A California bill to control healthcare mergers has stalled in the state legislature, marking the end — for now — of a proposal that drew fierce opposition from hospitals, physicians and private equity groups.

California’s two-year legislative session ended last week without the state assembly voting on the bill, known as SB-977. It aimed to address consolidation in the healthcare system by giving the state attorney general power to review and potentially block acquisitions of healthcare facilities or providers by private equity firms, hedge funds and large healthcare systems.

The legislative inaction effectively kills a proposal that appeared to be gaining momentum and had cleared several hurdles in recent months, including a favorable vote in the state senate.

Opponents said the measure could throw private equity investment in healthcare — one of the hottest sectors for buyout deals — into limbo in the nation’s most populous US state, and potentially beyond.

The bill’s supporters were unsure whether they had enough votes to pass it in the assembly and didn’t put it up for a vote before the session expired, said state Senator Bill Monning, a Democrat whose district includes the state’s central coast and who introduced the legislation in February.

The bill was supported by California Attorney General Xavier Becerra, as well as labor unions and state business groups concerned about rising healthcare costs. Opponents included groups representing California’s hospitals and physicians, the state Chamber of Commerce, and the American Investment Council, private equity’s largest trade and lobbying group.

Becerra, a Democrat whose office helped craft the legislation, said the goal was to gain some public oversight when companies providing critical services to the public change hands. His office already has the power to review mergers of nonprofit health providers, and the goal was to extend that authority to for-profit providers, in order to tamp down anti-competitive practices, he said.

Healthcare is “more and more becoming a commodity and not a service,” Becerra said. As providers consolidate, “we find that value is being extracted in ways that are not necessarily in the benefit of the patients.”

Becerra said the push for reform would continue despite the setback in the Democratically controlled legislature.

“You don’t always succeed the first time,” he said. “It’s a good idea whose day will come.”

California’s reform push came amid intense public scrutiny of the role of private equity firms and other investment vehicles in health care, particularly as the coronavirus pandemic has exposed holes in the nation’s medical system.

In Congress, Democrats have pushed bills requiring private equity firms to open up the books of hospitals they own and have probed the financial health and employee treatment of private equity-owned medical facilities.

Lawmakers have also investigated private equity firms over their role in the growth of surprise medical billing, in which an insured patient receives an unexpected bill for services not covered by the insurer. But legislation designed to prevent surprise bills has so far failed amid intense lobbying pushback by private equity-owned medical-staffing companies.

In California, Monning said he became concerned about private equity and hedge fund healthcare investments after the sale last year of the Watsonville Community Hospital, a facility in his district acquired by an investment vehicle through a sale-leaseback transaction. He said the bill was intended to provide oversight of such deals and, if necessary, make an acquirer commit to maintain a hospital’s services.

“The goal is to protect patient access,” Monning said. The bill “was designed to give the AG review authority, not with the intent of blocking all transactions, but of making sure existing services would be maintained after an acquisition, merger, or affiliation.”

The California Hospital Association and the California Medical Association both campaigned against the bill. CHA Chief Executive Carmela Coyle called it a dangerous measure that would give the attorney general too much power, while the CMA said it was an overbroad proposal that could force smaller practices out of business.

The AIC, the private equity lobbying group, wrote to lawmakers urging a no vote on the bill, saying it “will likely cause a drag on any M&A activity in California” and the nation as a whole. The group’s CEO, Drew Maloney, wrote that the bill wouldn’t give companies a right to appeal or question the attorney general’s decision on a merger, and that the measure offered little clarity about how an investor could prove a deal would improve healthcare access.

A new version of the bill could be reintroduced next year, when a new legislative session begins after November state elections, but it will need to be sponsored by a different lawmaker.  Monning is leaving the Senate this year because of term limits but said there remains “keen interest” among his colleagues in pushing through this bill or a similar measure.

Becerra, a former assembly member, said he intends to continue attempting to address excessive concentration in the healthcare sector.

“The loss of competition is becoming more and more obvious,” he said. “I’m hoping policymakers will continue to see the evidence that shows we need to get a grip on what’s going on in health care.”


Source: Wall Street Journal

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