Existing law requires a nonprofit corporation, as defined, that operates or controls a health facility, as defined, or operates or controls a facility that provides similar health care to provide written notice to, and obtain the written consent of, the Attorney General prior to selling or otherwise disposing of a material amount of its assets to a for-profit corporation or entity, to a mutual benefit corporation or entity, or to another nonprofit corporation or entity. Existing law provides that the Attorney General has discretion to give consent to, give conditional consent to, or to not consent to, the agreement or transaction and requires the Attorney General to consider any factors they deem relevant, including, but not limited to, whether the terms are fair and reasonable.

This bill would prohibit the Attorney General from giving conditional consent to any above-described agreement or transaction upon any condition or conditions that, individually or in aggregate, would reasonably be expected to, among other things, impose conditions that are unique to the selling nonprofit corporation, and are distinct from conditions that similarly situated selling nonprofit corporations are required to maintain or perform.

SENATE COMMITTEE ON HEALTH

Senator Dr. Susan Talamantes Eggman, Chair

BILL NO: SB 774

SUBJECT: Nonprofit health facilities: sale of assets: Attorney General approval: conditional consent

SUMMARY:

Prohibits the Attorney General from imposing conditions on any nonprofit facility transaction that would be expected to limit or restrain the selling nonprofit corporation from freely entering contracts and negotiating rates, have a material adverse effect on the selling nonprofit corporation, and impose conditions that are distinct from conditions that similarly situated selling nonprofit corporations are required to maintain.

Existing law:

1. Requires any non-profit corporation that operates or controls a health facility, as defined, to provide written notice to, and obtain the written consent of, the Attorney General (AG) prior to entering into any agreement or transaction to do either of the following:
   
   1. Sell, transfer, lease, exchange, option, convey, or otherwise dispose of, its assets to a for-profit corporation or entity, or another non-profit corporation; or,
   2. Transfer control, responsibility, or governance of a material amount of the assets or operations of the non-profit corporation to any for-profit corporation or entity, or another non-profit corporation. [CORP §5914, §5920]
2. Requires the AG, within 90 days of the receipt of a written notice of a proposed transaction involving a non-profit health facility, to notify the non-profit corporation in writing of the decision to consent to, give conditional consent to, or not consent to the agreement or transaction. Permits the AG to extend the 90-day deadline for one additional 45-day period if any of the following conditions are satisfied: the extension is necessary to obtain specified information; the proposed transaction is substantially modified after the first public meeting conducted by the AG; or, the proposed transaction involves a multifacility health system serving multiple communities. [CORP §5915, §5921]
3. Requires the AG, prior to issuing any written decision referred to in 2) above, to conduct one or more public meetings, one of which must be in the county in which the facility is located, to hear comments from interested parties. [CORP §5916, §5922]
4. Requires the AG, in making its decision to consent to, give conditional consent to, or not consent to any nonprofit health facility transaction, to consider specified factors that the AG deems relevant, including, but not limited to, whether the terms and conditions of the agreement or transaction are fair and reasonable to the nonprofit corporation; whether the proposed use of the proceeds of the agreement or transaction is consistent with the charitable trust on which the assets are health by the health facility; and whether the agreement or transaction may create a significant effect on the availability or accessibility of health care services to the affected community. [CORP §5917, §5923]
5. Prohibits the AG from consenting to a health facility agreement or transaction in which the seller restricts the type or level of medical services that may be provided at the health facility that is the subject of the agreement or transaction. [CORP §5917.5]
6. Licenses health facilities under the California Department of Public Health. Defines a “health facility” as a facility, place, or building that is organized, maintained, and operated for the diagnosis, care, prevention, and treatment of human illness, physical or mental, including convalescence and rehabilitation and including care during and after pregnancy, or for any one or more of these purposes, to which the persons are admitted for a 24-hour stay or longer, and includes hospitals and skilled nursing facilities, among other types of health facilities. [HSC §1250]

This bill: Prohibits the AG from giving conditional consent to any nonprofit health facility transaction upon any condition or conditions that, individually or in aggregate, would reasonably be expected to do all of the following:

1. Limit or restrain the selling nonprofit corporation from conducting its ordinary course of business, including, but not limited to, freely entering contracts and negotiating rates;
2. Have a material adverse effect on the financial condition, business, assets, liabilities, properties, operations, or results of operations of the selling nonprofit corporation; and,
3. Impose conditions that are unique to the selling nonprofit corporation, and are distinct from conditions that similarly situated selling nonprofit corporations are required to maintain or perform.

FISCAL EFFECT:

This bill has not been analyzed by a fiscal committee.

COMMENTS:

1. Author’s statement. According to the author, nonprofit Madera Community Hospital (MCH) was rapidly approaching bankruptcy due to insufficient reimbursements from Medi-Cal and Medicare. To remain open, MCH found a buyer in St. Agnes Health in Fresno, which loaned MCH $15.4 million to keep afloat until the sale was finalized. Current law requires nonprofit hospitals to obtain the consent of the AG to be sold to another entity, and grants the AG broad discretion in approving such sales, within limited requirements. The AG approved the sale of Madera Community to St. Agnes, as long as the parties agreed to a series of conditions compelled by the AG, most critically three of which imposed price caps on rates for five years. These price caps are not required under current law and no similar hospitals in California operate with the same price caps, nor do they reflect the economic realities confronting MCH. Consequently, St. Agnes backed out of the deal. This bill simply prohibits the AG from imposing economic conditions upon the sale of a nonprofit hospital under which no other California hospital is required to operate. We all want affordable healthcare, but that concern shouldn’t cost a community its only full service hospital.
2. Background on AG review. As described in existing law above, California law requires the AG's review and consent for any sale or transfer of a health care facility owned or operated by a non-profit corporation whose assets are held in public trust. The review process includes public meetings and, when necessary, preparation of expert reports. The AGs decision often requires the continuation of existing levels of charity care, continued operation of emergency rooms (ERs) and other essential services, and other actions necessary to avoid adverse effects on healthcare in the local community. Specifically, the law provides the AG with the discretion to consent to, give conditional extent to, or not consent to any agreement or transaction involving a non-profit health facility based on the consideration of any factors that the AG deems relevant, including but not limited to:
   1. Whether the agreement or transaction is at fair market value;
   2. Whether the proposed use of the proceeds from the transaction is consistent with the charitable trust on which the assets are held by the health facility or by the affiliated non-profit health system;
   3. Whether the transaction would create significant effects on the availability or accessibility of health care services to the affected community; or,
   4. Whether the transaction is in the public interest.

The law also prohibits the AG from consenting to a health facility transaction in which the seller restricts the type or level of medical services that may be provided at the health facility that is the subject of the transaction. The AG is authorized to contract with experts when deciding whether to give consent to a transaction, or to monitor ongoing compliance with the terms and conditions of any transaction, and requires the non-profit corporation to reimburse the AG for all reasonable and necessary costs to conduct the review or monitoring ongoing compliance.

1. Background on MCH and the AG’s review of its proposed transaction. MCH was a 106-bed general acute care hospital, and the only hospital operating in Madera County serving the general population (there is also Valley Children’s Hospital). The hospital, along with three rural health clinics that it operated, closed at the end of December, with the hospital board attributing the closure to costs and losses incurred as a result of the pandemic, as well as inadequate government and health plan rates for the services it provided. Prior to closure, MCH negotiated with St. Agnes Medical Center in Fresno, about merging MCH with St. Agnes. In August of 2022, MCH entered into an affiliation agreement with St. Agnes Medical Center and its parent organization, Trinity Health Corporation (headquartered in Indiana). Under the agreement, St. Agnes was to endeavor, but was not required, to operate MCH as a general acute care hospital after the closing of the affiliation agreement. Below is a summary of the AG’s review of the proposed affiliation agreement, the rationale for the conditions that were ultimately included by the AG in its conditional approval of the affiliation agreement, and the reason Trinity offered for not moving forward with the transaction:
   1. Initial independent review. As part of its required review of this transaction, the AG contracted for an independent analysis of the effects of the proposed acquisition of MCH by St. Agnes. According to this analysis, data showed that MCH was in a precarious financial position, and the proposed transaction could be beneficial to the financial stability of MCH and to the patients it serves. At the same time, approval of the transaction to stabilize the financial status of the hospital did not mean that the likely anti-competitive effects of the increased market concentration could or should be ignored. The analysis stated that there is a growing body of literature studying the impact of the acquisition of independent hospitals by systems, and that this literature documents that there is a risk that service availability can actually decline following the acquisition of an independent, locally governed hospital by a large, multi-hospital system, such as Trinity Health. The analysis initially recommended a number of conditions, including maintaining the ER and other specified services for at least ten years, and limiting post-transaction price increases for contracts with Medicare managed care plans to no more than 110% of prevailing fee-for-service (FFS) Medicare prices. For Medi-Cal managed care plans, the independent expert started off with 110% of Medi-Cal FFS prices as the initial recommendation, but in that same report, raised the ultimate recommendation to 120% of Medi-Cal FFS based on a supplemental analysis in that report. Additionally, the analysis initially recommended limiting out-of-network emergency services to commercial health plan patients to no more than 150% of Medicare FFS, but then raised its ultimate recommendation to 200% of Medicare FFS based on a supplemental analysis in that report.
   2. Supplemental reports. Following the initial report from the independent analysis, and after Trinity Health and MCH provided additional information, two supplemental reports were prepared to incorporate this additional feedback from the parties and to suggest modified conditions. In the supplemental reports, the “failing firm defense” for antitrust purposes was incorporated based on the supported claim that MCH was in imminent danger of failing if the transaction was not approved. The “failing firm defense,” which has been adopted by the US Department of Justice in its Horizontal Merger Guidelines, is used to allow the approval of what is otherwise an anti-competitive transaction, if one of the parties is likely to exit the market entirely. The analysis also found that MCH’s income from commercial plans, in particular, was sharply lower than other nearby and comparable rural hospitals for similar services, including St. Agnes. Based on this supplemental analysis, the recommended conditions were relaxed to permit MCH’s Medi-Cal managed care contracts to match St. Agnes Medi-Cal contracted rates and to allow out-of-network emergency services charges to commercially insured patients to go up to 250% of Medicare FFS rates. Because Medicare managed care price caps were already acceptable to Trinity, no further modifications were made to Medicare price caps. The AG conditions also only required Trinity to use commercially reasonable best efforts to maintain services at Madera for five years. According to the AG, taking Madera’s financial situation into account, this condition was a departure from the AG’s usual conditions that require the buyer of a nonprofit hospital to maintain services for 10 years.
   3. Trinity Health calls off purchase. In late December, about a week after the AG approved the sale with the conditions, Trinity Health announced it could not move forward with acquiring MCH. According to an article in the Fresno Bee on December 22, the chief executive officer of St. Agnes was quoted as saying “Unfortunately, given the complex circumstances and the additional conditions imposed by the AG…it became clear we could not move forward.”
   4. Perspective from the AG. According to the AG, price caps are a very common means of addressing anti-competitive and anti-equity impacts. MCH was only charging 51% of Medicare for its commercial business, far below its rural peers and St. Agnes, even though MCH’s commercial mix and volume of patients is similar to its rural peers. When supplemental payments are factored in, MCH was making money from its Medi-Cal business, but losing money on Medicare and commercial business. Everyone knew that MCH would need to raise its commercial rates, and the AG imposed no price caps whatsoever for its commercial rates, unless MCH ended up out-of-network. In the event of Madera ended up out-of-network, only ER services would be capped at 250% of Medicare, which would ensure Madera would receive a vast boost in its finances even as it would provide protection to patients who land in the ER. In the end, according to the AG, the economic conditions were not the issue. Instead, what was communicated to the AG was that Trinity Health did not want any conditions on requiring the maintenance of services.
2. Background on distressed hospitals. Beyond the situation in Madera, a number of hospitals, primarily those in rural areas but also some independent hospitals in urban areas, are in financial distress. Hazel Hawkins Memorial Hospital, a 25-bed facility in Hollister and the only hospital in San Benito County, declared a fiscal emergency last year, but has since taken steps to shore up its finances enough so that it was able to withdraw federally required notices that provided employees with 60 days of notice prior to layoffs. According to the Center for Healthcare Quality and Payment Reform (CHQPR), more than 600 rural hospitals across the country are at risk of closing in the near future due to persistent financial losses on patient services and low financial reserves. Of these, 200 are at “immediate risk of closing,” including six in California, according to CHQPR. CHQPR does not release names, and hospitals in general avoid publicizing financial distress because it could lead to staff leaving and exacerbating the hospital’s situation. According to an April 6, 2023 article in CalMatters, among hospitals that have publicly talked about their troubles or attributed reductions in services and staff to their finances are Mad River Community Hospital in Arcata, Kaweah Health Medical Center in Visalia, El Centro Regional Medical Center in Imperial County, and Beverly Community Hospital in Montebello. Beverly Community Hospital, which is a 202-bed facility, submitted a letter to the AG in January stating it was canceling plans to affiliate with the health care system Adventist Health because “Beverly Hospital does not have the resources to remain operational during the pendency of the attorney general review.”
   
   The California Hospital Association is requesting $1.5 billion as part of the 2023-24 Budget process as a one-time emergency infusion of cash for California’s hospitals, to be proportionally disbursed based on Medi-Cal utilization.
3. Double referral. This bill is double referred. Should it pass out of this committee, it will be referred to the Senate Judiciary Committee.
4. Related legislation. AB 412 (Soria) establishes the Hospital Emergency Loan Program, until January 1, 2029, for the purpose of providing loans to prevent the closure of a hospital, as defined, or facilitate the reopening of a hospital that closed between January 1, 2023 and March 1, 2023. AB 412 is pending in Assembly Health Committee.
5. Prior legislation. SB 687 (Skinner of 2017) would have required a non-profit corporation that operates a health facility that includes a licensed emergency center to obtain the consent of the AG prior to a planned elimination or reduction in the level of emergency medical services provided. SB 687 was vetoed by the Governor.
   
   AB 651 (Muratsuchi, Chapter 782, Statutes of 2017) revised provisions of law requiring nonprofit corporations that operate a health facility to obtain the consent of the AG prior to entering into any agreement to sell or otherwise transfer control of the facility to another entity, by giving the AG an additional 30 days to review the transaction, requiring the notice of the public comment hearings to be provided in different languages, requiring the AG to consider the impact on cultural interests of the affected community, and requiring the review of health facility transactions regardless of whether or not the nonprofit corporation has a suspended license.
   
   SB 1094 (Lara of 2014) would have provided an additional 30 days for the AG to review proposed transactions involving non-profit health facilities. SB 1094 would also have allowed the AG to enforce the conditions of an approved agreement, and to amend the conditions of an agreement or transaction involving a non-profit health facility if a party to the transaction or agreement made material misrepresentations to the AG. Finally, SB 1094 would have required the AG, prior to imposing an amended condition, to provide the parties to the agreement written notice of the proposed condition and allowed the parties 30 days to respond. SB 1094 was vetoed by the Governor.
   
   SB 932 (Bowen, Chapter 65, Statutes of 2003) prohibits the AG from consenting to an agreement or transaction involving the sale, transfer, lease or other disposition of a health facility owned by a non-profit corporation to a for-profit corporation, a mutual benefit corporation or another non-profit corporation, if the seller restricts the type or level of medical services that may be provided at the facility.
   
   AB 890 (Cedillo, Chapter 427, Statutes of 2002) subjects health facilities owned by religious corporations to the same requirements as other non-profit hospitals with regard to obtaining the consent of the AG prior to transferring hospital ownership. AB 890 also adds to the factors that may be considered by the AG when considering transfers of a health facility from one non-profit to another non-profit, and clarifies that the AG may collect the costs of the review from either the transferring or receiving entity.
   
   AB 254 (Cedillo, Chapter 850, Statutes of 1999) requires non-profit health facilities to obtain the consent of the AG prior to the sale, transfer or lease of a material amount of assets to another non-profit corporation.
   
   AB 3101 (Isenberg, Chapter 1105, Statutes of 1996) requires profit health facilities that are subject to public benefit corporation law to obtain written consent from the AG prior to entering into an agreement to a) sell, transfer, lease, exchange, option, convey, or otherwise dispose of assets, or b) transfer control or governance of assets. AB 3101 requires the AG to conduct at least one public meeting in the county where the facility is located, to contract with experts, and to obtain reimbursement for the costs from health facilities being reviewed.
   
6. Support. The California Hospital Association states in support that this bill would put some guardrails around the conditions that the AG may impose on hospitals that seek to partner. Specifically, the bill would prohibit the AG from imposing any condition that would have a material adverse effect on the financial condition, business, assets, liabilities, properties, operations, or results of operations of the partnering hospitals. California hospitals that seek to partner would benefit from having increased predictability around the conditions the AG may impose. Every effort to ensure hospitals have pathways to continue providing services to patients in their communities is important.
7. Opposition. Health Access California states in opposition that this bill would severely limit the authority of California’s AG to protect access to, and affordability of, hospital services provided by most hospitals in California. According to Health Access, under this bill, the AG would be force to stand by while an acquiring hospital “freely enters” contracts that would shut down the emergency room, eliminate labor and delivery services, close other hospital units, consolidate the entire hospital into another hospital, hike prices as high as 400% or 500% of Medicare, or more. Health Access states that Californians depend on their local hospitals for these services, and this bill restricts the AGs authority to prevent access to that care and prevent unjustified price hikes when nonprofit hospitals merge. A number of labor organizations, including the California Labor Federation, SEIU California, the California Nurses Association, AFSCME, the California Professional Firefighters, the California Teamsters Public Affairs Council, the United Food and Commercial Workers, and the United Nurses Association of California/Union of Health Care Professionals, submitted a joint letter of opposition. These labor organizations write that for almost thirty years, AGs of both parties have used nonprofit hospital oversite to protect hospital services to communities, and in more recent years, to prevent uncontrolled price hikes. During this time, AGs have used their authority to impose conditions on mergers involving nonprofit hospitals. According to the labor organizations, this bill would prevent the AG from even considering the impact on the health of the community or the public interest, focusing only on the financial condition of the seller. Numerous other organizations oppose this bill, making similar arguments.
   

SUPPORT AND OPPOSITION:

Support: California Hospital Association

Oppose: Access Reproductive Justice
AFSCME
California Labor Federation, AFL-CIO
California LGBTQ Health and Human Services Network
California Nurses Association
California Pan-Ethnic Health Network
California Professional Firefighters

California Rural Legal Assistance Foundation
California Teamsters Public Affairs Council
Health Access California

NARAL Pro-choice California

National Health Law Program

Planned Parenthood Affiliates of California

Purchaser Business Group on Health

Reproductive Health Access Project

SEIU California
Small Business Majority

Training in Early Abortion for Comprehensive Health Care
United Food and Commercial Workers, Western States Council
United Nurses Associations of California/Union of Health Care Professionals
Western Center on Law & Poverty
Young Invincibles

-- END

SENATE COMMITTEE ON HEALTH

Senator Dr. Susan Talamantes Eggman, Chair

BILL NO: SB 774

SUBJECT: Nonprofit health facilities: sale of assets: Attorney General approval: conditional consent

SUMMARY:

Prohibits the Attorney General from imposing conditions on any nonprofit facility transaction that would be expected to limit or restrain the selling nonprofit corporation from freely entering contracts and negotiating rates, have a material adverse effect on the selling nonprofit corporation, and impose conditions that are distinct from conditions that similarly situated selling nonprofit corporations are required to maintain.

Existing law:

1. Requires any non-profit corporation that operates or controls a health facility, as defined, to provide written notice to, and obtain the written consent of, the Attorney General (AG) prior to entering into any agreement or transaction to do either of the following:
   
   1. Sell, transfer, lease, exchange, option, convey, or otherwise dispose of, its assets to a for-profit corporation or entity, or another non-profit corporation; or,
   2. Transfer control, responsibility, or governance of a material amount of the assets or operations of the non-profit corporation to any for-profit corporation or entity, or another non-profit corporation. [CORP §5914, §5920]
2. Requires the AG, within 90 days of the receipt of a written notice of a proposed transaction involving a non-profit health facility, to notify the non-profit corporation in writing of the decision to consent to, give conditional consent to, or not consent to the agreement or transaction. Permits the AG to extend the 90-day deadline for one additional 45-day period if any of the following conditions are satisfied: the extension is necessary to obtain specified information; the proposed transaction is substantially modified after the first public meeting conducted by the AG; or, the proposed transaction involves a multifacility health system serving multiple communities. [CORP §5915, §5921]
3. Requires the AG, prior to issuing any written decision referred to in 2) above, to conduct one or more public meetings, one of which must be in the county in which the facility is located, to hear comments from interested parties. [CORP §5916, §5922]
4. Requires the AG, in making its decision to consent to, give conditional consent to, or not consent to any nonprofit health facility transaction, to consider specified factors that the AG deems relevant, including, but not limited to, whether the terms and conditions of the agreement or transaction are fair and reasonable to the nonprofit corporation; whether the proposed use of the proceeds of the agreement or transaction is consistent with the charitable trust on which the assets are health by the health facility; and whether the agreement or transaction may create a significant effect on the availability or accessibility of health care services to the affected community. [CORP §5917, §5923]
5. Prohibits the AG from consenting to a health facility agreement or transaction in which the seller restricts the type or level of medical services that may be provided at the health facility that is the subject of the agreement or transaction. [CORP §5917.5]
6. Licenses health facilities under the California Department of Public Health. Defines a “health facility” as a facility, place, or building that is organized, maintained, and operated for the diagnosis, care, prevention, and treatment of human illness, physical or mental, including convalescence and rehabilitation and including care during and after pregnancy, or for any one or more of these purposes, to which the persons are admitted for a 24-hour stay or longer, and includes hospitals and skilled nursing facilities, among other types of health facilities. [HSC §1250]

This bill: Prohibits the AG from giving conditional consent to any nonprofit health facility transaction upon any condition or conditions that, individually or in aggregate, would reasonably be expected to do all of the following:

1. Limit or restrain the selling nonprofit corporation from conducting its ordinary course of business, including, but not limited to, freely entering contracts and negotiating rates;
2. Have a material adverse effect on the financial condition, business, assets, liabilities, properties, operations, or results of operations of the selling nonprofit corporation; and,
3. Impose conditions that are unique to the selling nonprofit corporation, and are distinct from conditions that similarly situated selling nonprofit corporations are required to maintain or perform.

FISCAL EFFECT:

This bill has not been analyzed by a fiscal committee.

COMMENTS:

1. Author’s statement. According to the author, nonprofit Madera Community Hospital (MCH) was rapidly approaching bankruptcy due to insufficient reimbursements from Medi-Cal and Medicare. To remain open, MCH found a buyer in St. Agnes Health in Fresno, which loaned MCH $15.4 million to keep afloat until the sale was finalized. Current law requires nonprofit hospitals to obtain the consent of the AG to be sold to another entity, and grants the AG broad discretion in approving such sales, within limited requirements. The AG approved the sale of Madera Community to St. Agnes, as long as the parties agreed to a series of conditions compelled by the AG, most critically three of which imposed price caps on rates for five years. These price caps are not required under current law and no similar hospitals in California operate with the same price caps, nor do they reflect the economic realities confronting MCH. Consequently, St. Agnes backed out of the deal. This bill simply prohibits the AG from imposing economic conditions upon the sale of a nonprofit hospital under which no other California hospital is required to operate. We all want affordable healthcare, but that concern shouldn’t cost a community its only full service hospital.
2. Background on AG review. As described in existing law above, California law requires the AG's review and consent for any sale or transfer of a health care facility owned or operated by a non-profit corporation whose assets are held in public trust. The review process includes public meetings and, when necessary, preparation of expert reports. The AGs decision often requires the continuation of existing levels of charity care, continued operation of emergency rooms (ERs) and other essential services, and other actions necessary to avoid adverse effects on healthcare in the local community. Specifically, the law provides the AG with the discretion to consent to, give conditional extent to, or not consent to any agreement or transaction involving a non-profit health facility based on the consideration of any factors that the AG deems relevant, including but not limited to:
   1. Whether the agreement or transaction is at fair market value;
   2. Whether the proposed use of the proceeds from the transaction is consistent with the charitable trust on which the assets are held by the health facility or by the affiliated non-profit health system;
   3. Whether the transaction would create significant effects on the availability or accessibility of health care services to the affected community; or,
   4. Whether the transaction is in the public interest.

The law also prohibits the AG from consenting to a health facility transaction in which the seller restricts the type or level of medical services that may be provided at the health facility that is the subject of the transaction. The AG is authorized to contract with experts when deciding whether to give consent to a transaction, or to monitor ongoing compliance with the terms and conditions of any transaction, and requires the non-profit corporation to reimburse the AG for all reasonable and necessary costs to conduct the review or monitoring ongoing compliance.

1. Background on MCH and the AG’s review of its proposed transaction. MCH was a 106-bed general acute care hospital, and the only hospital operating in Madera County serving the general population (there is also Valley Children’s Hospital). The hospital, along with three rural health clinics that it operated, closed at the end of December, with the hospital board attributing the closure to costs and losses incurred as a result of the pandemic, as well as inadequate government and health plan rates for the services it provided. Prior to closure, MCH negotiated with St. Agnes Medical Center in Fresno, about merging MCH with St. Agnes. In August of 2022, MCH entered into an affiliation agreement with St. Agnes Medical Center and its parent organization, Trinity Health Corporation (headquartered in Indiana). Under the agreement, St. Agnes was to endeavor, but was not required, to operate MCH as a general acute care hospital after the closing of the affiliation agreement. Below is a summary of the AG’s review of the proposed affiliation agreement, the rationale for the conditions that were ultimately included by the AG in its conditional approval of the affiliation agreement, and the reason Trinity offered for not moving forward with the transaction:
   1. Initial independent review. As part of its required review of this transaction, the AG contracted for an independent analysis of the effects of the proposed acquisition of MCH by St. Agnes. According to this analysis, data showed that MCH was in a precarious financial position, and the proposed transaction could be beneficial to the financial stability of MCH and to the patients it serves. At the same time, approval of the transaction to stabilize the financial status of the hospital did not mean that the likely anti-competitive effects of the increased market concentration could or should be ignored. The analysis stated that there is a growing body of literature studying the impact of the acquisition of independent hospitals by systems, and that this literature documents that there is a risk that service availability can actually decline following the acquisition of an independent, locally governed hospital by a large, multi-hospital system, such as Trinity Health. The analysis initially recommended a number of conditions, including maintaining the ER and other specified services for at least ten years, and limiting post-transaction price increases for contracts with Medicare managed care plans to no more than 110% of prevailing fee-for-service (FFS) Medicare prices. For Medi-Cal managed care plans, the independent expert started off with 110% of Medi-Cal FFS prices as the initial recommendation, but in that same report, raised the ultimate recommendation to 120% of Medi-Cal FFS based on a supplemental analysis in that report. Additionally, the analysis initially recommended limiting out-of-network emergency services to commercial health plan patients to no more than 150% of Medicare FFS, but then raised its ultimate recommendation to 200% of Medicare FFS based on a supplemental analysis in that report.
   2. Supplemental reports. Following the initial report from the independent analysis, and after Trinity Health and MCH provided additional information, two supplemental reports were prepared to incorporate this additional feedback from the parties and to suggest modified conditions. In the supplemental reports, the “failing firm defense” for antitrust purposes was incorporated based on the supported claim that MCH was in imminent danger of failing if the transaction was not approved. The “failing firm defense,” which has been adopted by the US Department of Justice in its Horizontal Merger Guidelines, is used to allow the approval of what is otherwise an anti-competitive transaction, if one of the parties is likely to exit the market entirely. The analysis also found that MCH’s income from commercial plans, in particular, was sharply lower than other nearby and comparable rural hospitals for similar services, including St. Agnes. Based on this supplemental analysis, the recommended conditions were relaxed to permit MCH’s Medi-Cal managed care contracts to match St. Agnes Medi-Cal contracted rates and to allow out-of-network emergency services charges to commercially insured patients to go up to 250% of Medicare FFS rates. Because Medicare managed care price caps were already acceptable to Trinity, no further modifications were made to Medicare price caps. The AG conditions also only required Trinity to use commercially reasonable best efforts to maintain services at Madera for five years. According to the AG, taking Madera’s financial situation into account, this condition was a departure from the AG’s usual conditions that require the buyer of a nonprofit hospital to maintain services for 10 years.
   3. Trinity Health calls off purchase. In late December, about a week after the AG approved the sale with the conditions, Trinity Health announced it could not move forward with acquiring MCH. According to an article in the Fresno Bee on December 22, the chief executive officer of St. Agnes was quoted as saying “Unfortunately, given the complex circumstances and the additional conditions imposed by the AG…it became clear we could not move forward.”
   4. Perspective from the AG. According to the AG, price caps are a very common means of addressing anti-competitive and anti-equity impacts. MCH was only charging 51% of Medicare for its commercial business, far below its rural peers and St. Agnes, even though MCH’s commercial mix and volume of patients is similar to its rural peers. When supplemental payments are factored in, MCH was making money from its Medi-Cal business, but losing money on Medicare and commercial business. Everyone knew that MCH would need to raise its commercial rates, and the AG imposed no price caps whatsoever for its commercial rates, unless MCH ended up out-of-network. In the event of Madera ended up out-of-network, only ER services would be capped at 250% of Medicare, which would ensure Madera would receive a vast boost in its finances even as it would provide protection to patients who land in the ER. In the end, according to the AG, the economic conditions were not the issue. Instead, what was communicated to the AG was that Trinity Health did not want any conditions on requiring the maintenance of services.
2. Background on distressed hospitals. Beyond the situation in Madera, a number of hospitals, primarily those in rural areas but also some independent hospitals in urban areas, are in financial distress. Hazel Hawkins Memorial Hospital, a 25-bed facility in Hollister and the only hospital in San Benito County, declared a fiscal emergency last year, but has since taken steps to shore up its finances enough so that it was able to withdraw federally required notices that provided employees with 60 days of notice prior to layoffs. According to the Center for Healthcare Quality and Payment Reform (CHQPR), more than 600 rural hospitals across the country are at risk of closing in the near future due to persistent financial losses on patient services and low financial reserves. Of these, 200 are at “immediate risk of closing,” including six in California, according to CHQPR. CHQPR does not release names, and hospitals in general avoid publicizing financial distress because it could lead to staff leaving and exacerbating the hospital’s situation. According to an April 6, 2023 article in CalMatters, among hospitals that have publicly talked about their troubles or attributed reductions in services and staff to their finances are Mad River Community Hospital in Arcata, Kaweah Health Medical Center in Visalia, El Centro Regional Medical Center in Imperial County, and Beverly Community Hospital in Montebello. Beverly Community Hospital, which is a 202-bed facility, submitted a letter to the AG in January stating it was canceling plans to affiliate with the health care system Adventist Health because “Beverly Hospital does not have the resources to remain operational during the pendency of the attorney general review.”
   
   The California Hospital Association is requesting $1.5 billion as part of the 2023-24 Budget process as a one-time emergency infusion of cash for California’s hospitals, to be proportionally disbursed based on Medi-Cal utilization.
3. Double referral. This bill is double referred. Should it pass out of this committee, it will be referred to the Senate Judiciary Committee.
4. Related legislation. AB 412 (Soria) establishes the Hospital Emergency Loan Program, until January 1, 2029, for the purpose of providing loans to prevent the closure of a hospital, as defined, or facilitate the reopening of a hospital that closed between January 1, 2023 and March 1, 2023. AB 412 is pending in Assembly Health Committee.
5. Prior legislation. SB 687 (Skinner of 2017) would have required a non-profit corporation that operates a health facility that includes a licensed emergency center to obtain the consent of the AG prior to a planned elimination or reduction in the level of emergency medical services provided. SB 687 was vetoed by the Governor.
   
   AB 651 (Muratsuchi, Chapter 782, Statutes of 2017) revised provisions of law requiring nonprofit corporations that operate a health facility to obtain the consent of the AG prior to entering into any agreement to sell or otherwise transfer control of the facility to another entity, by giving the AG an additional 30 days to review the transaction, requiring the notice of the public comment hearings to be provided in different languages, requiring the AG to consider the impact on cultural interests of the affected community, and requiring the review of health facility transactions regardless of whether or not the nonprofit corporation has a suspended license.
   
   SB 1094 (Lara of 2014) would have provided an additional 30 days for the AG to review proposed transactions involving non-profit health facilities. SB 1094 would also have allowed the AG to enforce the conditions of an approved agreement, and to amend the conditions of an agreement or transaction involving a non-profit health facility if a party to the transaction or agreement made material misrepresentations to the AG. Finally, SB 1094 would have required the AG, prior to imposing an amended condition, to provide the parties to the agreement written notice of the proposed condition and allowed the parties 30 days to respond. SB 1094 was vetoed by the Governor.
   
   SB 932 (Bowen, Chapter 65, Statutes of 2003) prohibits the AG from consenting to an agreement or transaction involving the sale, transfer, lease or other disposition of a health facility owned by a non-profit corporation to a for-profit corporation, a mutual benefit corporation or another non-profit corporation, if the seller restricts the type or level of medical services that may be provided at the facility.
   
   AB 890 (Cedillo, Chapter 427, Statutes of 2002) subjects health facilities owned by religious corporations to the same requirements as other non-profit hospitals with regard to obtaining the consent of the AG prior to transferring hospital ownership. AB 890 also adds to the factors that may be considered by the AG when considering transfers of a health facility from one non-profit to another non-profit, and clarifies that the AG may collect the costs of the review from either the transferring or receiving entity.
   
   AB 254 (Cedillo, Chapter 850, Statutes of 1999) requires non-profit health facilities to obtain the consent of the AG prior to the sale, transfer or lease of a material amount of assets to another non-profit corporation.
   
   AB 3101 (Isenberg, Chapter 1105, Statutes of 1996) requires profit health facilities that are subject to public benefit corporation law to obtain written consent from the AG prior to entering into an agreement to a) sell, transfer, lease, exchange, option, convey, or otherwise dispose of assets, or b) transfer control or governance of assets. AB 3101 requires the AG to conduct at least one public meeting in the county where the facility is located, to contract with experts, and to obtain reimbursement for the costs from health facilities being reviewed.
   
6. Support. The California Hospital Association states in support that this bill would put some guardrails around the conditions that the AG may impose on hospitals that seek to partner. Specifically, the bill would prohibit the AG from imposing any condition that would have a material adverse effect on the financial condition, business, assets, liabilities, properties, operations, or results of operations of the partnering hospitals. California hospitals that seek to partner would benefit from having increased predictability around the conditions the AG may impose. Every effort to ensure hospitals have pathways to continue providing services to patients in their communities is important.
7. Opposition. Health Access California states in opposition that this bill would severely limit the authority of California’s AG to protect access to, and affordability of, hospital services provided by most hospitals in California. According to Health Access, under this bill, the AG would be force to stand by while an acquiring hospital “freely enters” contracts that would shut down the emergency room, eliminate labor and delivery services, close other hospital units, consolidate the entire hospital into another hospital, hike prices as high as 400% or 500% of Medicare, or more. Health Access states that Californians depend on their local hospitals for these services, and this bill restricts the AGs authority to prevent access to that care and prevent unjustified price hikes when nonprofit hospitals merge. A number of labor organizations, including the California Labor Federation, SEIU California, the California Nurses Association, AFSCME, the California Professional Firefighters, the California Teamsters Public Affairs Council, the United Food and Commercial Workers, and the United Nurses Association of California/Union of Health Care Professionals, submitted a joint letter of opposition. These labor organizations write that for almost thirty years, AGs of both parties have used nonprofit hospital oversite to protect hospital services to communities, and in more recent years, to prevent uncontrolled price hikes. During this time, AGs have used their authority to impose conditions on mergers involving nonprofit hospitals. According to the labor organizations, this bill would prevent the AG from even considering the impact on the health of the community or the public interest, focusing only on the financial condition of the seller. Numerous other organizations oppose this bill, making similar arguments.
   

SUPPORT AND OPPOSITION:

Support: California Hospital Association

Oppose: Access Reproductive Justice
AFSCME
California Labor Federation, AFL-CIO
California LGBTQ Health and Human Services Network
California Nurses Association
California Pan-Ethnic Health Network
California Professional Firefighters
California Teamsters Public Affairs Council
Health Access California

NARAL Pro-choice California

National Health Law Program

Planned Parenthood Affiliates of California

Purchaser Business Group on Health

Reproductive Health Access Project

SEIU California
Small Business Majority

Training in Early Abortion for Comprehensive Health Care
United Food and Commercial Workers, Western States Council
United Nurses Associations of California/Union of Health Care Professionals
Western Center on Law & Poverty
Young Invincibles

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