Private equity (PE) dollars have become prominent in the US healthcare industry in recent decades, with PE firms now owning roughly 8% of all private hospitals in the country, according to nonprofit Private Equity Stakeholder Project.
But studies have illustrated the financial model’s potential adverse effects, such as one published in JAMA in December 2023 that found PE-owned hospitals are 25.4% more likely to report patient complications. Others have found that PE-owned healthcare companies represented more than one-fifth of healthcare company bankruptcies in 2023 and that PE-owned hospitals see their assets drop an average of 24% following an acquisition.
In response, states have stepped up scrutiny of private equity’s influence on healthcare.
“Just in the last year or two, several states have amped up their efforts to increase market oversight, not just for private equity investors, but different types of consolidation activity in healthcare,” Yashaswini Singh, a healthcare economist and assistant professor of health services, policy, and practice at Brown University School of Public Health, told Healthcare Brew. “Instead of waiting for the federal government to do something, a lot of states are taking action.”
A case study in California
One of the most closely watched pieces of state legislation in 2024 came from California, a state where, along with Oregon, roughly 9% of total healthcare PE deals in the US and Canada take place, according to internal PitchBook data Rebecca Springer, lead healthcare analyst at the global market data company, shared with Healthcare Brew.
The California Legislature passed a bill (called AB 3129) in early September that would have required PE firms to give the California attorney general a written notice about its intentions to buy a healthcare organization at least 90 days before the deal closed. Then after reviewing the deal, the attorney general would have had the chance to determine if it could significantly stifle competition or healthcare access, and if so, stop it from going through.
But California Governor Gavin Newsom vetoed the bill on September 28, arguing it wasn’t necessary because the state had already established in 2022 the Office of Health Care Affordability (OHCA), which reviews and considers the potential effects of healthcare deals on the overall market. While the office doesn’t have the power to stop deals, it can make a recommendation to the attorney general to do so.
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Due to this existing back and forth, other states could have a harder time passing similar legislation in 2025, according to associates at Florida-based law firm Holland & Knight.
“AB 3129’s demise is particularly notable given the increased participation by industry stakeholders in the discourse for and against the bill,” they wrote in an October 1 blog post. “No other similar state healthcare transaction law received this level of attention.”
Keep your eyes on…
Despite the projected challenge, some states are still trying to put stricter controls on PE in healthcare. Pennsylvania and Indiana will be the states to watch in 2025, according to Holland & Knight.
Pennsylvania has three bills currently moving through the state’s Legislature that would require health systems to give the attorney general a heads-up before entering into certain types of transactions or making deals with out-of-state entities.
In Indiana, Mike Braun, who won the state’s gubernatorial election on November 5, proposed a plan in September that requires all healthcare private equity deals be approved by the state’s attorney general.
Whether California’s Legislature will try again to pass similar regulations on PE deals remains to be seen, particularly as the bill’s author, Assemblymember Jim Wood, is finishing his term in December 2024 and doesn’t plan to seek reelection.
But experts, including Springer and Singh, believe more states will push to further regulate private equity in healthcare.
“A lot of states are going to be continuing to look at healthcare and private equity,” Springer said. “There’s enough momentum there that this will continue.”