On September 28, 2024, California Governor Gavin Newsom vetoed Assembly Bill (AB) 3129, which had been passed by the California state legislature on August 31, 2024 and has received significant attention from the health care industry and private investment markets. AB 3129 would have posed a significant obstacle for private equity groups attempting to invest in California health care companies.
Instead, Newsom vetoed the bill, stating that the Office of Health Care Affordability (OHCA) was established in 2022 specifically “to review and evaluate health care consolidation transactions through cost and market impact reviews (CMIR) of mergers, acquisitions, or corporate affiliations involving health plans, hospitals, physician organizations, pharmacy benefit managers, and other health care entities.” The governor noted that although OHCA does not have the authority to block or disapprove a proposed transaction, it can refer a transaction to the state attorney general, who may further investigate and can use existing authorities to challenge proposed transactions that may limit competition or increase costs in the health care industry.
While AB 3129 would have specifically applied to certain private equity and hedge fund transactions in the health care industry, the existing California Health Care Quality and Affordability Act, which was signed into law on June 30, 2022, already requires any health care entities proposing to enter into a material health care transaction in California on or after April 1, 2024 to submit notice to OHCA at least 90 days before closing. OHCA can also extend the timeframes by initiating a CMIR, which can result in a delay of up to several months before the parties can consummate the transaction.
Health Care Entities Subject to Material Change Transactions Now Must File Notice
Notably, at the same time the California legislature was voting on AB 3129, OHCA was finalizing amendments to its material health care transaction regulations to clarify the application of the law and close certain loopholes. Specifically, the original version of the regulations (finalized December 18, 2023) required only health care entities that were a “party to” a material change transaction to file notice with OHCA. However, the amended regulations, effective August 22, 2024, also require health care entities that are “subject to” a material health care transaction to file notice. This effectively closes the loophole that could have allowed transaction parties to avoid filing simply by creating holding companies above health care entities or otherwise ensuring that the only “parties” to a transaction are not health care entities, even if they have health care entities as subsidiaries.
While Newsom appreciated the goals of ensuring California consumers receive affordable and quality health care, he stated that “OHCA was created as the responsible state entity to review proposed health care transactions, and it would be more appropriate for the OHCA to oversee these consolidation issues as it is already doing much of this work.” So while AB 3129 is gone (for now), the complex OHCA material change transaction notice regulations remain intact, now incorporating these recent updates that effectively broaden the scope of their application.
Takeaways
Although this veto seems like a win for health care investors in California, OHCA’s expanded authority through the regulatory amendments and Newsom’s comments still present a significant challenge to any health care transaction in the state. While the landscape is considerably less restrictive than if AB 3129 had been signed into law, the existing California Health Care Quality and Affordability Act has already complicated health care deals in the state. However, private equity deals can still be done in California. But these challenges underscore the importance of engaging experienced regulatory counsel early in any deal in California to analyze the applicability of the law to the proposed transaction and assist in navigating the preparation, filing, and CMIR process, all while mitigating risks inherent to this relatively new process.
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