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

1. AB 3129 Is Not the Law…Yet

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

2. Defined Terms Matter

As with most legal issues in the health care regulatory space, defined terms matter. AB 3129 regulates certain types of transactions involving private equity and hedge fund investment with specific types of California health care entities, as defined in the bill. The bill imposes an AG notice and consent process for transactions involving certain licensed health care facilities, or a “provider group.” The provider group must meet certain revenue thresholds and be comprised of 10 or more specific types of licensed health professionals to trigger AG review. By contrast, AG notice – but not consent – is required for transactions involving a “provider” or a “nonphysician” provider, that meet certain revenue thresholds. 

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

3. There Are Clear Exceptions

There are many exemptions to the AB 3129 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 AG may grant a waiver 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 is facing bankruptcy or a 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 was amended several times, there are still several questions that remain unanswered in the language of the current version of the bill. The bill only applies to provider groups, providers, and nonphysician providers that meet certain “gross annual revenue” thresholds, but the bill does not provide a definition of that phrase, or indicate whether it is limited to revenue generated for the provision of health care services in California. As it is still unclear whether and when the bill will be signed into law, there may be some timing challenges for parties who are required to submit a 90-day pre-closing notice for transactions intending to close shortly after the January 1, 2025 effective date. If the bill is signed into law, there may be regulations passed over the next few months that clarify some of these unknowns.

5. Existing Agreements May Need to Be Reviewed

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 physician, 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 having control of certain aspects of the practice. These limitations are codifying existing laws and guidance relating to the prohibition of the corporate practice of medicine. AB 3129 also prohibits covenants not to compete and non-disparagement clauses in management contracts between a private equity group or hedge fund and a physician, psychiatric, or dental practice.