Dive Brief:
California Gov. Gavin Newsom signed into law new rules on Monday that will place more restrictions on corporate investors’, including private equity firms’, role in healthcare delivery.
The law, Senate Bill 351, prohibits financial firms from having a hand in medical decisions, including determining how many patients clinicians see per hour or what diagnostic tests are appropriate.
The legislation was drawn up in response to a growing body of evidence that links private equity firms’ involvement in healthcare to higher costs, lower care quality and reduced services, according to the California Medical Association, which backed the bill.
Dive Insight:
Senate Bill 351 was popular among both Democrats and Republicans. The law follows Oregon’s lead in limiting the power of corporate investors over physicians. Oregon’s law, passed earlier this year, is considered the toughest in the country, and prohibits financial firms from owning a majority stake in medical practices.
While California’s law doesn’t go that far, it prohibits financial firms from inserting noncompete clauses into provider contracts and language that would bar providers from speaking out against private equity management practices.
The law also gives the state attorney general’s office the authority to fine bad actors.
“I am grateful for the governor’s signature to ensure that patients are receiving medical care prescribed by their doctors, not from private-equity investors,” said State Sen. Christopher Cabaldon, who authored the bill. “Private equity investment in health care practices has quintupled over the past decade. That kind of growth demands modern enforcement tools, not to restrict investment, but to make sure it doesn’t hurt patient outcomes or drive up the cost of care.”
The law is California’ second attempt at passing tighter restrictions on private equity investments in healthcare. Last year, Newsom vetoed a bill that would have given regulators more oversight on healthcare transactions, saying the state’s current processes were sufficient.
A similar proposal currently sits on Newsom’s desk: Assembly Bill 1415, which passed the California legislature last month. The bill would require a stronger review process of healthcare transactions involving corporate investors, such as private equity firms or hedge funds. Newsom has until Oct. 12 to sign it.
California isn’t alone in trying to get more oversight on private equity firms’ role in healthcare delivery.
The past two years have given rise to a groundswell of activism against private equity in healthcare, with patients, nonprofits and lawmakers beating the drum about the risks of financial firms overseeing patient care decisions.
Private equity firms typically acquire companies in order to flip the asset at profit over a short time frame — roughly three to seven years. Critics contend this model incentivizes the firms to cut costs quickly, often by cutting staff.
Multiple studies have demonstrated that healthcare quality in turn declines when private equity firms acquire a range of providers, including hospitals, disability care centers and hospices. Negative outcomes can range from increased risks of falls, to an elevated risk of death in understaffed emergency rooms.
Patients’ costs also rise after facilities are acquired by private equity firms, according to multiple studies, including one published this week in Health Affairs. The study found private equity affiliated physicians negotiated prices with insurers that were 6% higher for cardiology and 10% higher for gastroenterology procedures compared to independent physicians, for example.
Meanwhile, many healthcare companies decline post-acquisition. Reports from the Private Equity Stakeholder Project found the firms’ trademark aggressive financial practices, including the tendency to carry high debt loads, contribute to a high rate of bankruptcies among private equity-backed healthcare companies.
The collapse of private-equity backed Steward Health Care and Prospect Medical Holdings led to hospital closures around the country — and calls for reform. However, federal lawmakers have been unable to get policies aimed at regulating private equity off the ground. Last year, multiple bills died without being debated.
In absence of federal reforms, Oregon, Massachusetts, Maine, New Mexico, Indiana and Washington have passed laws this year requiring more oversight over private equity.
However, other state initiatives have met resistance. In Pennsylvania — where Prospect closed two rural hospitals during its bankruptcy proceedings — getting legislation across the finish line is proving to be a tough fight, despite backing from the governor. A nursing home lobby has pushed back against reform, arguing they need private equity investment to sustain struggling facilities.
