During the 2020 California legislative session, the legislature debated a bill (Senate Bill 977, which we covered during a webinar in July 2020) that would have required pre-approval from the California attorney general of an acquisition of a health care facility or provider. Had it become law, SB 977 would have imposed new requirements on private equity investors, as well as hospitals and health care systems, seeking to acquire hospitals, clinics, laboratories, ambulatory surgery centers, treatment centers and physician practices. SB 977 died without a final vote at the end of the 2020 legislative session. The 2021 legislative session already has taken up a similar cause. Assembly Bill 1132 (2021) has been introduced that would require attorney-general review of an acquisition of a health care facility or provider.

Assembly Member Jim Wood (D-Santa Rosa) introduced Assembly Bill 1132 on February 18, 2021. AB 1132 was referred to the Committee on Health on March 4, 2021. While it is too early in the legislative process to make any predictions about the bill’s prospects, the fact that a similar bill passed the California Senate and the Assembly Appropriations Committee less than a year ago suggests that stakeholders should pay close attention to AB 1132 as it proceeds through the legislative process.

Health provider or facility acquisitions

AB 1132, the Health Care Consolidation and Contracting Fairness Act of 2021, would require a medical group, hospital or hospital system, health care service plan, or health insurer that intends to purchase, or merge or consolidate with another entity, to provide written notice to the attorney general at least 90 days before entering an agreement with a value of $3 million or more. Because the bill broadly applies to any purchase, acquisition or control of a medical group, hospital or hospital system, health care service plan, or health insurer by an “entity,” most acquisitions among competitors and investments by private equity investors would likely be subject to attorney general review. The bill would apply to a large portion of the health care delivery system, but would not apply to non-physician providers, such as nurse practitioners, physical therapists, optometrists, dentists, etc.

Upon receipt of notice of a proposed consolidation, the attorney general would be authorized to consent to, give conditional consent to, or not consent to the agreement. The attorney general would be required to notify the entity of the decision within 90 days, subject to a potential extension. In particular, the 90-day period for review by the attorney general could be extended by an additional 45 days if: (1) the extension is necessary to obtain additional information; (2) the proposed transaction is substantially modified after the original notice; or (3) the proposed transaction involves a multi-facility health system that serves multiple communities.

The attorney general would be permitted to consider any factors that the attorney general deems relevant, including whether the transaction is likely to: (1) impact market competition or costs for payers, purchasers, or consumers; (2) improve the quality of care, such as the ability to offer culturally competent and appropriate care; and (3) maintain access to care in a rural community. As a result, the bill would grant the attorney general broad discretion to approve or deny any transaction valued at $3 million or more. This discretion would extend the attorney general’s authority much further than current state or federal antitrust laws.

The impact of health care consolidation on rural communities is a central theme of AB 1132. If the attorney general finds that access to care in a rural community will become more limited because of a proposed transaction, the attorney general could approve the transaction subject to conditions. The bill does not describe what type of conditions the attorney general may place on a proposed merger, acquisition or consolidation.

Payor contracting restrictions 

AB 1132 is broader in scope than its 2020 predecessor. In addition to requiring attorney general review of health care acquisitions, AB 1132 would prohibit a health care provider or health facility from entering into a contract with a health plan or health insurer that restricts the plan or insurer from steering an enrollee or insured to another provider or facility or requires the plan or insurer to contract with other affiliated providers or facilities. The bill also would prohibit making a contract contingent upon a health plan or insurer accepting specified payment rates or other terms for an affiliate of the health care provider or facility that is not a party to the contract. Furthermore, a health care provider or facility could not contractually restrict affiliates of a health plan or insurer from offering lower rates than what a provider or facility accepts from a contracting health plan or insurer. 

These restrictions on payor-provider contracting would significantly expand upon existing state and federal laws that prohibit anti-competitive terms and would potentially reduce the negotiating position of health care providers and facilities. If adopted, the bill would apply to any contract issued, amended, or renewed on or after January 1, 2022.

Health plan acquisitions

Similar to the proposed restrictions on health care provider and facility consolidation, the bill would require a health care service plan that intends to consolidate with another health plan to give notice to, and secure prior approval from, the director of the Department of Managed Health Care, who may disapprove a transaction or agreement if the director determines that such transaction or agreement would, among other things, substantially lessen competition in health care service plan products or create a monopoly on products for a specific line of business. For a major transaction, the director would be required to obtain an independent analysis of the impact of the transaction on enrollees, the stability of the health care delivery system, and other relevant provisions. A “major” transaction is defined as a transaction or agreement that (1) affects a significant number of enrollees; (2) involves a material amount of assets; or (3) adversely affects enrollees or the stability of the health care delivery system because of the entity’s market position.