California’s healthcare ecosystem may soon experience significant regulatory changes as Assembly Bill 3129 (AB 3129) heads to Gov. Gavin Newsom's desk for approval. If signed, the law will introduce strict regulations on private equity (PE) and hedge fund transactions with California healthcare entities that will increase compliance burdens and change deal approval processes where the California Attorney General (AG) will have broad authority to restrict and condition transactions in the name of public interest. The bill is expected to take effect on January 1 if Newsom doesn’t veto it by September 30, making it crucial for stakeholders to understand its requirements and implications.
Under AB 3129, a “private equity firm” or “hedge fund” involved in certain transactions with healthcare providers, facilities, or operations in California is generally required to notify the AG no later than 90 days before the anticipated closing date, or an earlier date on which another state or federal agency receives notice (i.e., HSR filings). Before the transaction can close, the AG must consent to the transaction at the end of such 90-day period (and any applicable extension imposed by the AG). Notably, the bill authorizes the AG to deny or conditionally approve transactions that might diminish competition, reduce healthcare access, or harm the public interest.
AB 3129 defines a "private equity firm" as investors primarily engaged in capital raising or returning, and in the investment or disposal of specified assets, while "hedge funds" are classified as pools of investor-managed funds aimed at earning returns. To avoid overbroad application of these terms, the final bill excludes:
If AB 3129 is not vetoed, it will cover any direct or indirect acquisition involving PE or hedge funds that results in a change of control or the transfer of a "material amount" of a healthcare entity’s assets or operations. The term "material amount" is defined to include transactions affecting over 15% of a healthcare entity’s market value, ownership, or operations. This threshold can also be met through governance arrangements that give PE firms and hedge funds substantial control, such as supermajority voting rights, veto powers, or exclusivity provisions.
Healthcare providers and groups also need to be aware of how they are classified under AB 3129. The pending bill applies to any PE or hedge fund transaction with a: (i) “healthcare facility” other than a hospital; (ii) a “provider group,” or any healthcare group with ten or more providers and/or over $25M in revenues; or (iii) a “provider” if the PE or hedge fund group has been directly or indirectly involved in a transaction involving any healthcare group listed in (i) through (iii) in the past seven years.
Under AB 3129, the following deal structures may be subject to the AG’s expanded regulatory authority and scrutiny:
Although the bill does not specify which documents need to be submitted with the notice filing, PE firms and hedge funds can expect to disclose, at a minimum, a copy of the deal documents and other related information that would enable the AG to sufficiently assess the likely impact of the transaction on competition, healthcare costs, and access to healthcare services in the state.
Despite the expanded coverage, AB 3129 includes some exemptions. Transactions involving hospitals, dermatology practices, and certain public entities, such as county-owned facilities or health districts, are not subject to the notice and consent requirements. Additionally, deals already established before January 1 may be grandfathered in if there are no major changes in the corporate structure.
Even with these exemptions, AB 3129 may significantly influence healthcare transactions in California, potentially delaying closures, subjecting agreements to more rigorous examination or generally chilling the healthcare transaction market in the state.
AB 3129 introduces new obstacles for PE firms and hedge funds investing in healthcare. Transactions will require advanced planning to comply with the 90-day plus notice and consent process, with the possibility of delays if the AG extends the review timeframe or requires a public meeting. Investors must be ready to defend how their transactions serve the public interest, as the AG retains broad authority to assess whether deals would harm competition or healthcare access.
Healthcare providers, especially smaller practices, may face reduced access to private investment since heightened regulatory challenges may discourage potential investors. Conversely, AB 3129 supports California's existing ban on the corporate practice of medicine, further limiting private investors' influence on clinical decision-making. For instance, AB 3129 would restrict PE and hedge-fund controlled entities from making certain clinical employment decisions, controlling provider and payor contracting, and determining coding and billing and/or diagnostic testing decisions, amongst others. This may preserve healthcare providers' professional independence but may complicate management agreements with investors.
While there is a larger national trend toward increased oversight of private equity in healthcare, AB 3129 would position California at the forefront of regulations that restrict private investments' impact on healthcare competition and access. As the industry adapts to these reforms, timely preparation and careful assessment of transaction models, including some level of competition, cost and access impact analyses, are critical for compliance and avoiding delays.