges, options, receipt of conveyances, creation of joint ventures, or any other manner of purchase of all, or any part of, the assets of a healthcare facility or provider by a healthcare system, private equity group or hedge fund. The bill defines an affiliation as an agreement, association, partnership, joint venture or other arrangement in which a healthcare system 1) sets up a cooperative relationship involving a bundling of healthcare services with a healthcare facility or provider, 2) shares control over healthcare services provided by such a facility or provider, or 3) acquires direct or indirect control over the operations of a healthcare facility or provider, in whole or in substantial part.

Standards for Transaction Approval by AG

Unless the acquisition or affiliation at issue will result in a substantial likelihood of clinical integration (defined as a reduction in costs for the benefit of consumer care and outcomes, or an increase or improvement in the quality of care), a substantial likelihood of increased availability and access to services in an underserved population, or both, the AG must deny consent to the transaction. The AG may also deny consent to a transaction if there is a substantial likelihood of anticompetitive effects (such as raising market prices, diminishing quality or reducing choice) that outweigh the benefits of clinical integration or increased services to underserved populations. This type of analysis requires the transactions to be reviewed by the antitrust division of the AG’s office, rather than by the charitable trusts division. Waivers are available for certain transactions involving healthcare systems in rural areas.

The AG has 60 days from the receipt of written notice to clear the transaction, grant the waiver or request additional information. If additional information is requested, the AG then has 45 days to grant or deny consent to the transaction. The review period may also be extended if the AG decides to a hold a public meeting regarding the transaction, or if the parties substantially modify the acquisition or affiliation. If the AG denies consent to a transaction, any of the parties may appeal the denial by a writ of mandate to the superior court.

Additional Grounds for AG Actions

This bill would make it unlawful for a healthcare system to have substantial market power and act in a way that has a substantial tendency to cause anticompetitive effects (such as raising market prices, diminishing quality, reducing choice or increasing costs). A healthcare system will also be presumed to be acting unlawfully if it has substantial market power and its conduct involves tying or exclusive dealing. A healthcare system’s substantial market power can be shown by 1) conduct that has an actual substantial anticompetitive effect, or 2) a sufficiently substantial market share in one or more markets for any service in trade or commerce (presumed if a healthcare system’s market share is greater than 60%). Civil fines imposed for such violations may be calculated as either $1 million, or as twice the gross gain to the healthcare system or gross loss to any other party multiplied by two, whichever is greater.

Bill Support/Opposition and Progress

SB 977 is supported by AG Xavier Becerra and California labor unions, and is opposed by the California Chamber of Commerce, the United Hospital Association, the California Hospital Association, the California Medical Association, Sutter Health and Tenet Health. On May 13, 2020, the bill passed 7–2 in the California Senate Health Committee. Next, it will be voted upon in the Appropriations Committee and then the Senate generally. If the bill passes both, it will go to the California Assembly and then to the governor.

Conclusion

This legislation would create burdensome and unnecessary processes of review for healthcare transactions while giving the AG arbitrary and absolute discretion to determine when the relevant criteria are met, without clear parameters. Any fees and fines obtained through civil actions will be deposited in the AG’s antitrust account within the general fund, possibly incentivizing the AG to bring such civil suits against healthcare systems. Additionally, while it is early in the process, the relative ease with which the bill passed the Health Committee, the support of the AG, similar bills in other states that have gained traction, and a general desire by many to keep the healthcare market fair and competitive, particularly during uncertain times, suggest there may be an actual chance that the bill will be passed in both houses and approved or signed by the governor.