California is the latest state to adopt tighter restrictions on private equity in the healthcare sector.

Diving brief:

• California Gov. Gavin Newsom signed new rules into law Monday that will place more restrictions on the role of professional investors, including private equity firms, in providing health care.
• The law, Senate Bill 351, prohibits financial companies from participating in medical decisions, including determining how many patients clinicians see per hour or what diagnostic tests are appropriate.
• The legislation was developed in response to a growing body of evidence linking private equity firms’ involvement in health care to higher costs, lower quality of care and reduced services, according to the California Medical Association, which supported the bill.

Dive overview:

Senate Bill 351 was popular among both Democrats and Republicans. The law follows Oregon’s lead in limiting the power of corporate investors over doctors. Oregon’s law, passed earlier this year, is considered the strictest in the country and prohibits financial companies from owning a majority stake in medical practices.

Although the California law does not go that far, it prohibits financial companies from inserting non-competition clauses in supplier contracts and language that would prevent suppliers from blowing the whistle on private equity management practices.

The law also gives the state attorney general’s office the authority to impose fines on bad actors.

“I am grateful for the governor’s signature to ensure that patients receive the medical care prescribed by their doctors, not private investors,” said State Sen. Christopher Cabaldon, author of the bill. “Private equity investments in health care practices have increased fivefold over the past decade. This type of growth requires modern enforcement tools, not to restrict investments, but to ensure they do not harm patient outcomes or increase the cost of care.”

The law marks California’s second attempt to enact tighter restrictions on private equity investments in the healthcare sector. Last year, Newsom vetoed a bill that would have given regulators more oversight over health care transactions, saying the state’s current processes were sufficient.

A similar proposal is currently on Newsom’s desk: Assembly Bill 1415, which passed the California legislature last month. The bill would require a more rigorous review process for health care transactions involving professional investors, such as private equity firms or hedge funds. Newsom has until October 12 to sign it.

California is not alone in its attempt to gain greater oversight of the role of private equity firms in health care delivery.

The past two years have brought a wave of activism against private equity in the health care industry, with patients, nonprofits and lawmakers raising the drum about the risks faced by financial companies overseeing patient care decisions.

Private equity firms typically acquire companies in order to make the asset profitable over a short period of time, approximately three to seven years. Critics argue that this model incentivizes companies to quickly cut costs, often by cutting staff.

Numerous studies have demonstrated that the quality of health care in turn declines when private equity firms acquire a range of providers, including hospitals, disability care centers, and hospices. Negative outcomes can range from increased risk of falls to elevated risk of death in understaffed emergency rooms.

Patient costs also rise after facilities are acquired by private equity firms, according to several studies, including one published this week in Health Affairs. The study found that private equity-affiliated physicians negotiated prices with insurers that were 6 percent higher for cardiology and 10 percent higher for gastroenterology procedures than private equity-affiliated physicians. independent doctors, for example.

Meanwhile, many healthcare companies decline after acquisition. Reports from the Private Equity Stakeholder Project have found that aggressive financial practices characteristic of the companies, including the tendency to carry high debt, contribute to a high rate of bankruptcies among private equity-backed health care companies.

The collapse of private equity-backed Steward Health Care and Prospect Medical Holdings led to hospital closures across the country — and calls for reforms. However, federal lawmakers have failed to get policies aimed at regulating private equity off the ground. Last year, several bills died without being debated.

In the absence of federal reforms, Oregon, Massachusetts, Maine, New Mexico, Indiana and Washington passed laws this year requiring increased oversight of private equity.

However, other state initiatives have encountered resistance. In Pennsylvania — where Prospect closed two rural hospitals during its bankruptcy proceedings — getting the legislation across the finish line is proving to be an uphill battle, despite the governor’s support. A nursing home lobby opposed the reform, arguing they need private equity investments to prop up struggling facilities.