California Bill Would Require State Review of Private Equity Deals in Health Care

A piece of legislation going through the California state assembly and senate to increase scrutiny of PE investments in healthcare has been warmly welcomed by consumer organisations, labour unions and the California Medical Association but opposed by hospitals that fear a source of funding. 
 
The bill authored by State Attorney General Rob Bonta would extend to private equity groups and hedge funds of dozens of types of health care businesses and would require the permission of his office for their acquisition. It also sustains state laws that prevent employment of doctors by other nonphysicians, or directing their activities, a factor the doctor association may have supported it. 
 
Private equity firms solicit cash from institutions like pension funds and usually purchase business that they reckon can be managed for superior returns. They turn to increasing revenues and selling the acquired assets for many times their cost, though sometimes they resort to that only after trying to spin them off. 
 
That may be beneficial to future retirees and sometimes to companies that have been poorly managed that require an injection of capital and a change of strategy. The problem, according to critics, is that this equation is not healthy for health care. The deals being done by private equity in the sector are coming under more pressure across the country as concerns grow over the impact of such activity with regards health services being more expensive of worse quality and resulting in less access to urgent care services. 
 
Critics of the measure, which include the state hospital association, and the California chamber of commerce, and a national advocacy group for private equity, claim the bill would dampen investment. Industry of hospital has already won the support of legislators to exclude sellings of for profit hospitals from the new law. 
 
‘We chose not to make that amendment,’ Bonta said in an interview. “But we still have a strong bill that offers very important shields”. 
 
The above legislation would still pull together a nearly all-inclusive list of medical business outfits such as clinics, groups of physicians, nursing facilities, testing laboratories, and appointed outpatient facilities to mention but a few. Nonprofit hospital deals are already under the review of the attorney general. 
 
It may be voted on as soon as this month if it gets through a state Senate committee. 
 
Globally, health care private equity has reached a $1 trillion mark with respect to buy side within the previous decade as reported by The Commonwealth Fund. They have been most interested in transactions with physician practices, which has increased sixfold in a decade and often results in increased prices. Others types of outpatient services, and the clinics as well, have also has been targeted. 
 
The volume of PE health care transactions raised 20- fold in California from 2005 to 2021, rising from below $1bn to $20bn as analysed by the California Health Care Foundation. Private equity firms are observing the pending legislation but it has not deterred investment in California –yet, as indicated in a recent research conducted by PitchBook. 
 
Some of the challenges generated by private equity in health care have been described in some surveys and a series of reports of KFF Health News. 
 
JAMA, which published this research last December, found a greater probability of adverse events, including patients’ infections and falls at PE hospitals in contrast to other establishments. While analysts argue that there is still more work to be done to understand how patient care is being reshaped, the impact on cost cannot be in doubt. 
 
“After watching a private equity acquisition of the service we began receiving significantly higher bills for the identical service or for one that was clearly inferior,” said Kristof Stremikis, director of Market Analysis and Insight at the California Health Care Foundation. 
 
A vast majority of private equity transactions in health care are below $119. 40,000 annual fee limit above which they and have to inform federal regulators, therefore, many operate below the government’s view. The Federal Trade Commission is getting more active, and in the last year it has sued a private equity-backed anesthesia group for anti-competitive behavior in Texas. 
 
Several other states such as Connecticut, Minnesota and Massachusetts are also deliberating on a legislation kind which will increase transparency on private equity deals. 
 
Not all private equity firms are bad operators, said Assembly member Jim Wood, a Democrat from Healdsburg, but review is essential: In the mouth of one of the characters: “If you are good, then you should not be afraid of this. ” 
 
The bill would mandate the attorney general to review of transactions to asses their effect on quality and availability of care and on competition and prices in the region. 
 
Critic argue that private equity operations involve a bulk of acquisitions funded by debt that is brought on the acquired firm. Quite often, where the private equity groups involve are interested in real estate, they will sell off the property to provide instant returns to the investors and then the new owners of the property recover cost by charging the acquired company rent. 
 
That was the case of the financial ruin of Steward Health Care, a multistate hospital system that was owned by Cerberus Capital Management, a private equity firm, from 2010 to 2020, as identified by the Private Equity Stakeholder Project, a nonprofit organization in support of the bill, CA. Steward filed for Chapter 11 bankruptcy in May In another paper by the group Other scholars have said that almost every struggling healthcare firm in the US is controlled by private equity firms.

Critics of the legislation say that it would destabilise a lot of the much-needed investment in an industry which has steep operating costs. “Our fear is that it will halt supply of funds that can advance health care,” said Ned Wigglesworth, a representative of Californians to Protect Community Health Care, a group of organizations against the legislation. He said that the process of having to undergo a review by the attorney general for instance would deter private funders. 
 
Advocates of private equity investment highlight, according to what they claim, certain positive examples of California health care. 
 
Children’s Choice Dental Care, for example, said in a letter to state senators that it treats more than 227,000 children for dental visits mostly through Medi-Cal in a year. “Your group has been able to open 25 stores because you have been able to obtain funding from a private equity firm,” the group wrote. 
 
Ivy Fertility, which has clinics in Californa and eight other states, wrote in a letter to state senators that private investment has improved its work to help those who need fertility treatment, and that the need for such treatments has grown. 
 
As the authors rightly point out, it is on this background that private equity investors are not the only ones making money out of the sick; not even the nonprofit organizations. One vivid example of a hospital being taken to court is Sutter Health, a big nonprofit hospital chain; they had to pay $575 million after Xavier Becerra, the then-Attorney General, sued them for unfair contracting and pricing. 
 
“It is useful to examine ownership classes as such, such as this private equity class, but really, as a benchmark we should ultimately look at behavior, and, I mean, anybody can do what these particular private equity firms do,” said Christopher Cai, a physician and health policy researcher at Harvard Medical School. He added, however, that private equity investors are “more likely to employ financially risky or profit-only viewpoint. ”