California Bill Seeks to Expand Oversight of Health Care Transactions

California Assembly Bill 1415 (AB 1415) is proposing significant changes to the regulatory landscape of health care transactions in the state.The bill aims to broaden the scope of entities subject to oversight by the Office of Health Care Affordability (OHCA), potentially impacting private equity groups, hedge funds, management services organizations (MSOs), and various health care providers. Stakeholders should monitor the bill’s progress, as its passage could lead to new compliance obligations and affect future transactions.

key Provisions of AB 1415

AB 1415 focuses on three main areas:

• Expanding the definition of a “health care entity” to include management services organizations (MSOs).
• Imposing notification requirements on private equity groups, hedge funds, and newly formed business entities involved in certain transactions.
• Broadening the definition of “provider” to include health systems and entities that own, operate, or control a provider.

Inclusion of Management Services Organizations

Currently, OHCA statutes define a “health care entity” as a payor, provider, or a fully integrated delivery system. AB 1415 seeks to expand this definition to specifically include MSOs. The bill defines an MSO as “an entity that provides administrative services or support for a provider, not including the direct provision of health care services.” These services may encompass functions like utilization management, billing and collections, customer service, provider rate negotiation, and network development.

This broadened definition could capture a wider range of administrative service providers than traditionally considered MSOs. For instance,a business exclusively providing billing and collections to health care organizations might fall under the “MSO” definition,even without managing a health care practice directly. The bill’s open-ended language could extend OHCA’s oversight to intermediaries that support providers but lack managerial control,like third-party administrators (TPAs) and health care technology firms.

A broad interpretation of AB 1415 could impose compliance burdens on entities offering administrative services without directly influencing health care delivery, potentially increasing regulatory complexity for non-clinical service providers. for example, a small technology firm offering a niche software solution to hospitals might suddenly find itself subject to OHCA regulations, adding unforeseen costs and administrative overhead.This could stifle innovation and discourage investment in the health care technology sector. The bill could inadvertently create a barrier to entry for smaller companies, potentially consolidating market power among larger, more established players.

Notification Requirements for Private Equity and Hedge Funds

AB 1415 would establish a notification requirement for private equity groups, hedge funds, and newly formed business entities involved in transactions with health care entities. These entities would be required to provide written notice to OHCA before entering into agreements that:

• “Sell, transfer, lease, or otherwise dispose of a material amount of a health care entity’s assets to another entity.”
• “Transfer control, obligation, or governance over a material portion of the health care entity’s operations or assets.”

The definition of a “private equity group” in AB 1415 is broader than that in recently proposed SB 351, which similarly targets private equity and hedge fund involvement with management arrangements of medical and dental practices in California.

If enacted,California could become one of the first states mandating private equity groups to report such transactions,and the only state to explicitly include hedge funds in its health care transaction review law. This heightened scrutiny on financial entities entering the health care sector reflects growing concerns about the potential impact of profit-driven motives on patient care and access. The question remains whether these reporting requirements will effectively deter practices detrimental to health care quality or simply add another layer of bureaucratic red tape.

expanded Definition of “Provider”

AB 1415 proposes expanding the definition of “provider” to include private and public health care providers, health systems, and any entity that owns, operates, or controls a provider.

The current OHCA statute applies to most health systems in California as the definition of “provider” includes acute care hospitals and other provider organizations comprising a “health system.” AB 1415 would separate “health systems” into their own category of “provider,” encompassing for-profit and nonprofit health systems, and combinations of hospitals and other physician organizations or health care service plans. It remains unclear whether adding “health systems” to the definition of “providers” will further expand OHCA’s applicability.

By expanding the definition of “provider” to include entities that own, operate, or control a provider, AB 1415 would extend regulatory oversight beyond direct care providers to financial and management entities, including holding companies, parent corporations, and private equity-backed groups. Such as, a real estate investment trust (REIT) that owns the building housing a hospital could potentially be subject to OHCA oversight, even though it has no direct involvement in patient care.

Potential Impact and Considerations

AB 1415 signifies a potential expansion of regulatory oversight in California’s health care market. by broadening the scope of health care entities required to notify OHCA of material transactions, the bill aims to increase openness, prevent unchecked consolidation, and include oversight extending beyond direct care providers.

However, the bill’s proposed broad definitions may capture more entities than intended, increase compliance burdens, and slow down transactions in an already complex regulatory habitat. The ambiguous language used in defining key terms like “material amount” and “control” could lead to confusion and inconsistent request of the regulations. This could create uncertainty for businesses operating in the health care sector, potentially discouraging investment and innovation.

Looking Ahead

AB 1415 represents a significant development in California’s health care regulatory landscape. As the bill progresses through the legislature, health care providers, investors, and management entities should monitor its progress closely. If enacted, AB 1415 will create new compliance obligations that could significantly impact future health care transactions and corporate ownership structures. Stay informed and prepared to adapt to these potential changes.