California AB 3129 and the Litmus Test of Value
Special Advocacy Edition #1
Wheels In — Intro + Opening Thoughts
The goal of “The Surgeon’s Record” is to provide a nuanced perspective backed by evidence. We want to add something to the conversation, not parrot what’s already been said. I dislike echo chambers, especially when it comes to health care policy and economics. Our tendency to succumb to emotion and cling to preconceived notions harms our ability to solve health care problems. Closed minds and polarized thoughts betray the complexity and nuance essential to productive discourse. We all have agendas and biases, and that’s okay. However, the capacity for critical thinking is one of our greatest assets. Rather than shouting into the void, we should deepen the conversation.
With that, let’s talk about California Assembly Bill 3129 and the role of management services organizations (MSO) in achieving health care value.
Dem Dry Bones
From the EiC’s Desk
Introduced in February of this year, California Assembly Bill 3129 (AB 3129) is primarily intended to curb health care consolidation with a particular focus on private equity (PE). Most states already limit the corporate practice of medicine (CPOM), but there are numerous exceptions and work arounds. One of the most popular is the “friendly PC” model in which a single physician controls the clinical aspects of a corporation while a management service company (MSO) handles the business side.
The “friendly PC” model is intended to create a clear distinction between medical and financial interests. Doctors practice medicine as they see fit, free from corporate influence. Critics of the friendly PC model question its ability to achieve this separation. California’s CPOM restrictions are already amongst the strictest in the country, but AB 3129 takes things even further. The bill contains vague language open to broad interpretation. Some have suggested AB 3129 could effectively eliminate the friendly PC model in California, a move that would have far-ranging effects and unintended consequences.
The growing presence of private equity in health care has received considerable attention at the state and national levels. The prevailing opinion is that private equity in health care is bad, and there are myriad examples to support this.
A small sampling:
Envision Healthcare’s out-of-network billing practices
The ongoing Steward Health debacle
Studies demonstrating worse treatment outcomes at private equity-owned hospitals
The counterpoint is that, just as no payment model is inherently good or bad, no model of health care financial management is inherently evil. Health policy professor Dr. Ge Bai’s recent thought-provoking (and controversial) article suggests that private equity isn’t the problem; it’s consolidation and lack of competition. Furthermore, the degree of concern and legislative focus on limiting PE in health care may be disproportionate to the size of the problem.
According to PitchBook, private equity owns less than 4 percent of health care providers by revenue, and there hasn’t been a major PE investment in a hospital or health system since 2018. Curiously, continued hospital and health system consolidation does not generate the same level of regulatory angst. Neither do “too-big-to-fail” nonprofits, which are nonprofit in name (and tax benefit) only. Ditto ineffective and expensive government-sponsored programs such as those offered by the Center for Medicare and Medicaid Innovation (CMMI).
Controversy over the role of private equity in health care aside, overly broad, unsophisticated legislation has ripple effects and harmful unintended consequences. AB 3129 could stifle innovation and effectively kill alternative solutions at a time when health care needs them most. As detailed by Chrissy Farr, the original bill posed a significant threat to VC-backed digital health companies and advanced care models that rely on the friendly-PC MSO structure. (Fortunately, the bill has since been amended to potentially reduce this impact.)
Despite all this attention, there is still too much focus on legislating downstream effects and not enough focus on addressing root causes. Health care providers are facing an increasingly restrictive and anti-competitive environment, including:
Declining reimbursement
Increasing administrative burden
Loss of market power and autonomy
Together, these factors have contributed to a record numbers of employed physicians and the slow death of independent practice. In the absence of high-level reforms to address these issues (which don’t appear imminent), doctors’ options are limited. Maintaining independence in the current climate requires negotiating skills, economies of scale, and business savvy. Forward-thinking physicians understand the importance of partnerships in navigating these complexities. Enter MSOs.
One flavor of MSOs—supergroups—involve associations of independent practices, often under a single tax ID number. Supergroups share resources, clinical protocols, and payer and vendor contracts to maintain leverage and autonomy while delivering high-quality care. Several supergroups exist in orthopedics, including OrthoCarolina, OrthoVirginia, OrthoIndy, and the recently formed PELTO.
Supergroups can be successful in supporting physician independence while providing practice management resources. However, consolidating disparate practices requires adept change management. The good is taken with the bad. In supergroups, physicians are still largely responsible for making business decisions and taking on financial risk. Getting large groups of physicians on the same page and keeping them there can be a challenge.
Venture capital and private equity-backed MSOs are an alternative to supergroups, with the theoretical advantage of providing comprehensive management services and access to capital. When well-executed, such models allow physicians to focus on patient care without the burden of running a business. Unfortunately, this promise doesn’t always come to bear. Critics argue that VC/PE-backed MSOs create perverse incentives, something AB 3129 aims to prevent.
Again, no model is inherently evil, and broad, vague legislation risks stifling innovation while paradoxically driving more provider-health system consolidation. The key is separating the good from the bad. I’d propose a simple litmus test: Is value being created or extracted? Value creators should be celebrated and supported. Value extractors should be identified and eliminated. This applies not only to MSOs but also to digital health companies, PBMs, ACOs, and even CMS/CMMI care delivery models.
The Litmus Test: Are you creating or extracting value?
There is precedent to identifying and legislatively supporting value creators. In December 2020, the Department of Health and Human Services issued two final rules—the Anti-Kickback Statute (AKS) final rule and Physician Self-Referral (Stark) final rule—introducing a new framework for regulation of value-based enterprises (VBEs). The final rules create a version of the litmus test by which care innovation can be measured and regulated. They relax restrictions for almost any VBE willing to take on risk and demonstrate value. Prior to the final rules, waivers were only available to CMS models. In essence, the final rules pave the way for payers and providers to create innovative care models. AB 3129 could unintentionally squelch this process. In addition, the final rules contain their own requirements and safeguards, making AB 3129 unnecessary.
The Final Rules incentivize stakeholders to design and implement high-quality, value-based arrangements with appropriate levels of risk. Doing so requires collaboration between provider groups, payers, venture capital-backed digital health companies, private equity-backed MSOs, and others who wish to take advantage of these safe harbors and exemptions. So far, there’s been a lot of talk about VBC, but not enough action. We need more forward-thinking legislation like the final rules and less heavy-handed regulation like AB 3129. As Dr. Bai, Michael Porter, and others argue, value is driven by fostering competition, not stifling it.
While the litmus test concept is straightforward, proving value creation is tricky. Simply defining “value” is a struggle. For this reason, enough time and leeway should be given for model creation and iteration, especially for startups or newly formed MSOs. Transparency and outcomes reporting are key, and it is incumbent upon VBEs to demonstrate improved access, quality, and costs. Abuse of safe harbors and exemptions harms everyone.
Finally, I’d argue that any MSO or VC/PE-backed entity should be required to demonstrate strong clinical leadership to be considered a VBE. Studies show that physician-lead value-based care models perform better. If the goal is to reduce consolidation and eliminate perverse incentives, the solution is physician empowerment. VBEs should be required to maintain diverse clinical advisory boards and appoint chief medical officers with the proper authority and support to guide these efforts.
- Ben
Small Incisions
Quick Takes on Timely Topics
Forty-five percent of patients polled said they’d recently skipped treatment or medicine due to cost or lack of easy access. This is exactly why no alternative method of care delivery should be off the table (or squelched by overly broad legislation). We’re well-resourced and proven innovators in other sectors. We must do better.
CrowdStrike outage hits US hospitals (Healthcare Dive)
Cue another round of sad-but-true jokes about the direct relationship between EMR downtime and health care productivity. (No one does it quite like Will Flannery, aka Dr. Glaucomflecken). I’m no technophobe and, while I’m old enough to remember simpler days of documentation and order entry, I’m not advocating for a return to paper charts. The Bronx cheers for EMR outages aren’t an indictment of technology; they’re commentary on poor technology implementation.
Why Primary Care Practitioners Aren’t Joining Value-Based Payment (Commonwealth Fund)
The answer: financial barriers, PCP workforce shortage, imperfect performance measures. Suggested solutions: sufficient upfront payments, increased payments, investment in primary care training, and ensuring health systems transfer VBC payments to frontline physicians. (The last bit is telling.) PCPs want metrics that support access and continuity of care, two things newer models like Making Care Primary and TEAM seem to offer. Reading this article reinforces one critical issue holding back VBC: the disconnect between model design and frontline reality.
Exhibit A of why physicians must pursue partnerships (supergroups, MSOs, and alternative practice models) if they have any hope of maintaining some form of autonomy and control. Per a recent Harris Poll, 62 percent of physicians don’t believe their practice is on sound financial footing. The average practice stands to lose $56,000/yr from the proposed 2025 Fee Schedule, equivalent to one FTE at a time when personnel shortages are already an issue. I’ll say it again: any value-focused practice model should be on the table and attainable.
The Gold Standard
Polling the Crowd
The Light Box
Health care Visuals
From the Gallery
Amplifying Community Voices
“If my money [comes] from the government, I would just focus on influencing the process. I don’t care about patients…they don’t bring me money. But if we have a competitive market…my money comes from patients…I must make them happy. We must make patients happy, not the government. I think that’s the key.”
Dr. Gei Bai on American Dynamism in Healthcare (Remarks to the Senate HELP Committee)
Wheels Out
Signing Off and Looking Ahead
Innovating health care delivery to create a system that achieves better outcomes, lower costs, and improved access is not controversial. How we get there shouldn’t be either. Just as efforts to “carrot-and-stick” value into existence are ineffective, so too are overreaching legislative efforts to curtail bad actors. The heart of AB 3129 may be in the right place, but now is not the time to score political points at the expense of innovation.
Until next time,
Ben Schwartz, MD, MBA
Editor-in-chief/Senior clinical fellow