This proposed bill in California could have a big impact on digital health

Let’s talk about California AB 3129.

Most people in digital health aren’t following this proposed bill, but the lawyers are. That’s because it could have major implications for digital health companies backed by private equity and venture capital.

The bill has two major pieces:

1. To institute a new review process with the Attorney General for transactions involving PE, hedge fund and health facilities. This is where a lot of lobbying and the attention around the legislation has been focused, per Quinn Shean, a strategist and regulatory advisor for digital health.

2. There’s proposed new provisions around what the investor relationship looks like with a medical practice.

What #2 threatens particular is the “captive PC” or “friendly PC” model, which is about 40 years old. This model is very common because of laws in many states related to the “corporate practice of medicine,” which means non-doctors can’t own medical practices or direct medical care. So VC’s, as well as hospitals and health plans, use the friendly PC model. It also protects the VC firm via share transfer agreements if a physician owner goes rogue by selling the practice to someone else. Investors ultimately need to make returns and they need to protect their companies against potential risks — for them, it can’t just be about the mission.

How does that work? In very simple terms, explains Manatt’s Randi Seigel, investors invest in management companies that contract with a physician practice, owned by one or more licensed physicians (one in very common) to provide all the non-clinical management and administration support under a management services agreement. This sets up operations so that the physician focuses solely on the supervision and quality of the medical care. The patient doesn’t see most of this on the back-end, unless they read the fine print. Underneath that is the medical group and the management company and there’s a relationship between the two.

Per legal experts I spoke to including from Manatt and Foley & Lardner - this bill could make it really hard to execute this model in California. So for Second Opinion subscribers, I dug into some of the potential impact, as well as the likelihood that a bill like this could pass in California. Where the macro concern seems to be on the regulatory side is that the lines are being blurred between the management services arm and the physician-owned practice.

“Yes, this legislation could actually pass and, signed into law, would likely eliminate the friendly PC model in California as we know it,” explained Nate Lacktman from Foley & Lardner. “Other states could follow suit,” he said.

Let’s discuss in more detail.