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On Monday, October 6, 2026, Governor Gavin Newsom signed into law SB 351, which codifies restrictions on private equity firms and hedge funds from influencing the clinical decision-making of California physicians and dentists.
As we discussed earlier in the year in our blog covering this and other legislative developments, SB 351 has been on the radar of California healthcare industry stakeholders eager to learn whether the state would enact new restrictions on investment activities in the California healthcare market.
Key Components of SB 351
SB 351 specifies that private equity groups and hedge funds (and controlled fund entities or affiliates thereof) may not (contractually or otherwise):
- Interfere with the professional judgment of physicians or dentists in making health care decisions, including determining diagnostic tests, treatment options, patient volume or referral requirements; or
- Exercise control over or be delegated the
power to do any of the following:
- own or determine the content of medical records,
- make hiring and firing decisions involving healthcare providers,
- set the parameters of physicians, dentists or practices entering into payor contracts,
- set parameters of physicians and dentists entering into professional service contracts with other physicians and dentists,
- make billing and coding decisions, and
- approve the selection of medical equipment and supplies for practices.
The new law also bans practice management contracts involving private equity groups or hedge funds from including clauses that would bar providers in the practice from (i) competing with the practice in the event of the provider's termination or resignation or (ii) disparaging or commenting on the practice in any manner as to issues involving quality of care, utilization, ethical or professional challenges in the practice of medicine or dentistry or revenue-increasing strategies used by the private equity group or hedge fund. This prohibition would not, however, affect the validity of otherwise enforceable sale of business non-competes and otherwise valid prohibitions on the disclosure of material nonpublic information about the private equity firm or hedge fund.
Takeaways and Related Observations
As we noted in our prior article, while this law contains certain similar provisions to much publicized AB 3129 proposed legislation that was ultimately vetoed by Governor Newsom last year, it does not contain AB 3129's proposed mandatory state pre-approval process for private equity backed healthcare transactions. Furthermore, this legislation does not take the approach pursued in earlier versions of AB 3129 or Oregon's newly enacted Senate Bill 951 and House Bill 3410 which would place further restrictions on the use of succession agreements and related arrangements often utilized by private equity and other organizations investing in health care companies.
In many ways, this legislation functions to reinforce generally understood legal boundaries regarding California's prohibition on the corporate practice of medicine, rather than to fundamentally change existing law. Still, with renewed regulatory focus on private equity and outside investment in healthcare, private equity backed healthcare physician practices, dental practices and management services organizations (MSOs) would be wise to take a fresh look at their operations and practice management contracts to ensure alignment with the specified prohibitions.
As a related matter, private equity and other stakeholders should closely monitor Governor Newson's pending decision regarding AB 1415, which, if enacted, would expand the reach of the California Office of Health Care Affordability (OHCA) in reviewing and clearing healthcare transactions involving private equity companies, hedge funds and/or MSOs.
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