A bill in the California legislature is drawing strong support from consumer advocates, labor unions, and the California Medical Association, but facing significant opposition from hospitals. The bill, introduced by Attorney General Rob Bonta, aims to increase oversight of private equity investments in health care.
The proposed legislation would require private equity firms and hedge funds to notify the Attorney General’s office of planned acquisitions in the health care sector and obtain approval. It also strengthens existing state laws that prohibit non-physicians from directly employing doctors or controlling their activities, a key reason for the Medical Association’s support.
Private equity firms raise capital from institutional investors, such as pension funds, to acquire companies they believe can be made more profitable. They then seek to enhance earnings and sell the businesses for a significant profit. While this can benefit future retirees and help struggling companies, critics argue that this profit-driven approach can negatively impact health care. Private equity deals are increasingly scrutinized nationwide due to evidence linking them to higher prices, lower quality care, and reduced access to essential services.
Opponents of the bill, including the state’s hospital association, the California Chamber of Commerce, and a national private equity advocacy group, argue that it could discourage much-needed investment. The hospital industry has already secured an exemption for for-profit hospital sales from the proposed law.
Attorney General Bonta acknowledged the amendment but emphasized that the bill still provides crucial protections. The legislation would apply to various medical businesses, including clinics, physician groups, nursing homes, testing labs, and outpatient facilities. Nonprofit hospital deals are already subject to review by the Attorney General’s office.
A final vote on the bill could occur this month if it advances through the state Senate committee.
Nationally, private equity investors have spent $1 trillion on health care acquisitions over the past decade, according to The Commonwealth Fund. Investments in physician practices have surged sixfold in ten years, often leading to significant price increases. Other outpatient services and clinics have also been targeted.
In California, the value of private equity health care deals increased from less than $1 billion in 2005 to $20 billion in 2021, as reported by the California Health Care Foundation. Despite tracking the pending legislation closely, private equity firms have not yet reduced their investments in the state, according to PitchBook.
Studies and reports from KFF Health News highlight the challenges posed by private equity in health care. Research published in the Journal of the American Medical Association found a higher likelihood of adverse events, such as patient infections and falls, at private equity-owned hospitals compared to others. Analysts believe more research is needed on the impact of private equity on patient care, but the cost implications are evident.
Kristof Stremikis from the California Health Care Foundation noted that private equity acquisitions typically lead to higher costs for the same services or worse quality.
Most private equity deals in health care are below the $119.5 million threshold that triggers federal regulatory notification, often escaping government oversight. The Federal Trade Commission is increasing its scrutiny, having sued a private equity-backed anesthesia group in Texas for anticompetitive practices last year.
Several states, including Connecticut, Minnesota, and Massachusetts, are considering legislation to increase transparency in private equity deals.
Assembly member Jim Wood, a Democrat from Healdsburg, acknowledges that while not all private equity firms are problematic, review is crucial. “If you are a good entity, you shouldn’t fear this,” he said.
The bill would require the Attorney General to assess the impact of proposed transactions on care quality, accessibility, regional competition, and prices.
Critics argue that private equity deals are often funded with debt, which the acquired company must repay. In some cases, private equity groups sell real estate to generate immediate returns, with new owners charging the acquired company rent. This was a factor in the financial collapse of Steward Health Care, which filed for Chapter 11 bankruptcy in May after being owned by Cerberus Capital Management from 2010 to 2020, according to the Private Equity Stakeholder Project.
Opponents of the legislation worry it will deter investment in an industry facing rising operating costs. Ned Wigglesworth from Californians to Protect Community Health Care said the prospect of a lengthy review process could create a “chilling effect” on private funding.
Proponents of private equity investment highlight successes such as Children’s Choice Dental Care, which expanded to 25 locations with private equity funding, and Ivy Fertility, which increased its capacity to provide fertility treatments.
Researchers note that profiteering is not exclusive to private equity and affects even nonprofit organizations. For instance, Sutter Health, a major nonprofit hospital chain, settled for $575 million over unfair contracting and pricing practices.
Christopher Cai from Harvard Medical School emphasizes the need to examine behavior across ownership classes. While private equity firms are more likely to engage in profit-driven behavior, other entities can also engage in similar practices.
