California legislation that would give the attorney general authority to block private equity firms’ moves into the health-care industry is seen as a potential model for other states looking to limit consolidation and protect patient care.
The bill (AB 3129), which the state’s Senate Judiciary Committee approved July 2, would authorize the attorney general to approve or deny an acquisition or change of control between a private equity firm and a health-care entity. The measure, which is supported by the state’s powerful medical trade associations and consumer advocacy groups, is set to go to the Senate Appropriations Committee before heading to the Senate floor. The Senate would have to vote on it in August before the legislative session ends.
Researchers and attorneys consider the proposal, sponsored by Assembly Speaker Pro Tempore
Labor unions and patient groups have called for more rigorous action on the issue, pointing to national research finding an association between private equity acquisition of health-care service providers and higher costs for patients and insurers, lower quality of care, and worse financial outcomes for entities acquired.
Lobbying from hospitals led the California bill’s sponsor to accept amendments that would exempt for-profit hospitals from the requirements over concerns that requiring deals to get attorney general approval would make it more difficult to raise capital. Private equity trade groups and hospital associations argue mergers and acquisitions help preserve access to health care, especially among rural and other traditionally underserved communities.
With the California legislation on its way toward passage, analysts say more states could follow California’s lead in giving state governments the authority to prevent certain deals from going through. Doing so will require lawmakers to balance the potential benefits of private equity investment to support health-care facilities with the risks of salary cuts, an increase in patient adverse events, and higher patient costs.
“If the goal of the state is to promote access to high quality cost-effective care, I don’t think private equity investment or participation in health care should be automatically considered contradictory to this goal,” but “there may need to be a reimagining of how to achieve” that, said Kenneth Yood, a partner at Holland & Knight LLP in Los Angeles who represents health-care providers and companies.
Reporting Rules
Some states have already enacted and implemented laws requiring notices of proposed acquisitions and their anticipated impacts on health-care costs and quality. But research on the effects of acquisitions for patients and providers raises questions as to whether these laws go far enough.
Private equity investment in the health-care sector reached a total of $750 billion in deals between 2010 and 2019, and more than 780 private equity deals were announced or closed in the health-care industry in 2023—the third-highest number on record, according to PitchBook, a venture capital data firm.
The health-care sector became an increasingly attractive industry for private equity firms starting in the early 2000s. This was driven, in part, by aging populations and growing demand for health-care services, said Zirui Song, an associate professor of health-care policy and medicine at Harvard Medical School who has conducted several studies on private equity in health care.
A study Song co-authored and published in JAMA in December 2023 found private equity acquisition was associated with a roughly 25% increase in hospital-acquired conditions, which was driven by falls and catheter–associated bloodstream infections. Song is also researching staffing cuts after private equity acquisitions, which he hypothesizes could be contributing to the increase in hospital adverse events.
A New York law that took effect in August 2023 requires physician practices and other health-care entities to provide a 30-day pre-closing notice to the New York Department of Health for transactions resulting in a $25 million or more increase in a health-care entity’s total gross in-state revenue. But Nili Yolin, a partner in Holland & Knight’s New York office, said “not much has changed” for the health-care entities she counsels as they’re working on acquisitions and deals.
“This is like a fact-gathering exercise, at least that’s what it appears to be, because there is no right to unwind transactions like these,” Yolin said.
California’s notification requirement, under which health-care entities must notify the state’s Office of Health Care Affordability, or OHCA, of proposed material change transactions at least 90 days prior to closing, went into effect in April 2024. OHCA can then decide whether to conduct a cost and market impact review, but the office doesn’t have the authority to approve or deny the deals.
Consumer advocacy group Health Access California has helped lobby in support of AB 3129, pointing to a recent California Health Care Foundation report linking private equity consolidation in health care with lower patient satisfaction, mixed changes to operating costs, and worsened care quality, among other outcomes.
Attorney general oversight on these deals “is a vital consumer protection,” the group said in an emailed statement. “Without it, these large and mostly secretive big corporations can continue to buy up hospitals, doctor practices, and nursing homes with no avenue for public vetting or comment.”
California, Massachusetts
Private equity firms and health-care entities worry the legislation in California and elsewhere will have a chilling effect on investment, a concern that’s likely to linger as states consider proposals to tighten enforcement over private equity in the health-care sector.
The California legislation “would slow down the ability to engage in the kinds of transactions that would be subject to the reporting requirements and require AG approval,” Yood said. He also argued the bill has “a predisposition to believe that a private equity deal is problematic or inappropriate, unless proven otherwise.”
The American Investment Council, which represents US private equity and growth capital firms, has opposed Wood’s legislation, arguing in a June 20 letter to the California Senate Judiciary Committee that the bill would establish a dual process under which certain changes involving health-care providers would be subject to existing OHCA regulations that went into effect this year, while “others would be subject to a new, more burdensome and chilling Attorney General review and approval process.”
Massachusetts also has legislation (H. 4643) that passed the state House in May that would expand existing transaction requirements and enhance penalties for failure to report deals to the state. Steve Walsh, president and CEO of the Massachusetts Health & Hospital Association, said in an emailed statement that while the group supports a “close examination of private equity’s role in our system,” the state must also ensure a role for private equity investment “to innovate and improve patient care delivery.”
Legislation in Pennsylvania would add written notice requirements for hospitals, nursing homes, and other facilities. Similar bills were also introduced this year in Connecticut, Florida, Maine, Minnesota, and Washington, but these bills either failed or are on pause with the conclusion of the state’s legislative session.
As states consider a path forward, Yood said a better understanding of private equity’s role and proper oversight that doesn’t overly limit investment should be part of legislative discussions.
“Certain types of providers that provide safety net services would welcome private investment if they are still free to expand their scope of services, increase quality, and do all those things that they think are necessary,” Yood said.
—With assistance from Andrew Oxford.
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