Updated: Nov 20, 2020
California Senate Bill 977 (“SB 977”), as most recently amended on August 6, 2020, would significantly extend the reach of the California Attorney General’s (“AG”) authority to review health care transactional activities in California. Specifically, the proposed legislation aims to (i) significantly expand the power of the AG to review and approve health care transactions in the state, (ii) expand the AG’s ability to pursue litigation against health care systems for anticompetitive conduct; and (iii) create a new health policy advisory board that advises the AG on whether to approve transactions and evaluates health care market conditions. This post summarizes the currently proposed legislation.
SB 977 Expands the AG’s Existing Review Powers into the Private Sector
Who are the Parties Affected?
SB 977 will add to, not replace, the AG’s existing powers in reviewing health care transactions. The AG review process currently is limited to the sale or transfer of nonprofit health care facilities. SB 977 is a groundbreaking move towards the AG’s reach into the private sector, by purporting to regulate the acquisition of, sale of, and agreements affecting control or governance of health care providers and facilities.
SB 977 will require AG approval in certain types of transactions where:
The definition of “health care system” has gone through several iterations. Under the current construct, the Legislature appears to be targeting hospital systems of a certain size on the buy-side. Therefore, a standalone hospital, a health plan, or a physician practice acquiring provider groups or other facilities would not be captured under SB 977.
SB 977 imposes no such size threshold on the sell-side, requiring AG approval for acquisitions (by the specified types of buyers) of even solo practitioners. Indeed, SB 977 as currently drafted broadly defines “health care facility” to include place or building where health-related services are provided. This could potentially encompass purchases of medical office buildings (MOB) owned by lay entities.
What Types of Deals are Affected?
As amended on August 6, 2020, the bill would apply to:
“acquisition” – defined as a direct or indirect purchase of all or any of the assets of a health care facility or provider (including leases and joint ventures); or
“change of control” – defined as (i) an arrangement resulting in a change in governance or sharing of control over health care services or by which a health care system establishes a change in governance or sharing of control over health care services, or (ii) an acquisition of direct or indirect control over operations of a health care facility or provider.
It is unclear whether a management services arrangement would be considered a “change of control” under SB 977, given that a provider of management or other business support services does not necessarily affect governance or control of the facility or provider group, at least not with respect to clinical services. However, the only mechanism for private equity groups or hedge funds to meaningfully invest in a health care provider in California is through a management services organization structure. Therefore, it is likely that this type of transaction is intended to be captured under SB 977.
SB 977 specifies that an employment agreement or engaging a provider does not constitute a “change of control.” Also, the bill does not impact de novo creation of a new health care facility or provider group.
What is the Timing for AG’s Review?
The AG has 60 days from receipt of written notice to (i) approve the transaction, (ii) grant a waiver, or (iii) request additional information. If the AG requests additional information, the review period is extended by 45 days after the AG receives the additional information. If the parties and the AG agree, the AG’s review could be extended by another 45 days if the transaction is substantially modified or involves multiple communities. The AG may also extend the review period by 14 days if the AG decides to hold a public meeting
An expedited review process of 30 days is available to health care system buyers (but not private equity groups or hedge funds) if the transaction value is not more than $1,000,000, or if the seller is a county health facility or an academic medical center (regardless of transaction value). However, if the AG finds there are substantial competitive concerns, the transaction would be reviewed under the regular 60-day review process.
In either instance, if the AG does not provide any notice after the specified number of days has passed, the transaction may proceed.
Are there Exemptions or Waivers?
SB 977 would not apply to transactions entered into prior to January 1, 2021. It would also exempt renewals of existing arrangements so long as such renewals do not materially change the corporate relationship between the parties.
If a buyer is located in a rural area, it may seek a waiver to the AG’s consent requirement under SB 977 if it can demonstrate that the transaction would either (i) directly benefit consumers of health care services in such rural area by improving or maintaining access or availability of those services, or (ii) improve or maintain the health, safety, and well-being of consumers of health care services such rural area. If the AG denies the waiver, the transaction would be reviewed under the same standards as other transactions that are subject to SB 977 review.
The following table summarizes the AG’s review power under SB 977 as compared to the current regime.
SB 977 Expands the AG’s Existing Review Criteria for the Review of Health Care Transactions
When determining whether a transaction may move forward, SB 977 would mandate that the AG make an affirmative determination that a transaction is in the “public interest.” The “public interest” standard would be defined as “protecting competitive and accessible health care markets for prices, quality, choice, accessibility, and availability” of health care services.
Additionally, SB 977 contemplates two specific instances where the AG may deny consent to a transaction under two circumstances:
The buyer cannot demonstrate that the change of control or acquisition will result in either:
A substantial likelihood of clinical integration, or
A substantial likelihood of increasing or maintaining the availability and access of services to an underserved population
There is a substantial likelihood of anticompetitive effects that outweigh either the benefits of:
A substantial likelihood of clinical integration, or
A substantial likelihood of an increase in, or maintenance of, services to an underserved population
These new approaches provide greater discretion to the AG to deny approval.
SB 977 Changes the AG’s Anti-competitive Analysis for Post-Transactions
Under current law, to pursue alleged antitrust violations, the AG must rely on the state’s Cartwright Act in state courts or the federal Sherman and Clayton Antitrust Acts in federal courts. However, both the Cartwright Act and the federal antitrust acts have very general and vague standards that leave key determining factors to judicial interpretation. Significant case law provides guidance to market actors as to permissible and prohibited conduct.
SB 977 would create new liability if a health care system has (i) substantial market power and (ii) exclusive dealing, tying, or a substantial tendency to cause anticompetitive effects (as specifically defined). The AG could bring a civil action for fines based on the greater of $1,000,000 or twice the gross gain to the health care system or the gross loss of any other party. Additionally, the AG could obtain monetary relief three times the total damage sustained, the interest on the total damages, and the costs of litigation, including reasonable attorney’s fees. Health care systems will risk expending much time and resources to clarify the scope of these proposed additional liabilities.
The following table summarizes definitions on certain key antitrust terms under SB 977:
SB 977 also creates a new definition for a geographic market that allows the AG to analyze anticompetitive effects among a greater or narrower swath of area. For example, under SB 977, a geographic market may be a county, the entirety of Northern California, or the entire state of California. Because of this, a health care system can no longer attempt to reduce the antitrust analysis to a narrow, specific geographic area.
Are there Waivers?
In a similar way to the pre-transaction waiver, SB 977 does specify that a health care system’s conduct is not unlawful if all the following applies:
Benefits consumers in the market where the conduct is taking place or the health care system is entirely in a rural area
No less restrictive alternative for the benefits
Benefits substantially outweighs anticompetitive effects
Benefits not needed to fulfill government requirement or mandate
This expansion also does not extend liability to intracorporate actions of a health care system.
SB 977 Creates New Health Policy Advisory Board
SB 977 will require the AG to establish a Health Policy Advisory Board (the “Board”) to assist the AG in evaluating the health care market and assessing the anticompetitive effects of transactions both before and after its completion. This appears to be a step toward mirroring Massachusetts’s Health Policy Commission, which require notice and review of all health care provider transactions.
The Board’s main tasks include:
Reviewing transactions submitted to the AG for approval under SB 977 and recommending to the AG whether to grant or deny consent;
Evaluating and analyzing health care markets in California in general and providing recommendations to the AG’s office; and
Producing an annual report on the conditions in health care markets in California relating to acquisitions and changes of control, including, but not limited to, cost and quality analysis.
To ensure that the Board takes into consideration perspectives of different stakeholders, SB 977 requires the 12-member board be comprised of the following:
AG or AG’s designee
A university professor who specializes in health care systems, economics, and antitrust law.
A person representing each of the following:
A health care system.
A health care provider
Employers as purchasers of health care services
Organizations that represent union trustees of health care trusts
2 Senate Committee on Rules appointees, one of whom shall be a representative of a consumer group
2 Speaker of the Assembly appointees, one of whom shall be a representative of a consumer group
SB 977 Has a Sunset Clause, but Repeal Not Assured
In the most recent amendments to SB 977 on August 6, the Assembly included sunset clauses that would automatically repeal the pre-transaction approval provisions on December 31, 2025 and repeal the Health Policy Advisory Board on January 1, 2027.
A sunset clause is often used to allow (or some would say, force) the legislature to evaluate the bill and determine whether the statutory regime should continue. For that reason, a sunset clause does not guarantee that the statute would be terminated. In a review of eleven states (not including California), the Mercatus Center at George Mason University found that sunset review often led to a renewal.
Some opponents of SB 977 are continuing to seek further amendments that would (i) exempt county health systems and sales of small private practices from the AG approval requirement, and (ii) narrow the definition of “private equity group.” Overall, these are technical changes that do not stray from the overall impact of the bill.
Time is ticking for SB 977 as it continues to the Assembly Appropriation Committee, which will hear the bill on August 18 and must pass the bill out of committee by August 21. The deadline for amendments to SB 977 are August 24. Finally, the Assembly and the Senate must pass the amended SB 977 by August 31. As Assembly Health Committee members noted, they may not vote for SB 977 if significant changes and clarifications are not made by then.
Since the bill’s inception in early 2020, SB 977 has gone through several iterations with material revisions on various aspects of the bill. Some of the key revisions include (i) clarifying the type of transaction impacted from “affiliations” to arrangements resulting in a “change of control,” (ii) increasing the threshold for expedited review from $500,000 to $1,000,000, and (iii) most recently (and perhaps most significantly), adding a sunset clause.
Defined as medical service study area with a population density of fewer than 250 persons per square mile and no population center in excess of 50,000 within the area, as determined by the Office of Statewide Health Planning and Development.
Cal. Corp. Code §§ 5914 - 5919, 5920 – 5925.
See Memorandum of Decision Overruling Objections of The California Attorney General to the Debtors’ Sale Motion, In re: Verity Health System of California, Inc., et al, Case. No. 2:18-bk-20151-ER at 9 (Bankr. C.D. Cal. 2018).