California Eyes Oversight of Private Equity Health Care Deals

Private equity firms and hedge funds would need approval from California’s attorney general to buy health care facilities in the state if legislators approve a proposal to expand oversight of the industry.

The measure (A.B. 3129) comes amid mounting scrutiny of private equity’s expansion into health care over the last decade, a boom that has seen firms buy hundreds of hospitals as well as nursing homes and provider groups.

The bill’s author, Assembly Speaker Pro Tempore Jim Wood (D), said such deals deserve more scrutiny to understand how competition, costs, and the quality of care could be effected.

“Demonstrate for us that this is going to be better for the patients,” he said.

Some lawmakers counter that the measure would only make it harder for struggling health care systems to find buyers, however, and stifle deals that could help keep some facilities open.

Competition, Access Criteria

The legislation would require a private equity group or hedge fund to give written notice to the attorney general before the acquisition or change in control of a health-care facility, like a hospital or long-term care home. The measure would also cover the acquisition of some provider groups.

If the attorney general determines the deal would likely have “anticompetitive effects” or significantly effect health-care access in the community where the facility operates, he could reject the deal or impose conditions on the facility.

The attorney general already has the power to review and attach conditions to deals involving nonprofit health-care facilities. Those conditions can include price caps or requirements on the particular services provided by the facility.

The push to expand the AG’s review jurisdiction comes after a somewhat quieter but still big year for private equity dealmaking in the health-care sector. More than 780 private equity deals were announced or closed in the industry during 2023, a decline from 2022 but still the third-highest number on record, according to PitchBook.

That comes as private equity has built a larger presence in health care over the last decade. Annual deal values went from an estimated $41.5 billion in 2010 to $119.9 billion in 2019, according to a 2021 study from the American Antitrust Institute.

The Private Equity Stakeholder Project tallies 22 hospitals in California that are currently owned by private equity.

About half of those facilities are run by Apollo Global Management’s ScionHealth, which was created out of LifePoint Health Inc.’s acquisition of Kindred Health in 2021.

Beyond Hospitals

Wood, the legislation’s author and a dentist, said he became more interested in the issue when one investor bought several of the nursing homes in the sprawling, largely rural district he represents along the Northern California coast.

“They’re small,” he said, “but when you cobble them together, it’s significant.”

While such deals are often cast as improving efficiency, he argued that such consolidation can reduce competition and drive up costs without improving care for patients.

Attorney General Rob Bonta (D) is backing the legislation, arguing it will help crack down on profiteering.

Senate Minority Leader Brian Jones (R) argues it’s an inappropriate role for the attorney general, though. He has proposed rolling back the attorney general’s power to impose conditions on the sales of nonprofit hospitals, contending that measures such as price caps only quash acquisitions that could otherwise keep struggling facilities open.

Expanding that authority to acquisitions of private health-care facilities only heightens that risk, he added.

“It’s just going to push all these transactions into bankruptcy and unfortunately, there’s a consequence to that,” said Jones.

Wood’s measure could get a hearing as soon as March. Some major trade groups have yet to weigh in on the legislation but it is likely to get support from labor unions, an influential constituency at the state capitol.

The California Nurses Association said that while it wasn’t involved in introducing the legislation, it supports expanding the attorney general’s authority over health care transactions.

“We know that health care conglomeration is a growing problem, particularly where private equity or hedge funds purchase struggling hospitals and health-care facilities, only to quickly close critical services or sell parts of a facility that are vital to our communities but are viewed as unprofitable,” said Carmen Comsti, California Nurses Association’s lead regulatory policy specialist.

Meanwhile, legislators in other states have also moved to tighten oversight of health care industry dealmaking.

Oregon legislators created a program in 2021 with the power to review deals in the industry for criteria such as quality of care, health equity and affordability.