A California law requiring private equity firms and hedge funds to get approval from the attorney general’s office when buying health care assets appears to be dead in the water.

The legislation is Assembly Bill 3129, sponsored by California Representative Jim Wood. Up until now, the bill has had plenty of momentum, making it out of the California State Assembly and succeeding in two committee votes in the California Senate. If finalized, AB 3129 would have forced PE-type buyers to disclose acquisitions 90 days before they close and get permission from regulators beforehand.

That’s notable for ambulatory surgery center (ASC) stakeholders, as private investors have turned their attention to the outpatient surgery market with greater frequency as of late. AB 3129 could have effectively put a damper on ASC M&A and investment activity, some experts believe.

But California Gov. Gavin Newsom, a Democrat, vetoed the legislation on Saturday.

Among the groups to oppose AB 3129 was Californians to Protect Community Health Care, a coalition of hospitals, doctors, behavioral health providers, dentists, investors and employers.

“California has made significant strides in improving access to affordable health care in recent years, but parts of the health care system remain severely underfunded,” Ned Wigglesworth, spokesperson for the coalition, said in a statement. “AB 3129 would have made these problems worse by blocking a critical source of funding that is supporting hospitals, clinics, doctors and other community health care organizations throughout California.”

If enacted, AB 3129 would have given the California attorney general “new power to unilaterally and arbitrarily” reject private funding and investment in health care providers and facilities, which often can serve as a “lifeline” for struggling health care providers, the coalition’s statement argues.

In theory, AB 3129 was meant to protect competition by blocking private interests from creating monopolies or near-monopolies in their markets.

Similar efforts have been picking up across the U.S. due to the negative spotlight on PE in health care.

In addition to California, at least two other states – Washington and Massachusetts – have enacted laws and/or have pending legislation restricting PE health care dealmaking, according to a recent report from Bloomberg Law. Several other states have been making moves as well.

According to Definitive Healthcare’s SurgeryCenterView product, California has more ASCs than any other state, with over 1,200 surgery centers within its borders. After California, Texas, Florida and George have the most ASCs, with the Lone Star State and the Sunshine State each having over 700 ASCs per Definitive Healthcare’s data.

When it comes to PE in the ASC space, 2023 had at least six add-on acquisitions executed by PE, plus at least one minority-investment deal, according to PitchBook data. As of June 30 of this year, there have been at least two ASC add-on acquisitions and two minority investments.

Rebecca Springer, lead health care analyst at PitchBook, recently discussed PE trends in the ASC market with ASC News.

“It’s that trend of pulling care out of the hospital into outpatient settings,” Springer told ASC News. “That’s been the case for a while. You look at a category like cardiovascular; the growth of private activity in that category for the past couple years was very much driven by certain procedures being approved for reimbursement in an outpatient setting.”

In regard to AB 3129, Newsom explained his veto was partly due to overlap between the bill and California’s recently created Office of Health Care Affordability (OHCA).

Health care attorneys from the law firm Polsinelli recapped the outcome of AB 3129 in a Monday brief.

“Newsom nodded to the potential overlap of the two laws and review processes and stated that it is OHCA’s role to review certain health care transactions and to monitor market consolidation in California,” the brief explains.

Polsinelli’s brief also cautions that the focus on PE in health care likely isn’t over.

“While AB 3129 will likely not become law in California, its passage in both the Assembly and Senate are an indication that there may be increasing attention by California regulators on private equity involvement in the health care industry,” the brief continued.