California Legislature Strengthens Corporate Practice and Restrictive Covenant Prohibitions for PE Groups and Hedge Funds Investing in Healthcare

The California legislature has passed two bills, Senate Bill 351 (SB-351) and Assembly Bill 1415 (AB-1415), to strengthen corporate practice and restrictive covenant prohibitions specifically in the context of private equity (PE) groups and hedge funds investing in California physician and dental practices. These bills aim to address increased PE group and hedge fund investment in the California healthcare marketplace within existing frameworks.

Key Takeaways:

• SB-351 codifies and formalizes long-standing precedent from California Attorney General opinions and Medical and Dental Board of California regulations and guidance, excluding passive investors, entities solely providing or managing secured debt financing, hospitals and health systems, and public agencies from the definitions of PE groups and hedge funds.
• PE groups or hedge funds investing or owning the assets of a physician or dental practice may not interfere with the professional judgment of physicians or dentists in healthcare decisions, such as deciding what diagnostic tests are appropriate, determining the need for referrals or consultations, or setting targets for the number of patients seen or hours worked.
• SB-351 expresses authorizes the California Attorney General to seek injunctive relief and attorneys' fees against PE groups or hedge funds improperly exerting undue influence or control over the professional clinical judgment of physicians or dentists.
• AB-1415 requires PE groups, hedge funds, and management services organizations (MSOs) to directly notify the California Office of Health Care Affordability (OHCA) of proposed healthcare material change transactions and affords OHCA review of such proposed transactions.
• AB-1415 requires MSOs to report to OHCA sales of assets or changes of control if the transaction involves a PE group or hedge fund, another MSO, or other entities created for the purpose of entering into agreements or transactions with healthcare entities.
• OHCA will assess the new requirements for noticing entities, including PE groups, hedge funds, and MSOs, to minimize duplicative reporting and establish data reporting requirements.

Statistics:

• The California legislature has passed two bills, SB-351 and AB-1415, to strengthen corporate practice and restrictive covenant prohibitions specifically in the context of private equity groups and hedge funds investing in California physician and dental practices.
• The bills aim to address increased PE group and hedge fund investment in the California healthcare marketplace within existing frameworks.
• Twenty-five healthcare entity material change transaction notices (MCNs) have received waived cost and market impact reviews (CMIRs), with 4 MCN determinations pending.
• The likelihood of additional CMIRs in 2026 and beyond is unclear.

Sources:

• Senate Bill 351 (2025)
• Assembly Bill 1415 (2025)
• California Office of Health Care Affordability (OHCA)
• Mondaq.com article (2025)