June 05, 2020

California Healthcare M&A Deals Could Be Facing Increased Regulatory Scrutiny


An expansive proposed law would require the California Attorney General’s prior approval for many significant healthcare acquisitions or affiliations in the state and would also impose greater restrictions on potentially anticompetitive practices by hospital chains. California Senate Bill 977 (“SB-977”), titled “Health care system consolidation: Attorney General approval and enforcement,” is set for a June 9, 2020, hearing before the Senate Appropriations Committee after having cleared the Senate Health Committee. If passed, the law would come into effect at the beginning of 2021.

Required Notice and Prior Approval Requirement

As proposed, SB-977 would require “health care systems,” hedge funds and private equity groups to notify and obtain consent from the Attorney General prior to “acquiring or affiliating [with]” a California healthcare hospital or non-hospital facility or a provider of physician, surgery or laboratory services when the transaction value exceeds $500,000. A “health care system” is defined as a chain of two or more hospitals within multiple counties or three or more hospitals within one county. The proposed law does not clearly define acquiring or affiliating activity or benchmark those concepts to changes in control or other readily discernable transactional thresholds. Notably, the definition of “affiliate” is broad enough to encompass the formation of Accountable Care Organizations in connection with the Affordable Care Act.

The written notice to the Attorney General must provide information sufficient for the Attorney General to evaluate the nature of the acquisition or affiliation and to determine that the proposed transaction will result in a substantial likelihood of “clinical integration” (defined as a reduction in costs or an increase in the quality of care as a result of the transaction), a substantial likelihood of increasing the availability and access of services to an underserved population, or both. SB-977 would require the Attorney General to deny consent to an affiliation or acquisition that, in the Attorney General’s judgment, fails these criteria. In addition, the Attorney General would be permitted, but not required, to deny consent to any transaction if, in the Attorney General’s judgment, there is a “substantial likelihood of anticompetitive effects” (defined to include “raising market prices, diminishing quality, reducing choice, increasing the total cost of care, or diminishing availability of, or diminishing access to, hospital or health care services”) that outweigh the benefits of a substantial likelihood of clinical integration, a substantial likelihood of increase in services to an underserved population, or both.

These criteria are not accompanied by easy-to-measure or bright-line tests, so a significant degree of discretion is expected to remain with the Attorney General, as is currently the case with approvals of non-profit/charity healthcare transactions. The Attorney General’s grant or denial of consent is effectively final, subject only to very deferential judicial review on a writ of mandate.

Within 60 days of receiving the transaction notice, the Attorney General must inform the transacting parties whether (i) the transaction has been approved, (ii) a waiver from approval requirements has been granted (applicable where the notifying acquiring or affiliating party is located in a rural area and has requested a waiver), or (iii) additional information from the parties is needed before a decision can be made. If additional information is requested, the Attorney General must approve or disapprove the transaction within 45 days of receiving that information. These timelines are subject to various extensions in the discretion of the Attorney General, and timing may be affected further where a public hearing is determined to be necessary.

As proposed, the law would subject California healthcare deals valued at less than $500,000 only to a notice requirement to the Attorney General, not prior written consent. However, the Attorney General may make any transaction subject to the prior approval regime that applies to larger deals.  

Potentially Anticompetitive Hospital Chain Conduct

The second part of the bill supplements existing antitrust law to authorize the Attorney General to challenge conduct by “health care systems” with “substantial market power” in any market where the conduct has “a substantial tendency to cause anticompetitive effects” (defined to include “raising market prices, diminishing quality, reducing choice, increasing the total cost of care, or diminishing availability of, or diminishing access to, hospital or nonhospital health care services”). Where the health care system employs exclusive dealing (i.e., an agreement, even if voluntary, requiring a health plan to use its services exclusively) or tying (i.e., an agreement conditioning access to one service on the health plan accepting another service, whether explicitly or implicitly, including through an “economic imperative,” which could encompass attractive package deals), the conduct is presumed to be unlawful.

The Attorney General would be authorized to seek civil fines for violations, set at the greater of $1 million or twice the gross gain to the healthcare system or gross loss to any other party. In addition, courts would be required to award the state three times the total damages sustained; costs, including attorneys’ fees; and interest.

The anticompetitive competition portion of SB-977 appears to be meant to address some of the conduct the Attorney General and a class of private plaintiffs took on in their recent class-action antitrust suit against Sutter Health, in which they contended that Sutter used its hospitals’ power in some local markets to force health plans to accept terms for other Sutter hospital and non-hospital providers that they would not have accepted in a freely competitive market. The bill’s prohibitions, however, apply effectively to virtually all hospital chains and create a strong presumption of illegality whenever such hospital chains that have market power anywhere enter into exclusive deals and bundled agreements, even as to agreements that might benefit health plans and their customers.

New Health Policy Advisory Board

SB-977 contemplates formation of a “Health Policy Advisory Board” to provide guidance to the Attorney General in evaluating healthcare markets in California, including on the state of competition. The board members would include various healthcare industry stakeholders (e.g., representatives from healthcare systems, healthcare providers, health plans, employers that purchase healthcare services, and union representatives). The bill permits the Attorney General to request and consider the board’s comments and recommendations on acquisitions and affiliations that are under review.

Related Services & Industries

Stay Up To Date With Our Insights

See how we use a multidisciplinary, integrated approach to meet our clients' needs.