California Enacts Legislation Impacting Private Equity Investments In The Health Care Industry

California Governor Gavin Newsom signed two new bills into law that have the potential to impact transactions in the health care industry, including transactions involving private equity (PE) investment.

Assembly Bill 1415 (AB 1415) extends the Office of Health Care Affordability's (OHCA) oversight of health care transactions that involve management services organizations (MSOs), PE groups, or hedge funds. Senate Bill 351 (SB 351) strengthens the existing corporate practice of medicine (CPOM) doctrine in California, by codifying restrictions on the involvement of PE groups and hedge funds in the operation of physician and dental practices. AB 1415 and SB 351 largely mirror last years' vetoed bill, AB 3129, with only a few changes.

AB 1415

Currently, health care entities (i.e., payers, providers, and fully integrated delivery systems) that meet certain threshold criteria must notify OHCA of certain material change transactions. Beginning January 1, 2026, AB 1415 imposes new transaction notification requirements on so-called "noticing entities," which are defined to include MSOs, PE groups, hedge funds, and entities newly created for purposes of entering into an agreement or transaction with a health care entity or MSO, as well as entities that own, operate, or control a provider, regardless of whether the provider currently operates, provides health care services, or has a pending or suspended license.

Specifically, these noticing entities will be required to notify OHCA 90 days in advance of agreements or transactions entered into with a health care entity or MSO that do either of the following:

• Sell, transfer, lease, exchange, option, encumber, convey, or otherwise dispose of a material amount of the health care entity's or MSO's assets to one or more entities.
• Transfer 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.

Because the provisions of AB 1415 apply to agreements or transactions involving both health care entities and MSOs, the law will broadly apply to typical physician practice management transactions, as well as practice management platform transactions.

AB 1415 also requires OHCA to establish requirements for MSOs to submit data and other information as necessary for OHCA to carry out its functions, including research and analysis of factors affecting health care costs, quality, equity, and workforce stability. These data submission requirements have not yet been defined. MSOs and other industry stakeholders should anticipate and keep apprised of regulatory developments concerning these data submission requirements.

SB 351

SB 351 largely reaffirms the established contours of California's ban on CPOM, rather than substantively overhauling existing law, with PE groups and hedge funds specifically prohibited from contractually or otherwise controlling professional entities in specific ways.

Interference with the Professional Judgment of Physicians or Dentists

The bill provides a non-exhaustive list of actions that would be considered prohibited interference with professional judgment, including actions such as determining permitted diagnostic tests and setting required patient volume thresholds. Contracts that permit these types of actions impacting professional judgments of physicians or dentists will now be deemed void and unenforceable.

Control over Practice Management

SB 351 also prohibits PE groups and hedge funds from exercising control over or having the power to do any of the following:

• Owning or otherwise determining the content of patient medical records.
• Selecting, hiring, or firing physicians, dentists, allied health staff, and medical assistants based, in whole or in part, on clinical competency or proficiency.
• Setting the parameters under which a physician, dentist, or physician or dental practice shall enter contractual relationships with third-party payers.
• Setting the clinical competency or proficiency parameters under which a physician or dentist shall enter contractual relationships with other physicians or dentists for the delivery of care.
• Making decisions regarding the coding and billing of procedures for patient care services.
• Approving the selection of medical equipment and medical supplies for the physician or dental practice.

Contract provisions that allow for this kind of control over a physician or dental practice would similarly be void and unenforceable. The bill does include a caveat to clarify that unlicensed individuals can still assist or consult with a physician or dental practice, provided that a physician or dentist retains the ultimate responsibility for, or approval of, the list decisions and activities.

Covenants Not to Compete and Anti-Disparagement Provisions

The new law renders void and unenforceable any provision within practice management or certain real estate agreements which would bar a provider from competing with a practice in the event of the provider's termination or resignation, or from disparaging, opining, or commenting on a practice regarding quality of care, utilization, ethical or professional challenges in the practice of medicine or dentistry, or revenue-increasing strategies employed by the PE group or hedge fund. However, the restriction will not apply to a noncompete or an otherwise valid provision prohibiting the disclosure of material nonpublic information about the PE group or hedge fund in the context of a sale of business agreement.

Attorney General Enforcement Powers

The California Attorney General will have the authority to seek injunctive relief or other equitable remedies for violations of the provisions outlined above. Additionally, the Attorney General will be able to recover attorneys' fees and costs incurred in enforcement actions.

Key Takeaways

Although this legislation does not take the more restrictive approach considered in early versions of last year's vetoed AB 3129 – or in Oregon's newly enacted Senate Bill 951 and House Bill 3410, which would place additional restrictions on certain often-utilized arrangements such as succession agreements –health care entities, investors, and MSOs should carefully assess the new restrictions imposed by SB 351 and the new notice and date submission requirements imposed by AB 1415.

These laws are part of a larger, ongoing trend toward increasing state oversight and regulation of health care transactions and investments in the health care industry. Bass, Berry & Sims is actively tracking these legislative trends via our interactive health care transactions map, available here. If you have any questions about the laws discussed herein, or any other state health care transaction notice requirements, please contact the authors.