Big California health care businesses win exemptions from proposed hedge fund rules

Stay up-to-date with free briefings on topics that matter to all Californians. Subscribe to CalMatters today for nonprofit news in your inbox.

Lea esta historia en Español

California lawmakers are poised to vote for the first time on regulating private equity investments in health care , but the proposal they will weigh in on carves out exemptions for some of the industry’s biggest players.

Heavy lobbying from deep-pocketed health care and investor groups forced Assemblymember Jim Wood to agree to exclude for-profit hospitals — about 20% of hospitals — from oversight.

Supporters of the hotly contested measure warn that private equity takeovers are already driving increased consolidation, higher prices and less access. Opponents contend that the measure will stifle much-needed investment in health care, leading to service cuts and hospital closures.

Wood, a Democrat from Healdsburg, said during a previous committee hearing that no one is more disappointed than he is to have to make concessions, but the bill still has merit.

“I’d rather make progress on (private equity) than lose this,” Wood said.

The measure attempts to place guardrails on private equity and hedge funds by requiring the attorney general to approve the majority of their health care transactions. The amendments exclude hospitals, dermatology practices, and government-run facilities.

The attorney general already has the authority to regulate nonprofit hospital mergers and stipulate conditions intended to protect patient access and cost, such as preventing facilities from eliminating certain services.

Even with the exclusions, many types of health businesses, such as nursing homes, dialysis centers and large physician groups, would be regulated, according to CalMatters’ Digital Democracy project .

More amendments are expected as Wood advocates for the bill in the final weeks of the legislative session. Between April and June, a coalition representing hospitals, investors, some dentists and doctors spent $583,000 lobbying against the measure, according to state financial reporting records. The California Hospital Association, one of the state’s largest political trade associations and a coalition member, independently spent more than $2 million since January on issues it cares about, including opposition to this bill.

Its members include the hospitals that are now exempted from the proposal.

“California has made significant strides in improving access to affordable health care in recent years, but parts of the health care system remain severely underfunded, harming the ability of many families and communities to access the care they need,” said said Ned Wigglesworth, spokesperson for Californians to Protect Community Health Care , the coalition that opposes the measure.

Wood, who is not running for reelection, has staked his political legacy on tackling thorny health care issues. In 2021, he brokered the deal that resulted in the creation of the Office of Health Care Affordability, a new oversight agency tasked with controlling inflationary health costs.

Addressing private equity’s incursion into health care has been Wood’s No. 1 priority in his final few weeks as a legislator, his staff said. For the five-term lawmaker, the growing market share of private equity in health care is something to be alarmed about. Mounting evidence nationally suggests private equity acquisitions lead to higher prices and spending with mixed effects on quality.

“There is no oversight at all on private equity in the health care space, period,” Wood said in a hearing last month.

More private equity deals in California health care

His allies say the proposal would not necessarily prevent private equity investments in California health care businesses. For instance, the attorney general’s office generally approved mergers and acquisitions among nonprofit hospitals, said Katie Van Deynze, a lobbyist with Health Access California which supports the legislation.

“In the history of the attorney general…80-90% of mergers have been approved,” Van Deynze said. “The goal has been to maintain access to care.”

Learn more about legislators mentioned in this story.

In health care, private equity firms tend to finance the purchase of hospitals, doctors offices, nursing homes and the like with borrowed money. The acquired entity then becomes responsible for the debt, which private equity firms rationalize can be paid for by increasing efficiency or selling off assets.

Investors typically sell the acquired facilities after three to seven years, according to a national advocacy group called the Private Equity Stakeholder Project . Nationally, private equity has garnered a larger and larger share of health care, investing more than $200 billion in 2021 on acquisitions alone, according to the Commonwealth Fund .

California health care companies — battered by inflation, thinning margins and a sometimes rocky pandemic recovery — have also increasingly turned to private equity investors for an influx of cash.

Between 2005 and 2021, private equity deals grew from $1 billion to $20 billion annually, according to a recent policy paper from the California Health Care Foundation . The paper identified 22 hospitals owned by private equity in California. The majority of investments have been in pharmaceuticals and biotechnology.

“It is not an emerging issue. It is here and it is creating challenges for the delivery of health care,” Wood said in a recent hearing.

Hospital sold its land to a private equity firm

In one recent example, a public buyout and an $8 million state loan saved Watsonville Community Hospital from bankruptcy  after its for-profit owners sold the hospital’s land to a private equity real estate group, The Wall Street Journal reported. That group, Medical Properties Trust, is also entangled in the collapse of Steward Health Care System , a 30-hospital chain primarily on the East Coast owned by another private equity firm that filed for bankruptcy earlier this year.

“They take over and bad things happen. How can you see all of that and not try to keep it from happening to our health care?” Van Deynze said.

But investors and some industry groups take issue with the characterization that private equity investors are inherently bad actors. The group opposing the measure points to recent partnerships like those made between UC Davis and UC Irvine and Lifepoint Rehabilitation, which is backed by investment firm Apollo Global Management, to open new rehab hospitals.

“A fundamental question we pose…is when does less capital in the marketplace lower prices?” said Marc Aprea, a lobbyist representing the American Investment Council and Children’s Choice Dental, during a committee meeting.

Those opposed also argue that the new Office of Health Care Affordability will have some regulatory powers over these transactions. The office has the ability to review how major health transactions impact the market and to request data from the companies, but it does not have the authority to stop a transaction.

Wood contends that the same opponents prevented similar regulatory oversight from being granted to the affordability office and that it consequently does not have any power over transactions.

“Let’s get the evidence in before we start fashioning any policy solutions,” Wigglesworth with the opposition campaign said.

CaMatters data reporter Jeremia Kimelman contributed to this reporting.

Supported by the California Health Care Foundation (CHCF), which works to ensure that people have access to the care they need, when they need it, at a price they can afford. Visit www.chcf.org to learn more.