California Governor Gavin Newsom recently signed two new bills into law that formalize restrictions on medical and dental practice management platforms operated by private equity groups and hedge funds and increase the state’s oversight of certain healthcare transactions. SB 351 and AB 1415 reflect California’s increasing attention on private equity and hedge fund participation in the healthcare industry. The changes to the law under each bill will go into effect on January 1, 2026.
SB 351
Signed into law on October 6, 2025, SB 351 strengthens California’s existing doctrines on the corporate practice of medicine and dentistry and codifies prohibitions already found in common law and guidance. SB 351 also introduces new restrictions on the use of employee noncompete and non-disparagement provisions. These changes are aimed at limiting investor involvement in clinical decision-making and give California regulators new tools to enforce corporate practice prohibitions.
Under SB 351, private equity groups or hedge funds are prohibited from engaging in certain matters of professional judgment with respect to physician or dental practices in the state, including:
- Dictating which diagnostic tests are ordered,
- Determining the necessity of outside provider referrals or consultations,
- Controlling how many patients a physician or dentist treats, and
- Maintaining responsibility for a patient’s overall care.
Additionally, SB 351 carves out the following select administrative functions that cannot be delegated to an unlicensed entity:
- Owning or determining the content of patient medical records
- Selecting, hiring, or firing of providers when that decision relates to clinical competency or proficiency
- Setting parameters on entrance into payer contracts
- Setting parameters specific to clinical competency or proficiency in contractual relationships with outside providers that relate to the delivery of patient care
- Decision-making regarding billing and coding practices
- Approving the selection of medical equipment and supplies for the practice
Beyond the foregoing restrictions on practice management, SB 351 also bans employee non-compete and non-disparagement clauses tied to arrangements for the management of physician or dental practices or the sale of such practices to hedge funds or private equity groups. As a result, physicians or dentists who leave an investor-owned practice cannot be blocked from practicing elsewhere or be restricted from speaking out about ethical or quality concerns within their former practice. Notably, SB 351 preserves provisions regarding sale-of-business non-competes and confidentiality of material nonpublic information, with exceptions for legally required disclosures and provider commentary on specified topics.
Further, SB 351 provides a direct legal avenue for oversight and enforcement of these protections by the California Attorney General, whereas, historically, enforcement of corporate practice restrictions stemmed from individual complaints and were largely resolved by professional boards.
AB 1415
On October 11, 2025, Governor Newsom signed AB 1415 into law, which will broaden the application of the existing California healthcare “mini-HSR” law, the Health Care Quality and Affordability Act (HCQAA), and could significantly increase the number of transactions that need to be notified.
Under the current HCQAA, merging parties must notify the California Office of Health Care Affordability (OHCA) of transactions involving “health care entities” that satisfy certain size-of-person and size-of-transaction thresholds at least 90 days before entering into the agreement or transaction. Beginning on January 1, 2026, AB 1415 will expand the types of entities that are subject to HCQAA reporting requirements to include “noticing entities,” defined to include (1) hedge funds, (2) private equity groups, (3) new business entities created for the purpose of entering into agreements or transactions with a health care entity, (4) management services organizations (MSOs), and (5) any entities that own, operate, or control providers.
Reporting to OHCA by a “noticing entity” is required for transactions between the noticing entity and a health care entity or MSO, or an entity that owns or controls the health care entity or MSO, that (1) sells, transfers, leases, exchanges, options, encumbers, conveys, or otherwise disposes of a material amount of the health care entity’s or MSO’s assets to one or more entities or (2) transfers control, responsibility, or governance of a material amount of the assets or operations of the health care entity or MSO to one or more entities.
In addition, an MSO must also provide written notice of any agreement or transaction between the MSO and any other entity that either (1) sells, transfers, leases, exchanges, options, encumbers, conveys, or otherwise disposes of a material amount of the MSO's assets to one or more entities or (2) transfers control, responsibility, or governance of a material amount of the assets or operations of the MSO to one or more entities. MSO filings are not limited to transactions with health care entities.
While AB 1415 will require broader categories of entities to submit premerger notifications to the California OHCA, AB 1415 defers the details of such filings—such as materiality thresholds or filing procedures—to OHCA agency rulemaking.
It remains to be seen what rules OHCA will adopt for the new categories of transactions subject to HCQAA filing requirements. Notably, under existing OHCA rules, reportable healthcare transactions can face delays of eight months or more if OHCA decides to open a Cost and Market Impact Review (CMIR), which is the OHCA equivalent of a DOJ or FTC “Second Request.” See our previous LawFlash to learn more.
Key Takeaways
Private equity sponsors, hedge funds, and MSOs should anticipate increased oversight from California state agencies of models that centralize clinical control outside licensed entities and an increase in enforcement, as well as expect enhanced scrutiny of proposed healthcare transactions under these new laws.
Investors and organizations should review their existing processes and agreements for compliance, including auditing existing employment agreements. Further, future healthcare transactions will need to incorporate provisions (e.g., timelines and closing conditions) that accommodate potential premerger notifications, information requests, or CMIRs under California’s expanded healthcare “mini-HSR” law.
How We Can Help
Our team regularly provides counseling to private equity sponsors, hedge funds, and MSOs on the changing regulatory environment and monitors progress of regulations impacting the application of new laws. We stand ready to assist with evaluating the impact of these changes to current and proposed healthcare transactions in California.