California lawmakers are once again considering legislation targeting private equity’s influence in health care. Senate Bill 351 (SB 351), introduced on February 12, 2025, seeks to limit the influence of management service organizations (MSOs) and dental service organizations (DSOs) backed by private equity (PE) groups and hedge funds over medical and dental practices.

SB 351 adopts certain provisions of last year’s vetoed Assembly Bill 3129 (AB 3129), which would have required PE groups and hedge funds to obtain California Attorney General (AG) approval before entering into certain health care transactions. In September 2024, Governor Gavin Newsom vetoed that bill, citing redundancy with the California Office of Health Care Affordability’s (OHCA) existing oversight of health care transactions. Our discussion of OHCA’s health care transaction notice requirements is available in an earlier Reed Smith in-depth piece.

As written, SB 351 contains corporate practice restrictions that are nearly identical to those contained in AB 3129 while excluding the California AG consent requirement that contributed to the prior bill’s downfall. The only apparent difference is that AB 3129 also implicated the professional judgment of psychiatrists in addition to physicians and dentists. 

Corporate Practice Restrictions

The bill defines “private equity group” as “an investor or group of investors who primarily engage in the raising or returning of capital and who invests, develops, or disposes of specified assets.” “Hedge fund” is defined as “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.” Both definitions exclude individuals or entities that contribute (or promise to contribute) funds to the PE group or hedge fund, but otherwise do not participate in the management of the group or its assets, i.e. investors.

The proposed legislation aims to ensure that clinical decision-making remains held exclusively by licensed health care providers and to safeguard against unlicensed individuals or entities exerting undue influence or control over care delivery. As proposed, SB 351 would prohibit PE groups or hedge funds “involved in any manner with a [California] physician or dental practice” (including as an investor in the practice or an investor or owner of the practice’s assets) from:

  • Interfering with the professional judgment of physicians or dentists in making health care decisions, including any of the following:
    • Determining what diagnostic tests are appropriate for a particular condition.
    • Determining the need for referrals to, or consultation with, another physician, dentist, or licensed health professional.
    • Being responsible for the ultimate overall care of the patient, including treatment options available to the patient.
    • Determining how many patients a physician or dentist shall see in a given period of time or how many hours a physician or dentist shall work.
  • Exercising control over, or being delegated 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 into contractual relationships with third-party payers.
    • Setting the parameters under which a physician or dentist shall enter into contractual relationships with other physicians or dentists for the delivery of care.
    • Making decisions regarding coding and billing procedures for patient care services.
    • Approving the selection of medical equipment and medical supplies for the physician or dental practice.

These restrictions are in large part consistent with California case law and the long-standing guidance of the Medical Board of California. Existing California law prohibits unlicensed persons – of any kind – from exercising control over clinical decisions, which the Medical Board broadly defines to include business decisions that result in the control over a physician’s practice of medicine.

Prohibition of Certain Restrictive Covenants

SB 351 would also prevent PE groups and hedge funds from entering into certain restrictive covenants with licensed health care providers. Specifically, for contracts involving the management of a physician or dental practice or a contract involving the sale of real estate or other assets owned by a physician or dental practice to a PE group or hedge fund, or any entity controlled by a PE group or hedge fund, SB 351 would void (1) provider non-disparagement clauses with respect to the quality or utilization of care or ethical or professional challenges, and (2) non-compete clauses that prevent a physician or dentist from competing with the practice following the provider’s termination or resignation.

It is important to note that SB 351 would not impact the validity of a noncompete tied to the sale of a business. California Business and Professions Code § 16600 has long prohibited non-compete agreements. However, § 16600 includes an exception that allows a business owner who sells the goodwill of a business to contractually agree to refrain from carrying on a competing business within a specified geographic area. SB 351 expressly acknowledges the validity of an otherwise enforceable noncompete tied to the sale of a business.

Enforcement

The bill authorizes the California AG to seek injunctive relief and recover attorneys’ fees and costs incurred in enforcement.

Takeaways

SB 351 demonstrates the California legislature’s continued focus on PE influence in health care. It is unclear, however, whether the bill sufficiently resolves redundancy concerns that resulted in the veto of AB 3129. California already possesses a well-established and strictly enforced corporate practice of medicine (CPOM) doctrine supported by the California AG. Importantly, however, the current version of the bill would add legislative support to, but not necessarily expand, California’s CPOM prohibition, as the restrictions in SB 351 are closely aligned with guidance on the Medical Board’s website.

Reed Smith will continue to monitor California and other state corporate practice restrictions. If you have any questions on compliance with SB 351 or other state corporate practice doctrines, please do not hesitate to reach out to one of the authors or the health care attorneys at Reed Smith.