By: Christopher A. Parrella, Esq., CPC, CHC, CPCO
Parrella Health Law, Boston, Ma.
A Health Law Defense and Compliance Firm

In a significant move aimed at increasing oversight of private equity investments in healthcare, the California Senate recently passed Senate Bill 2871, also known as the “Act Enhancing the Health Care Market Review Process.” This legislation, sponsored by Attorney General Rob Bonta, marks a critical step in regulating the influence of private equity and hedge funds in the state’s healthcare system. The bill has garnered strong support from consumer advocates, labor unions, and the California Medical Association, but it has also faced opposition from hospitals and private equity firms concerned about the potential impact on investment in the healthcare sector.

Key Provisions of the Bill

The bill mandates that private equity groups and hedge funds notify the California Attorney General’s office of planned acquisitions or investments in healthcare businesses and obtain official consent before proceeding. This new requirement extends to a wide range of healthcare entities, including clinics, physician groups, nursing homes, testing labs, and outpatient facilities. The bill also reinforces existing state laws that prohibit non-physicians from directly employing doctors or influencing their medical decisions, which is a primary reason for the California Medical Association’s strong backing.

By expanding the scope of the California Health Policy Commission’s (HPC) Material Change Notice (MCN) program, the bill aims to:

– Expand the Type of Transactions Subject to Review: The bill broadens the range of healthcare transactions that require an MCN, including significant for-profit investments, asset purchases, and acquisitions of control over healthcare providers.
– Increase Transparency: Private equity firms will now be required to submit detailed financial and corporate structure information as part of the MCN filing.
– Assess Long-Term Impact: The HPC will evaluate the cumulative impact of these transactions over time, ensuring that healthcare access, quality, and competition are not adversely affected.
– Prohibit Corporate Practice of Medicine (CPOM): The bill emphasizes that management services organizations (MSOs) and corporate employers cannot interfere with the clinical judgment of healthcare practitioners.

The Debate Over Private Equity in Healthcare

Private equity’s involvement in healthcare has been a contentious issue across the United States. Proponents argue that private equity firms provide much-needed capital to healthcare entities, allowing for expansion, modernization, and improvement of services. However, critics contend that the profit-driven nature of these investments often leads to higher costs for patients, reduced access to essential services, and a focus on short-term financial gains over long-term patient care.

In California alone, private equity investments in healthcare have surged dramatically, increasing from less than $1 billion in 2005 to $20 billion in 2021. This growth has led to concerns that the influx of private equity money could undermine the quality and affordability of healthcare services in the state. The bill’s proponents argue that increased oversight is necessary to protect consumers and ensure that healthcare remains accessible and affordable, particularly in underserved areas.

Implications for the Future

If enacted, this legislation could serve as a model for other states considering similar measures. The bill reflects a growing national trend toward increased scrutiny of private equity’s role in healthcare. Other states, including Massachusetts, have introduced or passed legislation aimed at regulating private equity transactions in healthcare, signaling a shift toward greater transparency and accountability in the industry.

As the California Senate moves toward a final vote on the bill, stakeholders from across the healthcare and investment sectors will be watching closely. The outcome of this legislation could have far-reaching implications for the future of healthcare investment in California and beyond.

Conclusion

The passing of Senate Bill 2871 by the California Senate is a clear indication of the state’s commitment to ensuring that private equity investments in healthcare are conducted transparently and in the best interests of patients. As the healthcare landscape continues to evolve, it is crucial for stakeholders to remain informed and engaged in these regulatory developments.

Christopher Parrella, ESQ, CPC, CHC, CPCO, is the founding partner of Parrella Health Law in Boston, Mass. The firm focuses exclusively on healthcare defense and compliance matters. Chris also travels the country on behalf of a wide range of healthcare organizations, lecturing on a variety of health care enforcement and compliance topics. Chris is one of a handful of health care attorney’s that are also Certified Professional Coders (CPC) and is a member of the AAPC’s National Legal Advisory Board and Ethics Committee.  He is also a Certified Professional Compliance Officer (CPCO) and Certified in Health Care Compliance (CHC.)