The Act contains several restrictions on health care transactions involving private equity or hedge fund backers, including (1) the Attorney General’s prior approval of acquisitions of health care facilities or provider groups by private equity or hedge funds, (2) various restrictions on arrangements and agreements (for examplePrivate equity management services arrangements between provider practices and entities owned, directly or indirectly, in whole or in part, by private equity groups or hedge funds. Management services organizations may have a wide range of funding sources, including hospitals, venture capital firms, angel investors, and nonprofit organizations, and the Act’s broad definition of the use of private equity is likely to include arrangements funded by these groups.
Most notably, section 1190.40(c)(2) of the Act prohibits a physician, psychiatrist, or dental practice from entering into an arrangement or contract with a private equity group or hedge fund (or an entity controlled, directly or indirectly, in whole or in part by a private equity group or hedge fund) to “provide business or administrative services” for a fee that is passed “directly or indirectly to a payor, purchaser of physician, psychiatrist, or dental services, or patient.” Because the Act does not define “business or administrative services,” it is unclear what specific arrangements the Act prohibits. However, on its face, this restriction could be interpreted as broadly prohibiting providers from entering into standard administrative services agreements with third parties backed by private equity or hedge funds.
The restrictions would also undermine the physician practice management (PPM) structure. The PPM structure utilizes management services agreements to create non-clinical and administrative stability across the practice and provide physicians with the business support they need for the continued growth of their practice. The PPM structure is used by thousands of healthcare organizations, including virtual care providers, private practices, hospitals, and managed care organizations, to leverage efficiencies, create a more integrated approach to care delivery, and in many cases, simply operate more efficiently. For digital health companies, the law would limit their ability to grow and operate in California by restricting their access to outside capital from investment groups.
The law could impede the ability of digital health companies to operate in California once they reach a certain size. Virtual care providers and other digital health companies often turn to venture capitalists and other investment groups for funding to launch their next stage of growth or expansion into new markets. Importantly, the draft law appears to treat venture capital funds as private equity groups. For purposes of the law, a private equity group is an “investor or group of investors that is primarily engaged in raising or returning capital and that invests in, develops, or disposes of certain assets.” This broad definition could include venture capital funds and other investment sources (such as an innovation center at an academic medical center). These investment sources often fund the expansion of startup companies or the commercialization of their products with the intent of earning a return on their investment (usually when the startup sells or goes public).
As a result, early stage digital health companies seeking growth capital (e.g., Series A financing) may be bound by this law and be unable to serve California patients. The restrictions may also limit the ability of larger digital health companies that rely on PPM structures to integrate complex technologies developed by public organizations with quality clinical care to expand or start new business in California.
