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Ropes & Gray attorneys provide timely analysis on legal developments, court decisions and changes in legislation and regulations.
Jaclyn Freshman: Hello, and welcome to our podcast series, Health Care Transaction Laws Unwrapped. Today, we’ll be focusing on updates to state health care transaction laws on the West Coast. My name is Jaclyn Freshman and I’m an associate in Ropes & Gray’s health care practice group. With me today are my colleagues, partners Jenn Romig and Ranee Adipat. Jenn and Ranee represent a variety of health care industry clients and investors in connection with strategic mergers and acquisitions, joint ventures, and the complex regulatory regimes implicated by these transactions. Jenn also represents private equity clients in their acquisitions of a wide range of health care businesses. Jenn and Ranee, thanks for joining me today.
Ranee Adipat: Thank you—happy to be picking this series back up. A lot has happened since our last discussion.
Jenn Romig: That’s certainly true—we have a lot to cover today.
Jaclyn Freshman: We definitely do, so let’s dive right in. To start off, would one of you be able to set the stage on the landscape of laws that we’ll be discussing?
Ranee Adipat: Sure. States are becoming increasingly involved in reviewing health care deals, with a focus on examining the impact of transactions on cost, quality, and access to health care services. Recently, the West Coast, in particular, has been very active in its enforcement and introduction of these laws—especially Oregon over the past couple years, and now, in California.
Jenn Romig: And then, of course, most recently in the news, there was the quite controversial private equity oversight bill in California, AB 3129.
Jaclyn Freshman: Thanks, both. We’ll return to AB 3129 in a bit since there’s a lot to dissect there, but let’s start off with California’s current review process for health care transactions. Ranee, I know you’re based in L.A., so you’re quite familiar with this: Can you start by providing us with an overview of what California’s review process looks like?
Ranee Adipat: Sure. For some quick background, California established the Office of Health Care Affordability (or “OHCA” as we’ve nicknamed it) and passed a health care transaction law in 2022. The law requires health care entities to submit notice 90 days before entering into a covered transaction, and OHCA may then either issue a waiver to a cost and market impact review or initiate a cost and market impact review. And since our last discussion, OHCA issued and revised implementing regulations, and began accepting notices for health care transactions earlier this year.
Jaclyn Freshman: And with respect to OHCA’s recent revisions to the regulations, are there any significant updates or insights we should be aware of there?
Ranee Adipat: OHCA’s latest revisions, which were finalized in August, had one change that’s pretty interesting. OHCA clarified that the notice requirements apply not only to health care entities that are “party to” a transaction, but also apply to health care entities that are more broadly the “subject of” a transaction—meaning, the transaction results in a transfer of the entity’s assets, control, responsibility, governance or operations to another entity. OHCA has explained that it made this change in an effort to align the regulations more with statutory text, and to clarify that indirect changes of ownership are captured.
OHCA expressed during its Board meeting that this change is aimed at closing loopholes for PE investors up the chain, that are claiming that the OHCA process does not apply to their indirect transactions involving health care entities. This revision does raise questions regarding how broadly OHCA will interpret and expand the “subject of” language.
Jaclyn Freshman: And along those lines, what have we seen so far in terms of enforcement by OHCA, now that we are approaching the one-year mark since OHCA began accepting applications?
Ranee Adipat: So far, we’ve seen fewer OHCA submissions than we expected. Currently, there’s fewer than 10 transactions that have submitted applications, but we understand from OHCA Board meetings that OHCA has received many inquiries from entities, so there could be many more in the queue. OHCA also stated that it expects more submissions given the updated “subject of” language.
And in terms of the submission process itself, OHCA seems to be reviewing transactions pretty efficiently. In our experience, OHCA will always have a few follow-up questions upon receiving an initial application, and it has taken around 10 days for OHCA to deem an application “complete.” Once deemed complete, the clock then starts for the 45-day review period to issue a waiver to a cost and market impact review. So far, OHCA has not been taking the full 45 days to review, but it has made no promises on whether that will be true moving forward.
Jaclyn Freshman: Thanks, Ranee—that’s very helpful context. Moving on from OHCA, let’s talk about the controversial bill, AB 3129. Jenn, can you catch us up on that one?
Jenn Romig: As background, AB 3129 was a bill that gained a lot of attention from our clients this year because of its pretty unprecedented implications for private equity (or “PE”) investments in health care. AB 3129 was passed by the California legislature in August 2024, but was ultimately vetoed by Governor Newsom at the end of September. AB 3129 would have authorized the California AG to require notice and consent for certain health care transactions involving private equity groups and hedge funds, and also would have imposed restrictions on a PE group or hedge funds’ relationships with certain professional practices. The bill was unique in comparison to the currently active state health care transaction laws in that it focused on targeting PE specifically, rather than health care transactions more broadly.
Jaclyn Freshman: That’s really interesting. Do you have insights into Governor Newsom’s rationale for vetoing the bill?
Jenn Romig: Yes—this honestly was pretty unexpected. AB 3129 provoked strong reactions on both sides. It received a significant amount of pushback from a variety of PE and health care industry stakeholders, due to concerns that it would deter private funding in health care. We worked closely with a number of clients on advocacy efforts to shape amendments to the bill as it went through the House and Senate. Legislators, who were very passionate about increasing oversight of PE in health care, were receptive to these advocacy efforts because they really wanted something to pass and wanted to garner as much support as possible. The bill went through a number of amendments—even carving out hospitals in full in response to lobbying efforts. The fact that the bill passed in both the California House and Senate demonstrates the widespread support it had with California legislators.
Governor Newsom, however, ultimately decided to veto the bill due to its redundancy with the OHCA process. Even though the bill provided that transactions subject to review under AB 3129 would be exempted from review under OHCA, in Governor Newsom’s view, OHCA was the more appropriate body to review health care transactions in the state.
Jaclyn Freshman: Thanks, Jenn, for providing that background. So, how does AB 3129 compare to OHCA?
Ranee Adipat: That’s a good question. I think Governor Newsom makes a valid point—there’s a lot of overlap in the transactions captured. While AB 3129 would have granted the AG with actual approval rights over transactions—meaning the AG could block a transaction—under current law, OHCA still has the ability to refer transactions to the AG, and the AG may take action accordingly at its discretion. Given OHCA’s relative novelty, it still remains to be seen how this plays out, but there is still some AG oversight in the current process, even if it is more attenuated than it would have been under AB 3129.
Jaclyn Freshman: So, if AB 3129 had passed, what would this bill have meant for PE investors?
Jenn Romig: It would have definitely ratcheted up the scrutiny for PE investors in California. Many health care entities with PE investors, or that were potentially seeking PE funding in the future, were paying close attention to the bill because it was written really broadly to capture all direct and indirect “changes of control” of a health care entity by a PE group or hedge fund. Changes of control, add-ons, exits—these could all potentially be captured if a PE investor and health care entity were involved. The bill was already starting to spook investors a bit, but its ultimate impact would have really depended on how aggressively the AG chose to enforce it.
And AB 3129 would also have imposed restrictions on private equity or hedge funds’ ability to exercise control over certain professional practices and the terms of corresponding management contracts. The restrictions largely echoed existing corporate practice of medicine and dentistry prohibitions, but if passed, parties would have had to draft agreements with a close eye towards the legislation.
Jaclyn Freshman: Thanks, Jenn. And do we expect legislation, like AB 3129, to be re-introduced in the future in California?
Ranee Adipat: It’s hard to tell—we could definitely see legislation like this being re-introduced, but maybe in a slightly different form. One interesting point to note is that the author of this bill, Assemblymember Jim Wood, had previously attempted twice before to introduce similar legislation in the California legislature. He was unsuccessful in prior attempts—AB 3129 was the closest that this type of legislation came to being signed into law. This is Assemblymember Wood’s last term, though, so it remains to be seen whether other California legislators will take up his cause and re-introduce PE-focused legislation in the coming years.
Jenn Romig: Yes, I agree with all of that. On a national level, there has been a big push lately toward PE-focused legislation, which we’ll explore more during our upcoming podcast on PE and management services organizations. Interestingly, this year, we’ve seen PE-focused bills introduced in a number of other states, like Massachusetts, Connecticut, and Minnesota—but none managed to make it to the finish line. This could be because each of these states have existing laws on the books that oversee health care transaction laws—and legislators may be questioning whether additional heightened scrutiny is necessary, and whether any additional costs of administration are justified.
Jaclyn Freshman: Those are great points. So, now, I’d like to turn now to Oregon, which I understand has been the most aggressive state in terms of enforcement of health care transaction laws. Jenn, I know you have a lot of experience with this state: Could you start by giving us a quick refresher on Oregon’s law before we jump in?
Jenn Romig: Oregon’s a state we pay a lot of attention to because its law is broad and the agency that administers the review process, the Oregon Health Authority (or “OHA”) has demonstrated a willingness to proactively enforce the law. As we discussed in our last podcast, health care entities in Oregon are required to submit pre-closing notice, and OHA has 30 days to either approve the transaction, approve the transaction with conditions, or initiate a comprehensive review. Oregon’s law is the only state health care transaction law to explicitly require approval from a state agency.
Jaclyn Freshman: Interesting. And can you expand on OHA’s proactive enforcement a bit, including the trends you’ve been seeing in the state?
Jenn Romig: Yes, OHA has been very active in enforcing its review process. We’re quite familiar with the process and have been involved with a number of deals that have required submission to the state. To date, around half of the transactions that have gone through preliminary review have been approved, while around a third have been approved with conditions, and several have received comprehensive review. Many of the simple approvals without conditions are from 2022, when the law was new, and Oregon promised to take a light touch with regard to enforcement. As Oregon has gotten its footing, it’s now more likely to impose conditions on transactions.
Jaclyn Freshman: And what kinds of conditions are we seeing being imposed on transactions generally?
Jenn Romig: Conditions are generally imposed for a number of years following the close of the transaction and they’ve included restrictions on the ability to jointly negotiate with payors, requirements to continue services for certain Medicare populations, limitations on the ability to influence clinical decisions, and prohibitions on controlling future opportunities for employees.
Jaclyn Freshman: Thanks for the insights, Jenn. I know that earlier this year, OHA posted updates to its notice application and guidance materials, and also recently published proposed updates to its administrative rules. Are there any updates to the guidance or elements of the proposed rule changes that stand out to you?
Jenn Romig: Yes, the proposed revisions to the rules are minor overall, but some of the updates to the guidance were interesting—for example, OHA recently updated its guidance on entities subject to review to add medical device and durable medical equipment (“DME”) providers.
Jaclyn Freshman: That is really interesting—we don’t typically see those types of entities captured in other state transaction laws. Given Oregon’s broad enforcement, I understand that there was a legal challenge brought against Oregon’s review program. Can you catch us up on what happened there?
Jenn Romig: Yes, so the Oregon Association of Hospitals and Health Systems brought a challenge against OHA in the U.S. District Court in Portland, arguing that OHA’s review process is unconstitutionally vague, in violation of the Due Process Clause, and that the program impermissibly delegates legislative powers to OHA, in violation of the nondelegation doctrine of the Oregon state Constitution. The judge sided with OHA on the federal claims and found that the hospital association did not successfully meet the heavy burden to invalidate a statute for vagueness under the Due Process Clause and declined to rule on the state claims. Notably, though, this decision is being appealed by the hospital association in the Ninth Circuit—we’re closely monitoring updates on the appeal.
Jaclyn Freshman: Thanks, Jenn. And have we seen any other challenges against Oregon’s law, or state health care transaction laws more broadly?
Ranee Adipat: This is the only formal legal challenge to invalidate one of these laws that we’re aware of, but we’re sure it won’t be the last, especially as both OHA in Oregon and California state regulators are continuing to ramp up enforcement efforts.
Jaclyn Freshman: Interesting—well, thanks for the update on Oregon. I know we’ve been focusing on Oregon and California given that these states have been the most far-reaching in terms of the transactions that they capture—and California, in particular, has experienced the most changes since our last podcast. Are there any other West Coast states that we should be discussing today?
Ranee Adipat: There are—both Washington and Nevada have also required notice of certain health care transactions. At a high level, Nevada’s law is pretty narrowly focused on entities with a large in-state presence—it establishes notice requirements for group practices, health carriers, hospitals, and physician group practices that enter into transactions that would result in market dominance for a health care service in the state. Washington’s law imposes notice requirements on mergers and acquisitions between two or more hospitals, health systems, and provider organizations. Washington did introduce a bill that would expand the scope of its current review process by broadening the scope of entities subject to review and enhancing the state AG’s enforcement authority, but the bill didn’t pass during this year’s legislative session.
Jaclyn Freshman: Thanks for that overview. We have covered a lot today, and we really appreciate your time, Jenn and Ranee. So, just one last question here: Looking ahead, what do you see as the most important takeaways to keep in mind?
Jenn Romig: Jaclyn, it ultimately will be important to keep current with legislative or regulatory updates from states and really think about how these laws impact deals on a practical level. Over the last year, we’ve gained some clarity on the structure and enforcement of these laws, but there is still a lot of unresolved ambiguity. With the emergence of so many new laws in other states—on the West Coast and nationwide—it’s definitely something that health care entities and health care investors will need to continue to pay attention to.
And for private equity firms, in particular, it’ll be important to keep apprised of any new legislation targeted at PE. AB 3129 didn’t get signed into law this year, but it’ll be interesting to see if attempts to pass PE-focused legislation continue next year.
Ranee Adipat: I agree with all of that, Jenn. And to that end, given how complex these state health care transaction laws are, I think my main piece of advice would be engage counsel early to think through different transaction structures and to understand how these new laws may apply and impact deal timelines. For some of the newer laws, like OHCA, there may be flexibility to work collaboratively with OHCA to understand filing requirements and to minimize the burden of filing.
Jaclyn Freshman: Thanks again, Jenn and Ranee. If those listening would like more information on this topic or our health care group, please don’t hesitate to contact us or visit our resource center, where you can also find a full list of podcasts in this series. The resource center also includes our interactive map, which provides detail about the various pending and enacted state health care transactions laws nationwide. You can also subscribe and listen to other Ropes & Gray podcasts wherever you regularly listen to your podcasts, including on Apple and Spotify. Thanks again for listening.