The Regulatory Barriers and Scrutiny That Continue to Burden Investment in Healthcare/Behavioural Healthcare in California

At present, it seems that many market participants believe a resurgence of healthcare and behavioural healthcare mergers, acquisitions and other investment is on the horizon, but not as many feel confident about exactly how far on the horizon it rests. These days, the “goal posts” for reaching that phase of greater activity seem to be regularly moved back a quarter or two. 

For healthcare, key drivers of the expected uptick in investment activity include:

• the need for greater access to care for chronic conditions;
• potential profits related to certain physician practice specialties, related ambulatory surgery centres and other outpatient services; and
• IT-related developments to better support clinical decision-making.

Key investment drivers in behavioural health include:

• unmet social need for behavioural health treatment;
• expanded third-party reimbursement; and
• evolving business models that create opportunity for established providers and new market participants alike.

Notwithstanding the foregoing, barriers for healthcare/behavioural health investment activity include capital constraints, (still) high interest rates, persistent inflation potentially made worse by concern on the part of some about current US trade and tariff policy, and ongoing staffing challenges. Many express the view that the current fluid economic and regulatory environment will eventually settle into new norms and with that will come the anticipated greater M&A activity many have been expecting, but uncertainty about when that will happen continues for now.

At present, this means that investors are more circumspect about whether to wade into the market and more careful about each potential deal when they do wade in. Predictably, this has also placed an even greater emphasis on due diligence and vetting applicable regulatory/third-party reimbursement issues, among other things. Not surprisingly, some sellers continue to defer a sale process ‒ awaiting improved market conditions, greater certainty and/or stronger financial performance to maximise exit value.

Notwithstanding all the foregoing, successful investments and healthcare deal-making continues and there are good deals to be struck for buyers and sellers alike. With the added present volatility, parties seeking to transact in current market conditions are well advised to prepare for a thoughtful and careful diligence process to avoid or minimise disruption, delay and surprises on the path to closing. Market conditions along with heightened regulatory barriers and scrutiny place a premium on early, close alignment between business and legal teams on both sides of the table to support a timely and successful transaction.

California corporate practice of medicine

Various states have differing degrees of what is commonly known as the prohibition on the corporate practice of medicine (CPOM). California is among the most restrictive CPOM states. While many levels of healthcare and behavioural healthcare fall under a state agency licence, certain levels of care may only be rendered by a professional corporation (PC) owing to CPOM. Often this is the case for physician practice clinics, urgent care clinics and related ancillary services lines, outpatient mental health services and/or certain clinician-provided services within a residential setting. All of this can impact legal structure in varying degrees of scope and scale.

For those who practise, operate and invest in related affected areas, this often leads to structuring and investment in a “friendly professional corporation” and management services organisation (MSO) arrangement in order to facilitate needed investment in healthcare by private equity investors, hospitals, health systems and laypersons while remaining compliant with applicable CPOM parameters. It is important to note that friendly PC/MSO models have been in existence and operation in substantial numbers and for decades in California; however, California remains focused on close regulation of same. By way of example, pending California legislation may add another layer of statutory restriction on such models, with a particular focus on private equity investors (a bit more discussion on this point follows later in this article). 

Licensing, certification, accreditation and other regulatory approvals

As in other states, parties to many healthcare transactions in California must also navigate an array of state-level and federal-level change of ownership licensing, certification and accreditation requirements ‒ each potentially requiring notice and/or approval. Some of these may involve lengthy pre-closing filing and approval requirements, some may require short pre-closing filing requirements, and others may require notice (and potentially even approval) requirements within some prescribed period after the deal closes. 

Certain California healthcare regulatory agencies are not always as responsive as healthcare providers, investors and other stakeholders might hope, owing to cumbersome internal structures and the voluminous demands of a large state. Those realities must be recognised and planned for as well when projecting costs and timelines for closing a given transaction.

California Attorney General notice and approval

Non-profit corporations that own and operate certain healthcare facilities and other healthcare services are subject to either pre-closing notice to or review and approval by the California Attorney General (AG). Required submissions by the parties in these cases can be burdensome to produce and voluminous.

The AG has 90 days in which to respond after receipt of sufficient notice about whether it will grant consent, grant conditional consent or withhold consent for the transaction. This time period can be subject to an extension under certain circumstances. 

Persistent spread of “mini-HSR” legislation in California and elsewhere

Several states have enacted legislation and promulgated regulations to subject various healthcare transactions to review that often were not subject to material review before. To some extent, it appears that the more hostile regulatory posture towards M&A (including but not limited to healthcare M&A) of late is related to and important to understanding related state legal developments and current enforcement climates, including those in California.

Parties to a given transaction may be compelled to make detailed submissions for prior review and, in some cases, approval before a given deal can be completed. This still-unfolding series of requirements somewhat resembles submissions that must be made for certain healthcare (and other) deals under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (“HSR”), but often for far smaller dollar values than the HSR reporting threshold. Lower dollar reporting thresholds have in part given rise to the label “mini-HSR” legislation, involving healthcare market review for certain transactions with thresholds driven by provider size and type and revenue source (as opposed to transaction value) capturing deal values far below HSR requirements. California is among the states perpetuating this onerous legislative trend.

California OHCA

As many who participate and invest in the California healthcare sector know all too well, California’s Office of Healthcare Affordability (OHCA) pre-closing notice and review process took effect in 2024, impacting many healthcare acquisitions, affiliations, joint ventures and other transactions that were scheduled to close on or after 1 April 2024. Members of the healthcare and behavioural health industry should give careful and early consideration to whether OHCA’s regulations impact any of their respective transactions. Although OHCA currently appears to have a more direct impact on the healthcare sector, it has the potential to impact the behavioural health sector as well, depending on the state law at issue, how the deal is structured, how the behavioural healthcare providers are structured, and the size of the transaction (among other factors). 

Preparing required submissions is burdensome and the OHCA review process can be costly and lengthy. OHCA’s transaction notice requirements apply if the transaction meets the following three requirements.

• At least one party to the transaction is a “healthcare entity” or the “subject of” a transaction ‒ OHCA defines “healthcare entity” to include a “payer, provider, or fully integrated delivery system”. Each term is further defined in the statutes and regulations to include a broad range of health facilities, provider organisations, health insurers, and others. And, in light of amended regulations in 2024, the reach of OHCA was further broadened less than a year after OHCA notice and review requirements took effect. Impacted healthcare transactions can require submission of notice and undergoing the required review process if a “healthcare entity” (as defined) is the “subject of” the transaction, even if it is not a party to the deal agreements.
• The healthcare entity must meet certain thresholds for California assets or revenue ‒ OHCA’s notice requirements only apply to:
1. healthcare entities that have at least USD25 million in California-derived assets or annual revenue;
2. healthcare entities with at least USD10 million in California-derived assets or annual revenue when another party to the transaction is a healthcare entity with USD25 million in California-derived assets or annual revenue; and
3. healthcare entities located in a designated primary care Health Professional Shortage Area (HPSA) in California.
• The transaction must constitute a “material change transaction” ‒ OHCA’s regulations list and define several types of transactions that constitute material change transactions, including transactions with a proposed fair market value of at least USD25 million that concern the provision of healthcare services, transactions involving the sale of 25% or more of the submitter’s total California assets, transactions involving a change of control of the submitter, and other prescribed types of transactions.

If all three requirements are met, the healthcare entity must provide OHCA with notice of the transaction at least 90 days before the expected closing date of the transaction. The notices will require extensive information and documentation about the transaction and the transaction’s potential impact on healthcare services in California.

It is important to consider the potential time delay involved for any given healthcare or behavioural healthcare deal when an OHCA filing may be required. OHCA filings require a great deal of data and information and often take weeks or longer to assemble given the complexity of the filing requirements, information and documents required.

Once submitted, OHCA will conduct an initial review of the notices and determine whether to conduct a more intensive and lengthy cost and market impact review (CMIR), which will open the transaction to public comment. Although the regulations establish timelines for OHCA’s review process, the review process can take anywhere from a few months to nearly a year, depending on the circumstances.

By way of example, even though OHCA regulations specify that the agency will notify the parties within 45 days if OHCA determines to waiver the CMIR, that 45 days is measured from the point that OHCA deems the required notice complete; there can be follow-up requests that cause that initial 45-day “clock” not to begin running until days or weeks after the submission was made. On a related note, OHCA can toll the initial review period even if ‒ after determining the initial submission is complete ‒ it has follow-up questions or requests. As a result, in planning for anticipated transaction timing and desired closing, parties must take into account that said initial 45-day period may be substantially longer than 45 days, possibly growing into months. And if OHCA determines not to waive the CMIR, a far lengthier delay will be in store for the parties as OHCA then engages in a more in-depth and time-consuming review process. 

Although OHCA does not have approval power over a given transaction, the transactions that are subject to such notice and review requirements cannot take effect until after OHCA has completed its review of the transaction and issued its final report.

As if the foregoing were not enough, this relatively new healthcare notice and review process may expand in scope again if pending California legislation is passed later in 2025 and signed into law by the governor of California. Among several other things, California Assembly Bill 1415 (“AB 1415”) would add MSOs as entities that are required to provide notice and undergo a review process when entering into a material change transaction with a healthcare entity even though the MSO itself is not a healthcare entity. This is an apparent effort to pull even more healthcare transactions within OHCA’s orbit. AB 1415 has several other troublesome provisions with regard to investment in healthcare, including some aimed directly at private equity investment, and merits continued careful monitoring and planning.   

Potential application of OHCA notice and review requirements depends upon understanding the nuances of the law, regulations and exceptions. Proceed early and with care if OHCA requirements may apply.     

Heightened scrutiny of private equity investment in healthcare continues

Many within (and even outside) the California healthcare and behavioural healthcare provider communities, as well as those who invest in and support these communities, will recall that in 2024 the California legislature was considering a bill that could have severely impacted the ability of private equity companies and hedge funds to operate in the California healthcare industry. California Assembly Bill 3129 (“AB 3129”) would have:

• required prior notice to and approval by the AG before a change of control or acquisition between certain healthcare entities and private equity groups or hedge funds; and
• limited the ability for private equity companies or hedge funds to exercise managerial authority over physician and psychiatric practices.

AB 3129, part of an ongoing trend of adding barriers to and scrutiny by state and federal enforcement agencies of private equity investments in the healthcare industry, would have taken effect as of 1 January 2025 had it passed and became law. AB 3129 passed both houses of the California legislature but was vetoed by Governor Newsom, who reasoned in part that the measure appeared to duplicate the scope and purpose of OHCA. 

Earlier in 2025, the California legislature introduced a bill that would implement some of the same restrictions on private equity healthcare investments as 2024’s AB 3129. CA Senate Bill 351 (“SB 351”) includes some of the same language from AB 3129 that would limit the authority of affiliates of private equity companies when entering into management agreements with physicians and dentists; however, it does not include AB 3129’s language requiring notice and consent of the AG for certain private equity healthcare transactions.

While SB 351 shows that California is doubling down on restricting friendly physician arrangements, it largely reflects many of California’s existing laws and requirements prohibiting the corporate practice of medicine and dentistry. Many believe that both AB 1415 and SB 351 are a direct response to the battle over AB 3129 in 2024 and the governor’s rationale for vetoing the same. At a minimum, this development appears to reflect a reaffirmation by the California legislature and other proponents of SB 351 that private equity investment in healthcare, MSO arrangements and perceived or real infringements upon California corporate practice restrictions are to remain closely scrutinised. Like AB 1415, SB 351 merits careful monitoring and planning.

What should healthcare and behavioural health providers, investors and other stakeholders do now? 

As discussed earlier, current market conditions warrant special attention to legal structure and regulatory considerations in the planning and execution of a successful transaction. Those same considerations, along with a healthcare and behavioural health M&A market that remains somewhat unpredictable at this time, place a premium on advanced preparation in the early stages of a transaction process. Careful attention to structure, notice, review and approval processes that may be implicated can help keep a transaction moving and avoid surprise and/or delay on the path to closing. Similarly, increased regulatory scrutiny for healthcare and behavioural healthcare transactions may create new substantive barriers to investment at a time when healthcare and behavioural health providers are in need of investment to meet challenges posed by long-term increased demand and more complex business-model, operating and reimbursement challenges.

When considering and planning for investment and transaction activity in California, it is recommended that healthcare and behavioural healthcare providers, private equity investors, health systems and other stakeholders heed the following advice.

• Legal and regulatory assessment of deals and the above-mentioned issues should be commenced early. The novelty and complexity of these issues means that early assessment can help avoid surprises and expedite closing.
• It should be kept in mind that transaction structure can significantly impact necessary transaction approvals and related processes, along with substantive regulatory compliance risks. Experienced healthcare transaction counsel should be involved in the early stages of setting the structure and charting the path to closing.
• It is worth strategising early to try to limit follow-up questions/request and potentially more lengthy review (where applicable) by pre-emptively addressing areas with regulatory agencies that are likely to attract greater scrutiny. Co-ordination among buyers and sellers in preparing for such notice and review can help manage and mitigate the entire review process.
• The evolving legal and regulatory standards applicable to healthcare and behavioural health providers should be monitored and planned for. This includes ongoing changes to federal and state antitrust, mini-HSR requirements, corporate practice restrictions, and heightened focus on private equity.