California Passes Law Requiring Attorney General Approval for Certain Healthcare Investments and Emphasizes Requirements for MSO-PC Models

Executive Summary

• Pre-Closing Notice or Consent: If signed by Governor Newsom, Assembly Bill 3129 (AB 3129) will mandate that, starting January 1, 2025, certain healthcare investors provide a 90-day written notice to, or obtain consent from, the California Attorney General (AG) before proceeding with transactions involving specific healthcare facilities and providers.
• Administrative or Management Service Contracts: With California’s growing scrutiny of management services organizations (MSO) and professional corporations (PC)-based healthcare investments and the clarified corporate practice of medicine rules outlined in AB 3129, healthcare investors and providers utilizing the MSO-PC model should carefully review their MSO-PC agreements and, more importantly, assess their actual operations to ensure compliance with these regulations.

AB 3129, passed by the California legislature on August 31, 2024, will, if signed by Governor Newsom, require healthcare investors to notify and obtain written consent from the California AG before investing in certain healthcare facilities and providers, starting January 1, 2025.

Introduced in February 2024, the bill has undergone several amendments, drawing close attention from the healthcare investment community. Initially, AB 3129 included provisions that would have drastically altered healthcare investment in California by banning the use of MSOs—structures that enable non-physician investors to manage healthcare entities while adhering to state corporate practice of medicine (CPOM) laws. This proposed MSO ban faced significant opposition from industry experts and was ultimately removed from the bill. While the removal of the MSO prohibition has relieved many investors and healthcare providers, AB 3129 still imposes significant requirements, including burdensome requirements on investors to provide notice and obtain the AG’s approval before certain investments can be made.

Additionally, AB 3129 bars healthcare investors from exerting control or interfering with the professional judgment of healthcare providers through the MSO-PC model. Although these provisions align with existing CPOM guidance, they highlight California’s increasing focus on MSO-PC based healthcare investments. All healthcare investors and providers that utilize the MSO-PC model must reexamine their MSO-PC documents, and in particular, their actual operations, to ensure compliance with corporate practice of medicine requirements.

Notice and Consent Requirements for Healthcare Investments

AB 3129 mandates that healthcare investors provide notice and obtain consent from the California AG if certain conditions related to a proposed transaction are met. These requirements can be grouped into three main categories: 1) investor criteria, which defines the types of healthcare investors covered by the law; 2) healthcare facility or provider criteria, which defines the types of healthcare investments subject to the law; and 3) material transaction and change of control criteria, which specify the types of deals that fall under the law. Each of these categories is explained below. 

1. The Investor Criteria. AB 3129 applies to “private equity groups” and “hedge funds,” as defined, that invest in healthcare facilities and providers. These terms are defined broadly enough to also include venture capital investors, even though they are not mentioned by name. Specifically, a “private equity group” is defined as investors who “primarily engage in the raising or returning of capital and who invest, develop or dispose of specified assets,” while a “hedge fund” is defined as a “pool of funds managed by investors for the purpose of earning a return on those funds.” The law excludes natural persons or entities that contribute but do not otherwise participate in the management of the private equity group or hedge fund. Additionally, AB 3129 explicitly exempts entities that provide or manage debt financings secured by healthcare facility assets, such as banks, commercial real estate lenders, and bond underwriters.
2. The Healthcare Facility and Provider Criteria. The obligation to provide written notice and obtain consent from the California AG is triggered when an investor intends to acquire certain “healthcare facilities,” “provider groups,” or “providers” as defined by AB 3129. The law references various sections of the California Health and Safety Code and Business and Professions Code to define healthcare facilities, which include entities such as primary care clinics, specialty clinics, outpatient settings where certain types of anesthesia are administered, ambulatory surgery centers, accredited outpatient settings, skilled nursing facilities, clinical laboratories, and imaging facilities. Notably, hospitals are excluded from the definition of healthcare facilities subject to the law. The law also applies to investments in certain “provider groups.” Under AB 3129, a “provider group” is defined as either a) a group of 10 or more licensed health professionals or b) a group of two to nine licensed health professionals that generates gross annual revenue of $25 million or more. Provider groups whose primary purpose is to deliver dermatology services are excluded from this definition.

   Additionally, smaller practices (consisting of two to nine licensed health professionals) may be subject to the notice and consent requirements if the investor has made other healthcare-related investments within the past seven years.

3. The Material Transaction or Change of Control Criteria. An investment in a healthcare facility or provider, as defined under AB 3129, only triggers the law’s notice requirements if the transaction is considered material or involves a change of control, as specified. AB 3129 broadly defines “transactions” as any direct or indirect acquisition in any manner (such as leases, transfers, exchanges, options, receipts of a conveyance, or creation of a joint venture), by an investor of a “material amount of the assets or operations,” or a “change of control,” of a healthcare facility or provider operating in California.

   A transaction is deemed to involve a “material amount of assets or operations” if it affects more than 15 percent of the market value or ownership shares of the healthcare facility or provider. Additionally, a transaction may still be considered material even if it involves less than 15 percent of the market value or ownership shares, provided it grants rights significant enough to effect a change in control, such as supermajority rights, veto rights, exclusivity provisions, and similar provisions. A “change of control,” on the other hand, means an arrangement in which an investor establishes a change in governance or sharing of control over healthcare services provided by a healthcare facility or provider.

Notice and Consent Requirements

For transactions that meet the criteria above, the acquiring party must submit notice to and obtain written consent of the California AG prior to completing the transaction. The notice must be sent to the AG’s office at least 90 days prior to the expected closing date or the same day that another state or federal agency receives regulatory notice of the transaction, including a filing under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended. This 90-day notice period may be extended by an additional 45 days if the AG needs to obtain additional information, or the proposed transaction involves a multifacility health system that serves multiple communities or is substantially modified. The timeline may be extended by an additional 14 days if the AG decides to hold a public meeting. AB 3129 does not specify the form that the notice must take. Instead, the bill states that the notice shall contain information sufficient to evaluate the nature of the transaction and whether consent should be granted. 

In deciding whether to provide consent to a proposed transaction, the AG will assess whether the transaction a) may have a substantial likelihood of anticompetitive effects, such as a substantial risk of lessening competition or tending to create a monopoly, or b) may create a significant effect on the access or availability of healthcare services. When making this determination, the AG will apply the public interest standard to determine whether the transaction is in the interest of the public in protecting competitive and accessible health care markets. This standard would provide broad authority for the AG to consider a wide range of factors, including the risk of anticompetitive effects from lessening competition in horizontal or vertical markets or increased leverage to foreclose competitors. The AG may also consider views from local communities and any other positive or negative effects of the transaction. Although the legal standard set forth in AB 3129 contemplates a substantive antitrust analysis that has similarities to the analysis conducted by the federal antitrust agencies under the Clayton Act, the initial 90-day notice period in AB 3129 (in contrast to the 30-day waiting period under the HSR Act) may complicate the regulatory timeline for acquiring persons.

At the end of the review period, the AG must issue a written determination stating whether it will consent, provide conditional consent, or not consent to the transaction.  If the AG fails to issue a written determination and the notice period described above has expired, the parties are free to close the transaction. AB 3129 also enables the acquiring private equity group or hedge fund to pursue an evidentiary hearing before an administrative law judge after receiving the AG’s written determination. If, at the conclusion of the evidentiary hearing, the AG does not consent or gives conditional consent to the transaction, the private equity group or hedge fund may pursue judicial review of the decision.

Corporate Practice of Medicine Updates. Although the final AB 3129 bill does not include the controversial MSO prohibition, it still aims to clarify California’s CPOM restrictions. Specifically, AB 3129 outlines that an MSO involved in any manner with a physician, psychiatric, or dental practice must not interfere with the professional judgment of healthcare providers, including:

• determining what diagnostic tests are appropriate for a particular condition;
• determining the need for referrals to, or consultation with, another healthcare professional;
• being responsible for the ultimate overall care of the patient, including treatment options available to the patient; or
• determining how many patients a healthcare provider shall see in a given period of time or how many hours the healthcare provider shall work.

Additionally, an MSO must not exercise control over, or be delegated the power to do, any of the following:

• owning or otherwise determining the content of patient medical records;
• selecting, hiring, or firing physicians, physiatrists, dentists, allied health staff, and medical assistants based, in whole or in part, on clinical competency or proficiency;
• setting the parameters under which a physician, psychiatrist, dentist, or physician, psychiatric, or dental practice shall enter into contractual relationships with third-party payers;
• setting the parameters under which a physician, psychiatrist, or dentist shall enter into contractual relationships with other physicians, psychiatrists, or dentists for the delivery of care;
• making decisions regarding coding and billing procedures for patient care services; or
• approving the selection of medical equipment and medical supplies for the physician, psychiatric, or dental practice.

While these stipulations align with existing California CPOM guidance, healthcare investors and providers utilizing the MSO-PC model should review their MSO-PC agreements to ensure that the above activities are not explicitly or implicitly included in the administrative services provided by the MSO. More importantly, investors and providers must audit their actual operations to ensure compliance with CPOM regulations. Although MSO-PC documents are often drafted by experienced healthcare counsel, investors and providers may not fully understand or adhere to these rules in practice, leading to potential issues when seeking future investments or planning an exit, or lead to scrutiny from regulatory bodies.

To maintain compliance with CPOM requirements, healthcare investors and providers using the MSO-PC model should also implement policies and procedures to ensure adherence with CPOM and provide regular training for employees on the topic, many of whom may be unfamiliar with CPOM restrictions.

Restrictive Covenants

AB 3129, likeSB 699, reflects California’s continued efforts to promote unfettered competition within the state. If signed into law, AB 3129 will prohibit any contractual provision between a physician, psychiatric, or dental practice run by a private equity group or hedge fund (or any entity directly or indirectly, in whole or in part, controlled by a private equity group or hedge fund) and a provider that explicitly or implicitly prohibits that provider from competing with such practice after the end of their relationship. The law does not appear to affect the status quo in California. It may, however, broaden California’s prohibition on noncompetes in this context because its noncompete ban extends to clauses that “implicitly” prohibit competition. Although it is unclear how a court would interpret what constitutes an “implicit” prohibition, the intent of the language appears to be to prohibit provisions that indirectly prohibit provider competition, such as non-solicitation provisions, holdover clauses, forfeiture-for-competition clauses, or liquidated damages provisions.

Additionally, AB 3129 prohibits covered practices from prohibiting their providers from disparaging or otherwise commenting, in any manner, as to “any issues involving quality of care, utilization of care, ethical or professional challenges in the practice of medicine or dentistry, or revenue-increasing strategies employed by the private equity group or hedge fund.” Such a prohibition would extend beyond non-disparagement provisions to other contractual provisions, such as those related to confidentiality. Nondisclosure provisions may be interpreted to violate this aspect of the statute insofar as they could be read to prohibit a provider from commenting on any of the subjects mentioned in the statute.

Practices that fall within the purview of AB 3129 should be prepared to review their agreements with the foregoing in mind. They should consider whether any of their agreements with providers could be construed as “implicitly” prohibiting competition. They also should be prepared to include carveouts to nondisclosure provisions and other similar provisions if necessary to ensure that, under AB 3129, the provisions are not voided due to the chilling effect they may have on permissible commentary under the law.