Private equity-backed behavioral health companies are organizing to oppose additional dealmaking oversight in the health care hotbed of California.

Since April, Assembly Bill 3129, sponsored by Assemblymember Jim Wood, has passed out of the California State Assembly and has succeeded in two committee votes in the California State Senate. The bill, if enacted, would require private equity or hedge funds to disclose acquisitions 90 days before they close and get permission from the state attorney general to do so.

The new coalition of providers says that this proposed law jeopardizes the industry’s ability to meet the crushing demand for behavioral health services.

“Behavioral health providers are already under-resourced to meet the unprecedented demand for behavioral health care and SUD services,” the group said in a statement. “AB 3129’s arbitrary approval process jeopardizes private funding needed to preserve and expand access to a wide range of behavioral health care services offered for patients in need of treatment for SUD/opioid addiction, PTSD, developmental disabilities, depression, autism spectrum and eating disorders.”

The group so far includes Sacramento-based outpatient mental health provider Mindpath Health; ​Mt. Laurel, New Jersey-based Pinnacle Treatment Centers, along with Pinnacle’s California-based entity, Aegis Treatment Centers; Newport Beach-based Northbound Treatment Services; and Los Angeles-based The Haven at College.

The bill is also intended to address critics’ concerns regarding private investment in health care. Some skeptics, for instance, fear that such investment ultimately leads to staffing reductions to maximize profits and risky debt financing during scaling-up plays, which puts providers’ operations at risk of closure.

That’s on top of the general concerns about care quality.

Assembly Bill 3129 — as well as other other state efforts and federal actions — is meant to prevent anti-competitive behaviors such as establishing local monopolies for services. A frequent example of the reality of these actions includes hospital systems.

However, the bill has been amended to exempt hospital systems. It also exempts health plans, which are increasingly vertically consolidating the health care industry, acting as both payers for and providers of health services, as well as other middleman services such as prescription drug management (PDM) services. 

“AB 3129 cuts off a critical source of funding that has enabled independent providers to establish premier medical practices and stay independent from managed care payers and large health and hospital systems without addressing the underlying and fundamental need these providers have for funding to support [the] expansion of care,” the new coalition’s statement reads. “Behavioral providers and practices still need funding to meet patient needs: where will this come from if private funding is effectively shut off?”

Dictating the role of PE 

On top of the 90-day disclosure and attorney general review, the bill would allow the state attorney general to extend the review period another 45 days and an additional 14 days if the attorney general called for a public hearing on a given deal. If the attorney general makes no ruling at the end of the relevant review periods, the deal may close.

The bill also dictates what role private equity and hedge fund executives may have in their health care entities.

They are forbidden “from interfering with the professional judgment of physicians, psychiatrists, or dentists in making health care decisions.” They are also to have no excessive control over the content of medical records, the hiring and firing of providers, payer contracting, contracting with other health care providers, billing and coding and the selection of medical equipment and supplies.

There is a waiver process. Acquirers must show, and the state attorney general must find, that “all” of the following conditions have been met:

— Submitting all deal documents

— Show that costs have been higher than revenue for three years and the entity can’t meet its debt obligations

— Is likely to close and file for Chapter 11 bankruptcy protections

— Is likely to seek liquidation under Chapter 7 bankruptcy protections

— The deal continues care access

— The seller “made commercially reasonable best efforts in good faith to elicit reasonable alternative offers”

The state attorney general would have 45 days to review the waiver request.

In its definitions, providers under the bill include “nonphysician mental health professionals” and physicians. It includes acute psychiatric hospitals in its definition of hospitals.

Contextually, there’s debate around how significant a role PE actually has in the U.S. health care system.

In a recently published report, for instance, PitchBook reported that PE-backed providers represent less than 4% of the U.S. health care provider ecosystem by revenue. In the same report, though, PitchBook pointed to the mental health space as one of PE’s major focus areas, along with home-based care, dental and musculoskeletal care. 

“In the early 2010s, PE firms backed numerous ‘luxury rehab’ SUD treatment facilities, which tended to fly in patients from out of state and to bill out of network,” PitchBook wrote in its report. “Due to payer pushback and the clinical inadequacies of this model, PE investment in SUD treatment and other mental health models swung in the late 2010s toward acquiring in-network, in-state, medically focused providers almost exclusively, as out-of-network reimbursement is considered too risky and volatile to underwrite.”