What Bill SB-642 Could Mean for Healthcare Businesses

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By Nicholas D. Jurkowitz, Partner, Fenton Law Group

A new proposed bill in California is currently pending and will undergo examination until it gets approved or not. If approved, California’s SB-642 would implement changes that could devastate many California healthcare businesses. Many healthcare facilities believe that it is too restrictive and subjective.

It is a change that goes against how many California medical establishments have done business over the years. It will affect all involved and create a decline in the system, which will affect patients.

SB-642 recently got a clearance from the California Senate Health Committee, meaning the law may get enacted within the next two years.

Section 2408.5

As a part of the bill, Section 2408.5 is an addition to the Business and Professions Code. It reads as follows:

“The shareholders, directors, and officers of a medical corporation as outlined in Section 2408 shall manage and have ultimate control over the assets and business operations of the medical corporation and shall not be replaced, removed, or otherwise controlled by any lay entity or individual, including, without limitation through stock transfer restriction agreements or other contractual agreements and arrangements.”

How Does Section 2408.5 Affect Healthcare in California?

Healthcare in California is a complex and fluid system where hospitals can independently manage to treat patients with the equipment and staff they have. However, there are some limitations as many hospitals do not have funding for all necessities. To make up for this, many establishments work closely with management services organizations (MSOs).

MSOs fill the gap that healthcare services need by providing various management functions. These operate independently of regular operations and are responsible for handling various administrative tasks, including:

  • Fixing care arrangements
  • Scheduling
  • Health plan management
  • IT and infrastructure
  • Vendor contracts
  • Payments

When a healthcare business partners with an MSO, they are getting all the services and equipment they need at a minimal cost. It works well because of limitations medical facilities have:

  • Lack of resources: Creating systems for administrative management is time-consuming and costly. With how high-traffic medical establishments have been in the past few years, there is no time to adjust.
  • Staffing: Medical facility staff isn’t enough to cover every administrative task to help run operations smoothly. Most of the staff prioritizes healthcare and other health-related services. MSOs fill the gap.

MSOs are the economical and practical choice, allowing healthcare professionals to focus on patient care rather than running a facility. Additionally, the facilities don’t have to worry about scaling because MSOs have enough staff to scale and cover operations at multiple locations.

By having an MSO at their side, hospitals don’t need to be afraid when attracting partners, vendors, and more. However, making the hospital shareholders solely responsible for this task will create a rift. Work would be much slower, and the lag would create a gap of service for the hospital, which creeps unto its patients.

What Happens if SB-642 Comes into Effect?

A sudden implementation of SB-642 will likely catch many establishments unaware. The shock to the healthcare system can affect everything, slowing down services as facilities try to catch up. Here are some of the things that can happen:

Healthcare Services Slow Down

Administrative services provided by MSOs are one of the reasons healthcare can operate fast in today’s environment. It makes it easy for hospitals and the like to connect to vendors they need. They can partner and work without having to worry about micromanagement. 

Under SB-642, they will have to do this themselves, including covering staffing needs. This will cut their operations and reduce their capacity to take on new patients. California’s healthcare system could see a shock leading to a decline in overall healthcare quality. It could even ripple to the point that it may take years for hospitals to recover.

Businesses Shut Down and People Lose Jobs

MSOs are thriving businesses that specialize in healthcare services, and many cannot transition to other industries. As a result, they will likely shut down, leaving companies bankrupt and hundreds, if not thousands of people out of work. 

Medical Facilities Stretch Finances Thin

Since many medical operations would lose their MSO connections due to restrictions, they’ll have to reconfigure their entire business. Most will struggle to accommodate this change, and some facilities may close down to restructure.

Other Changes in the Bill

Aside from the change in MSO arrangements, the bill would change how decisions of a hospital’s governing body can impact hospital operations. SB-642 will prevent these bodies from decisions that are not in the approval of their medical staff. For example, some hospitals will hold judgments made by a physician for treatment.

This change likely targets hospitals in California which consider their beliefs of healthcare. Some prevent medical practices like in-vitro fertilization and abortion due to ethical concerns. With the law, the governing body cannot exercise any change with a treatment recommended by staff if the two don’t agree.

Attorney General Control

The final part of the bill states that the Attorney General will have the power to approve health care transactions in California. The Attorney General can intervene in two scenarios:

  1. When the transaction reduces the accessibility of health care services to those under the Unruh Civil Rights Act
  2. An unlawful motive affects a patient’s medical access

It is not the first time a bill has tried to give more control to the Attorney General. There have been at least three recent bills that tried, but they have all failed due to various concerns. The main concern is that they inhibit hospitals’ abilities to work quickly.

Many Do Not Agree with California’s SB-642

After the information went public, many have stepped forward to go against the bill. The biggest argument is that physicians are getting too much control. Governing bodies are important in making critical decisions and changing this would destroy the fundamentals of hospital operations, reducing institutional stability.

Additionally, while the bill doesn’t specify religious or ethical activities, Catholic healthcare institutions believe it is targeting their practices directly. Faith-based institutions have a right to operate within their beliefs, and these changes would violate their First Amendment rights. 

Many letters from those in opposition go on to state numerous issues that will lead to more problems down the line. These include:

  • Restricting the governing body would remove responsibility and oversight.
  • Restricting the governing body also destroys its ability for full administrative support. The body is also responsible for handling things outside healthcare.
  • It would create funding, staffing, and competency concerns as hospitals also have limitations.
  • Removes the ability of a governing board to enter or cancel contracts with partner groups.
  • Would give physicians the authority to perform higher-risk treatment that could do more harm to the patients. It could, in turn, result in the hospital losing credibility and becoming vulnerable to lawsuits.

Preparing in Case of a Change in the Coming Years

The law is still subject to some changes and is being “shelved” until the next legislative session (2022-2023). It’s still important to be ahead of the curve and prepare. MSOs and healthcare facilities have some time to review their policies and prepare for anything similar. Here are some things that these companies can do within the next year:

  • Review their policies, conditions, and covenants. Consult with legal professionals to ensure that they follow current laws. At the same time, they can consider their options for when changes happen.
  • Make clear agreements with other parties such as MSOs. Ensure that everything is within the scope of current laws.
  • Reassess current religious and ethical directives to see if they interfere in any way with operations. Patient welfare should be a priority for healthcare institutions.

SB 642 Needs Revisions

Since releasing the information publicly, California’s SB 642 has been on the end of controversy. Many medical facilities and MSOs have spoken out on how the bill will be more detrimental than good. For now, the California Senate Appropriations Committee has listened to all the concerns. They tabled it to next year’s legislative session, subject to deeper review.

Seeing the bill’s objectives, professionals in the healthcare industry can make preparations in case something similar arises in the future. Those in California should remain vigilant. SB-642 might resurface next year and still have issues that can affect MSOs, although many are hoping that new laws don’t affect what is already working well in California.

About the Author:

Nick Jurkowitz has a wide range of experience representing and advising healthcare providers on litigation and regulatory related matters. He has represented providers in all aspects of administrative hearings and investigations, including before the Medical Board, Board of Registered Nursing, Board of Psychology, Board of Pharmacy, Physical Therapy Board and Board of Occupational Therapy; and providers in contract disputes, business torts, insurance fraud cases, employment discrimination cases, unlawful employment termination cases and Medicare and Medi-Cal fraud related cases. He also counsels clients on complying with federal and state laws in the establishment of health care related businesses and ventures.

Prior to joining Fenton Law Group, Nick was a litigation associate in the Los Angeles office of Sullivan & Cromwell, LLP, where he practiced business litigation. He has been named to the “Best Lawyers in America” in the area of health care litigation since 2016, and has been named a Thomson Reuters “Super Lawyer – Rising Star” since 2014. In 2015, 2016 and 2017 he made the “Up-and-Coming 100: Southern California Rising Stars” list, placing him in an elite group of Southern California’s top 100 “Rising Stars.”

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