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What You Need to Know
Key takeaway #1
California's newly enacted AB 1415 imposes new notice
requirements for health care transactions involving alternative
investment firms.
Key takeaway #2
SB 351 also codifies restrictions on corporate management of
health care providers.
Key takeaway #3
California's new laws reflect a trend of increasing state
health care and general purpose transaction restrictions and notice
requirements.
California recently enacted two laws instituting new restrictions and requirements for health care transactions. On October 6, Governor Newsom signed SB 351, which codifies elements of the state's corporate practice of medicine doctrine and strengthens restrictions against private equity, hedge fund, and other private investor control of health care organizations and operations. On October 11, Newsom signed AB 1415, which expands the scope of parties and relevant transactions that require pre-transaction notice to the state's Office of Health Care Affordability (OHCA). Both laws are intended to provide the State of California greater oversight of transactions involving health care entities, and raise additional hurdles for parties seeking to acquire or sell health care operations in the state,1 consistent with a broader trend across the country. The key points of each of the California laws are summarized below:
AB 1415
This law amends the existing California Health Care Quality and Affordability Act, giving OHCA additional authority to analyze health care markets and transactions. The new statute expands the scope of parties and transactions subject to notice requirements. Among other things, it:
- Defines hedge funds, private equity groups, and management services organizations (MSOs) and makes them "Noticing Entities," responsible for submitting pre-transaction notice to OHCA;
- Requires Noticing Entities to provide 90 days' notice of
agreements or transactions with a health care entity or MSO that
either:
- "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"; or
- "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."
- Adds a requirement that MSOs submit "data and other information as necessary" to inform OHCA's market studies.
Governor Newsom vetoed a similar bill last year. Unlike the vetoed bill, AB 1415 requires notice to OHCA rather than the Attorney General and does not provide the government with veto power over transactions. That said, nothing in the bill prevents the Attorney General from suing to block a transaction on antitrust or other grounds.
SB 351
This law codifies and strengthens California's existing restrictions on corporate control over medical and dental practices, but with a focus on alternative investment firms. In particular, it prohibits hedge funds and private equity groups involved in business with any medical or dental practice from:
- "Interfering with the professional judgment of physicians or dentists in making health care decisions," including by determining what diagnostic tests, treatments, or referrals are allowed or required;
- Hiring or firing medical or dental personnel for clinical competency;
- Setting parameters for how providers engage in relationships with either third-party payers or other providers;
- Approving selection of medical equipment or supplies;
- Making decisions regarding coding or billing;
- Owning patient medical records; or
- Imposing noncompete or non-disparagement provisions on providers owned by hedge funds or private equity groups.
The law does not directly impact medical group arrangements with management services organizations that are not hedge funds or private equity groups, but the restrictions set forth in SB 351 are in large part identical to the restrictions available on the Medical Board of California website relating to corporate practice of medicine more broadly. Those restrictions continue to apply to private interference in the practice of medicine outside of the hedge fund and private equity context.
Both laws will take effect January 1, 2026. Health care companies and investors may want to review existing management agreements as well as expected transactions for compliance before then.
These California statutes follow similar recent laws targeting private equity involvement in health care and imposing new transaction notice requirements in New York, Oregon, Indiana, and Massachusetts, among other states. At least 15 states currently have health care-specific transaction notice requirements. Additionally, Colorado and Oregon recently enacted the Uniform Antitrust Pre-Merger Notification Act, which requires notifying and potentially submitting documents to the state Attorney General related to transactions in any industry, and the Act has been introduced in at least five other states.
Crowell & Moring's team is closely monitoring these developments and is prepared to help your business navigate state transaction requirements and restrictions.
Footnote
1. In certain instances, the laws may apply to out-of-state transactions for entities with significant affiliate operations in California.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
