A bill introduced in the California Legislature in February had a simple but significant goal: to force more scrutiny of private equity investors as they increasingly encroach on the state’s health care industry.
Given private equity’s history of often-disastrous outcomes in the health care field, both in patient care and cost, such legislation was reasonable. The bill, as originally written by Assemblymember Jim Wood (D-Healdsburg) and supported by state Attorney General Rob Bonta, would have given Bonta’s office wide latitude to stop or place conditions on the kinds of private equity takeovers that the AG feared would worsen health care in the state.
Six months later, Assembly Bill 3129 is still alive — and substantially weakened. It may yet pass, and its implementation would still apply to many health care settings. But some of the industry’s biggest power players won’t be affected by it, including for-profit hospitals, because they’ve been made exempt.
This is a measure rooted in concern about what private equity is doing to Californians’ ability to receive adequate care without facing astronomical bills. In the end, though, AB 3129 appears to be falling victim to the usual suspects: money, influence and lobbying power.
The incursion of private equity firms in the health care industry has been, on balance, a disaster for both the industry and the people who need to use it.
A research letter recently published in the Journal of the American Medical Association online brings home the truth in depressing doses. With few exceptions, private equity firms squeeze profit out of health care by loading borrowed-money debt onto the companies they acquire, then selling off real estate, cutting services and/or raising prices to satisfy their investors.
They then often exit the business, and what’s left behind can be a financial wreckage that also doesn’t meet patients’ needs.
A sampling of the damage:
- In the first two years after being taken over by private equity firms, hospitals on average are stripped of nearly 25% of their assets, including land, buildings and equipment.
- Private equity investment in hospitals is associated with a 25% increase in patient falls and hospital-acquired conditions like blood poisoning (sepsis), as standards and quality of care decrease while staff sizes dwindle.
- When private equity buys a doctor’s practice or a clinic, prices go up 20% and so do the number of visits, including big increases in follow-ups that often prove unnecessary.
- The equity companies often dump the health care acquisition between three and seven years after buying, according to a watchdog group – or they allow the entity they bought and drained to fall into bankruptcy. The Private Equity Stakeholder Project found that 21% of the 80 large health care companies that filed for bankruptcy in the U.S. last year were owned by private equity firms. So far this year, the figure is 23%.
California’s health care industry is a playground for private equity. From 2005 to 2021, private equity investment in health care in the state has skyrocketed from less than $1 billion a year to $20 billion annually, including the purchase of at least 22 hospitals, according to research by the California Health Care Foundation.
Wood, a Healdsburg resident and former longtime practicing dentist, wrote AB 3129 in an attempt to stem that tide. Under the legislation as originally written, equity and hedge fund groups would have to notify Bonta’s office of their planned purchases of many types of health care businesses in the state — and the attorney general could say no, or revise the conditions under which the takeovers could occur.
“A majority of studies show that health care consolidations are not lowering costs for anyone (except) the entities consolidating,” Wood said in introducing the legislation. “We are often led to believe that these consolidations will save money and that it’s good for consumers, but … it reduces competition and results in higher corporate and shareholder profits.”
But it was always going to be a tough sell. Going against major players in the health care industry, even in a Democrat-controlled legislature, often means going against their lobbyists, their deep pockets and their influence.
Several well funded lobby groups, including the California Chamber of Commerce and the California Hospital Association (CHA), opposed AB 3129 from the start. Once the measure reached the Senate Appropriations Committee, it was saddled with amendments, two of which were particularly significant.
The first exempts all for-profit hospitals in the state from any private equity scrutiny by Bonta’s office. Not only do for-profit facilities account for 20% of all hospitals in California, but they’re often the target of equity investors who see an opportunity to crank up the profit margin.
Another amendment exempts dermatology clinics, a favored target of equity companies. Nationally, about 8% of dermatology clinics are owned by private equity investors who see them as cash cows of follow-up appointments, questionable biopsies, cosmetic sales and add-on procedures.
The source of these amendments is a mystery even to the originator of the bill, other than to say the changes occurred at Senate Appropriations. “Because we were not the author of the amendments, we are currently reanalyzing the bill to see if we need any [further] amendments,” Cathy Mudge, Wood’s chief of staff, told Capital & Main. “We continue to not know where the amendments came from, just that it was not us.”
The Cal Chamber noted last week that AB 3129 has been “amended to remove major concerns” and listed it among the organization’s “wins on priority bills” for this legislative session. It said Wood’s proposal stifles free market transactions in the industry.
A spokesperson for the California Hospital Association said the CHA, which represents more than 400 facilities statewide (including for-profit hospitals now excluded from enforcement), is reviewing the amendments. To this point, it has opposed the bill entirely, arguing that it restricts the flow of needed capital for a struggling health care industry.
“Nearly half of California’s hospitals lose money caring for patients every day,” the association said in a position paper released in May. “The state should encourage investment in California’s fragile health care delivery system rather than further destabilize it.”
An industry group that includes investors, hospitals and some doctors and dentists also opposes the bill. That group, Californians to Protect Community Health Care, spent $583,000 between April and June to lobby against Wood’s bill, according to state records cited by Cal Matters.
Considering that further amendments are possible, it’s not clear what the final bill will look like. It certainly won’t be what Jim Wood wanted. During a previous committee hearing, Wood expressed frustration with the changes but added, “I’d rather make progress on [private equity] than lose this.”
As amended, AB 3129 will force equity companies to notify Bonta’s office when they want to buy large doctor practices, dialysis clinics, nursing homes and other types of health care businesses. But the exclusion of dermatology clinics — and especially for-profit hospitals — is a blow. Those are private equity targets again and again.
Wood, a five-term member of the Assembly who isn’t running for reelection this fall, has spent years taking on some of the power brokers in California’s health care industry, and he is especially concerned about equity encroachments in the field. Given past performances, he’s right to worry.
It’s also unlikely that Wood is shocked by much of anything that happens during the sausage-making portion of the bill process. But unless there’s a late turnaround, this effort may be more remembered for what didn’t get included than what did. The health industry lobby remains a true power in Sacramento.
