California Expands Oversight of Private Equity in Healthcare with AB 1415 and SB 351

Takeaways

• AB 1415 establishes a pre-transaction notice framework, requiring certain healthcare deals to be reported to the California Office of Health Care Affordability (OHCA) starting in 2026.
• SB 351 codifies the prohibition on the corporate practice of medicine, limiting private investors from influencing physicians’ clinical decisions.
• Healthcare providers and private investors should review agreements and monitor upcoming OHCA regulations to ensure compliance with these new laws.

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California Governor Gavin Newsom recently signed two significant pieces of legislation into law: Assembly Bill 1415 (AB 1415) and Senate Bill 351 (SB 351). Both bills target private equity and hedge fund activity in the healthcare industry. Together, these new laws codify California’s existing prohibitions on the corporate practice of medicine and establish a pre-transaction notification framework for certain healthcare deals involving private investors and management services organizations (MSOs).

AB 1415: New Transparency Rules for Healthcare Deals Expand Governmental Review of Healthcare Transactions

Beginning on January 1, 2026, AB 1415 will significantly expand the oversight powers of the California Office of Health Care Affordability (OHCA) by requiring that written notice be provided to OHCA by “noticing entities” at least 90 days before entering into material transactions with a healthcare entity, MSO, or other entity that owns a healthcare entity. Material transactions involve:

• the sale, transfer, lease, exchange, option, encumbrance, conveyance, or other disposition of a material amount of the healthcare entity’s or MSO’s assets; or
• the change of control, responsibility, or governance of the assets or operations of a healthcare entity or MSO.

Who Must File a Notice?

“Noticing entities” are defined as:

• a private equity group[1] or hedge fund,[2]
• a newly created business entity for the purpose of entering into material transactions with healthcare entities;
• an MSO,[3] and
• an entity that owns, operates, or controls a healthcare provider.

Uncertainty in OHCA Enforcement

AB 1415 requires OHCA to adopt regulations to identify proposed material changes that warrant a notification, establish appropriate fees, and consider appropriate financial thresholds (e.g., revenue or market share). This means the exact scope of what makes a transaction material is still to be determined, and we will need to continue to monitor OHCA for further guidance once it has adopted the necessary regulations to fully implement AB 1415.

SB 351: Codifying the Prohibition on the Corporate Practice of Medicine

SB 351 codifies California’s long-standing prohibition on the corporate practice of medicine by prohibiting private equity groups, hedge funds, and their downstream affiliates (private entities) from interfering with the decision-making of medical professionals. SB 351’s language largely mirrors the California Medical Board’s existing guidance, so this legislation likely will not impact future operations in California nearly as much as AB 1415 may impact future transactions.

Key Prohibitions

Private equity groups, hedge funds, and their downstream affiliates cannot influence or control healthcare decisions, including:

• what diagnostic tests are appropriate;
• whether a patient needs a referral or specialist consultation;
• what treatment options are offered to the patient;
• how many patients a doctor sees; or
• how many hours a doctor works.

Consulting Allowances

SB 351 does allow private equity groups, hedge funds, and their downstream affiliates to assist or consult with healthcare providers in making the following decisions, as long as the physician or dentist retains the ultimate authority to make the decision:

• 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 within which a physician, dentist, or physician or dental practice may enter into contractual relationships with 3^rdparty payors;
• setting the clinical competency or proficiency parameters within which a physician or dentist may enter into 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; and
• approving the selection of medical equipment and medical supplies for the physician or dental practice.

Other Restrictions

SB 351 also prohibits private equity groups or hedge funds from entering into any agreement or arrangement that would enable a person or entity to interfere with the professional judgment of the physician or dentist in making health care decisions which raises concerns about the use and enforceability of succession-type agreements. Lastly, SB 351 prohibits any use of restrictive covenants and non-disparagement clauses in management agreements; however, SB 351 specifically states this provision does not impact the use of these types of provisions in connection with the sale of a business.

Looking Forward

In response to California’s changing regulations, private investors and healthcare providers should:

• review existing management agreements to ensure compliance with SB 351, especially provisions related to clinical oversight and restrictive covenants.
• monitor OHCA rulemaking to stay ahead of financial thresholds, fee structures, and what will constitute a “material transaction” in 2026 that may trigger notice requirements to OHCA; and
• ensure that doctors retain their clinical authority in all contracts.

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[1] “Private equity group” means “an investor or group of investors who primarily engage in the raising ore returning of capital and who invest, develop, dispose of, or purchase any equity interests in assets, either as a parent company or through another entity the investor or investors completely or partially own or control.

[2] “Hedge fund” means “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. Hedge funds include, but are not limited to, a pool of funds managed or controlled by private limited partnerships or other types of private corporate or partnership formations.”

[3] “MSO” means “an entity that provides management and administrative support services for a provider in support of the delivery of health care services, excluding the direct provision of health services. Management and administrative support services shall include provider rate negotiation, revenue cycle management, or both. A management services organization does not include entities that own one or more health facilities, as defined in subdivision (a) or (b) of Section 1250.”