California lawmakers are preparing to vote for the first time on regulating private equity investments in health care, and among the proposals they will consider are exemptions for some of the industry's largest players.
Intense lobbying from deep-pocketed medical and investor groups forced Rep. Jim Wood to agree to exempt for-profit hospitals (about 20 percent of hospitals) from oversight.
Supporters of the hotly contested bill warn that private equity takeovers have already led to greater consolidation, higher prices and less access, while opponents say the bill would stifle badly needed investment in health care, leading to cuts in services and hospital closures.
Wood, a Democrat from Healdsburg, said at the last committee hearing that no one is more disappointed than he is that he has had to make concessions, but that the bill still has value.
“We'd rather move forward with (the private equity business) than lose it,” Wood said.
The bill seeks to put guardrails on private equity and hedge funds by requiring the attorney general to approve most health care transactions. The proposed amendment exempts hospitals, skin clinics and government-run facilities.
The attorney general already has the power to regulate mergers among nonprofit hospitals and prescribe conditions aimed at protecting patient access and costs, such as preventing facilities from cutting certain services.
Even with the exemptions, many types of health care businesses would still be regulated, including nursing homes, dialysis centers and large physician groups, according to the CalMatters Digital Democracy Project.
Wood has been supporting the bill in the final weeks of the legislative session, and further amendments are expected. Between April and June, a coalition representing hospitals, investors and some dentists and doctors spent $583,000 lobbying against the bill, according to state financial reporting records. The California Hospital Association, one of the state's largest political trade groups and a coalition member, has independently spent more than $2 million since January on issues it cares about, including opposing the bill.
Its members include hospitals that are currently exempt from the proposal.
“While California has made great strides in recent years to improve access to affordable health care, parts of our health care system remain severely underfunded, leaving many families and communities without the care they need,” said Ned Wigglesworth, spokesman for Californians for Community Health Care, a coalition that opposes the bill.
Wood, who is not seeking reelection, has staked his political legacy on tackling tough health care issues, and in 2021 brokered a deal that led to the creation of the Affordable Care Administration, a new oversight agency tasked with keeping health care costs in line with inflation.
Addressing private equity's expansion into health care has been Wood's top priority in his final weeks as a senator, according to his staff. For Wood, a fifth-term senator, private equity's growing market share in health care is alarming. Mounting evidence nationwide suggests that private equity takeovers lead to higher prices and spending, with a variety of effects on quality.
“There is absolutely no oversight of private equity in the health care sector,” Wood said at a hearing last month.
Private equity deals on the rise in California health care
His supporters say the proposal doesn't necessarily discourage private equity investment in California's health care business. For example, the attorney general's office generally approves mergers and acquisitions between nonprofit hospitals, said Katie Van Deinze, a lobbyist for Health Access California, which supports the bill.
“In the history of the Attorney General's Office, 80 to 90 percent of mergers have been approved,” Van Deinze said. “The goal has been to maintain access to care.”
In the healthcare sector, private equity firms tend to use debt to finance the purchase of hospitals, clinics, nursing homes, etc. The acquired entity then becomes responsible for the debt, but the private equity firm rationalizes that it can pay down the debt through efficiency gains or asset sales.
Investors typically sell the facilities they acquire after three to seven years, according to a national advocacy group called the Private Equity Stakeholder Project. Nationwide, private equity is taking an increasingly larger share of the health care sector, investing more than $200 billion in acquisitions alone in 2021, according to the Commonwealth Fund.
California health care companies, hit by inflation, declining profit margins and a sometimes shaky recovery from the pandemic, are also increasingly turning to private equity investors for an influx of capital.
According to a recent policy document from the California Healthcare Foundation, private equity deals grew from $1 billion to $20 billion per year between 2005 and 2021. The document identified 22 hospitals in California that are privately owned by private equity, with the majority of the investments going to the pharmaceutical and biotechnology sectors.
“This is not a new problem. It's already here and it's creating challenges in the delivery of health care,” Wood said at a recent hearing.
The hospital sold the land to a private equity firm.
In one recent example, Watsonville Community Hospital was saved from bankruptcy by a public buyout and an $8 million state loan after its for-profit owner sold the hospital's land to a private equity real estate group, The Wall Street Journal reported. That group, Medical Properties Trust, is also embroiled in the collapse of Steward Healthcare Systems, a chain of 30 hospitals, mostly on the East Coast, owned by another private equity firm that filed for bankruptcy earlier this year.
“When they have power bad things happen. How can we look at all that and not stop the same thing from happening to our health care?” Van Deinze said.
But investors and some industry groups dispute the notion that private equity investors are inherently bad guys. Opponents of the measure point to a recent partnership between the University of California, Davis, the University of California, Irvine, and LifePoint Rehabilitation, backed by investment firm Apollo Global Management, to open a new rehabilitation hospital.
“The fundamental question we raise is, when does less capital in the market lead to lower prices,” Mark Aprea, a lobbyist who represents the American Investment Council and Children's Choice Dental, said at the committee meeting.
Opponents also argue that the new Affordable Care Administration would have some regulatory power over these transactions: It would have the power to study the market impact of major health care deals and require data from companies, but not the power to block them.
Wood argues that those same opponents have blocked the Affordable Housing Authority from being given similar regulatory oversight, resulting in the Affordable Housing Authority having no authority over the transactions.
“Let's gather the evidence before we start formulating policy solutions,” said the Opposition campaign's Wigglesworth.
CaMatters Data Reporter Jeremia Kimelman contributed to this report.
Supported by the California Healthcare Foundation (CHCF), we work to ensure people get the care they need, when they need it, and at an affordable price. For more information, visit www.chcf.org.
