Our Health Care Group breaks down two California bills (SB 351 and AB 1415) that would regulate private equity’s and hedge funds’ roles in managing health care and dental practices.
- SB 351 would codify the state’s existing guidance for the restrictions on the corporate practice of medicine and add a new enforcement mechanism for the attorney general
- AB 1415 would add health systems, management service organizations, private equity firms, and hedge funds to the existing Office of Health Care Affordability material change transaction law
- The proposed bills specifically target private equity and hedge funds, continuing the trend of heightened scrutiny in California
On February 13, 2025, Senate Bill (SB) 351 was introduced in the California Senate. The bill proposes to regulate the involvement of private equity and hedge funds in health care practices by prohibiting these entities from “interfer[ing] with the professional judgment of physicians or dentists in making health care decisions.” It additionally proposes to prohibit “a private equity group or hedge fund involved in any manner” from exercising control over or “being delegated the power” to control operations such as the content of patient medical records, hiring decisions, and contractual relationships.
Continuing the trend of hostility towards noncompetes and other post-employment restrictive covenants in California, the bill voids any contractual clauses in management agreements and real estate or asset sales that “explicitly or implicitly” prevent health care providers from “competing with that practice in the event of a termination or resignation.” This provision would also prohibit contracts that restrict providers from “commenting on” the practice regarding issues such as: “quality of care, utilization of care, ethical or professional challenges in the practice of medicine or dentistry, or revenue-increasing strategies employed by the private equity group or hedge fund.”
Notably, the proposed provision carves out “otherwise enforceable sale of business noncompete agreement[s],” so SB 351 is not expected to affect noncompete agreements that result from a provider or practice receiving substantial consideration for selling the practice.
SB 351 introduces an enforcement mechanism for the attorney general to prohibit the corporate practice of medicine through “injunctive relief and other equitable remedies,” but it does not change the standards for what is considered improper influence. The bill emphasizes that clinical and treatment decisions should remain exclusively in the hands of licensed health care providers, preventing nonlicensed entities from “interfering with” professional judgment of care delivery and clinical operations. It also clarifies that the bill does not “narrow, abrogate, or otherwise lower the bar” of existing laws regarding the corporate practice of medicine.
Unlike 2024’s Assembly Bill (AB) 3129, which, before it was vetoed by Governor Newson in September 2024, caused quite a stir for its potentially significant curtailing of private equity investment in health care in California, SB 351 does not propose a material change from existing medical board guidance or California state law. AB 3129 specifically targeted private equity and hedge fund investment in health care deals by requiring these parties to obtain consent from the California attorney general to close certain deals. In his veto, Newsom emphasized that the Office of Health Care Affordability (OHCA) already addressed the issues set forth in the bill through its ability to refer transactions to the state attorney general for investigation and its requirement to submit notice of “material” health care transactions to OHCA under the existing material change transaction law at Cal Health & Safety Code § 127507, et seq.
AB 1415, introduced on February 21, 2025, appears to reflect the underlying logic of Newsom’s veto of AB 3129 by focusing on the interactions of private equity deals with OHCA. If passed, it would add or update the following definitions to the existing material change transaction law:
- Health System. “includes any of the following entities, under common ownership or control, in whole or in part: (1) A hospital system, as defined in subdivision (e) of Section 127371[;] (2) A combination of one or more hospitals and one or more physician organizations[;] (3) A combination of one or more hospitals, one or more physician organizations, or one or more health care service plans or health insurers.”
- Hedge Fund. “means a pool of funds managed by investors for the purpose of earning a return on those funds, regardless of the strategies used to manage the funds. Hedge funds include, but are not limited to, a pool of funds managed or controlled by private limited partnerships or other types of private corporate or partnership formations.”
- Management Services Organization (MSO). “means an entity that provides administrative services or support for a provider, not including the direct provision of health care services. Administrative services or support may include, but are not limited to, utilization management, billing and collections, customer service, provider rate negotiation, and network development.”
- Private Equity. “means an investor or group of investors who primarily engage in the raising or returning of capital and who invest, develop, dispose of, or purchase any equity interest in assets, either as a parent company or through another entity the investor or investors completely or partially own or control. A private equity group does not include natural persons or other entities that contribute or promise to contribute funds to the private equity group, but otherwise do not participate in the management of the private equity group or the group’s assets, or in any change in control of the private equity group or the group’s assets.”
- Health Care Entity. The bill would amend the existing definition to add MSOs to the current list of payers, providers, and fully integrated delivery systems that are currently considered “health care entities” subject to the filing requirements.
The bill would require that private equity groups, hedge funds, or “any newly created business entity created for the purpose of entering into agreements or transactions with a health care entity” notify OHCA of certain health care transactions. This explicitly adds these entities to the existing OHCA notification framework.
What Would These Bills Change?
With SB 351, not much. Though SB 351 makes a point to specifically call out hedge funds and private equity, it is simply codifying existing guidance on the corporate practice of medicine that the California Board of Medicine has been sharing for years. SB 351’s provisions would strengthen noncompete prohibitions for physicians but keeps intact the carve-out for the enforcement of sale of a practice noncompete clauses, following existing trends of noncompete enforcement.
But for AB 1415, the addition of private equity, hedge funds, newly created entities, and MSOs to the material change transaction law, and requiring them to notify OCHA of their health care transactions, materially broadens the purview of the existing law. However, the bill would not create additional burdens to transactions or new enforcement mechanisms, unlike last year’s vetoed AB 3129.
Takeaways
These two new bills, and previously AB 3129, demonstrate a trend of increased scrutiny around private equity investments in health care in California. However, if passed, neither SB 351 nor AB 1415 would constitute the kind of sea change that troubled providers and investors with last year’s AB 3129. For now, the California legislature has focused on codifying long-standing guidance and beefing up existing structures rather than overhauling the transaction environment itself.
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