Publication
Proposed Senate Bill in California Would Strengthen Restrictions on Hedge Fund and Private Equity Investments in Healthcare
On February 12, 2025, Senator Christopher Cabaldon introduced Senate Bill 351 (“SB 351” or “the bill”), to strengthen and codify the corporate practice of medicine doctrine (CPOM) in California as it relates to private equity and hedge fund investments in medical and dentistry practices in California. The bill mirrors certain provisions of Assembly Bill 3129 (AB 3129), which was vetoed by Governor Gavin Newsom in September 2024.
Background on AB 3129
AB 3129 would have required a private equity group or hedge fund to provide notice to, and obtain the consent of, the California Attorney General before entering into certain transactions with a healthcare provider. In his veto message, Governor Newsom stated that the Office of Health Care Affordability (OHCA), was established in 2022 to review and evaluate certain proposed healthcare consolidation transactions and is the “responsible state entity” to review such transactions. SB 351 excludes such Attorney General notice or consent requirements but contains similar language reinforcing California’s CPOM restrictions as they relate to hedge fund and private equity investment in healthcare.
Definitions of “Hedge Fund” and “Private Equity Group” Under SB 351
SB 351 defines “hedge fund” as a pool of funds managed by investors for the purpose of earning a return on those funds. The definition excludes entities that solely provide or manage debt financing secured by the assets of a healthcare facility (including, but not limited to banks and credit unions, commercial real estate lenders, bond underwriters, and trustees). The term “private equity group” is defined in the bill 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.
SB 351 excludes from the definitions of both “hedge fund” and “private equity group” natural persons or other entities that contribute funds to the hedge fund or private equity group, but do not otherwise participate in the management of the hedge fund or private equity group.
Prohibitions Under SB 351
The CPOM generally prohibits non-licensed individuals and/or entities from practicing medicine and aims to ensure that such non-licensed individuals or entities are barred from interfering with the professional judgment of licensed persons in making healthcare decisions and/or exercising control over certain actions in connection with the provision of healthcare services. Further, the Medical Board of California has well-established guidance on the prohibition against the CPOM. The restrictions in SB 351 (detailed below) largely reflect the Medical Board of California’s guidance on the CPOM.
Under SB 351, private equity groups and hedge funds are prohibited from interfering with the professional judgment of physicians or dentists in making healthcare decisions. Such prohibited decisions include:
- 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.
Further, SB 351 prohibits private equity groups or hedge funds from 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.
Prohibitions on Non-Competition and Non-Disparagement Clauses
Under SB 351, any contract involving the management of a medical or dental practice, or the sale of real estate or other assets owned by the medical or dental practice to a private equity group or hedge fund, shall not include any clause (i) barring a provider from competing with the practice in the event of termination or resignation of that provider from the practice, or (ii) disparaging, opining, or commenting on that practice. Any such clauses (explicit or implicit) would be deemed void, unenforceable, and against public policy. The bill clarifies that the prohibition on non-competition clauses would not impact the validity of an otherwise enforceable non-competition agreement in connection with the sale of a business.
California Attorney General Oversight
SB 351 gives the California Attorney General the power to obtain injunctive relief and other equitable remedies for the enforcement of the provisions in SB 351.
SB 351’s Stated Intent and Impact on the Corporate Practice of Medicine in California
The stated intent of SB 351 is to ensure that clinical decision-making and treatment decisions remain exclusively in the hands of licensed health care providers and to safeguard against private equity groups and hedge funds from exerting influence or control over the delivery of care. The bill also clarifies that the provisions of SB 351 do not narrow or otherwise lower the bar on the corporate practice of medicine or dentistry in California.
Key Takeaways
If passed into law, SB 351 would codify certain restrictions on private equity and hedge fund involvement in healthcare and would help ensure that key clinical decision-making authority and control remains with licensed providers. Further, SB 351 would prohibit non-competition and non-disparagement clauses in management contracts, but the bill would not impact the validity of non-competition agreements associated with the sale of a business. If SB 351 is passed into law, providers should review any management agreements with private equity groups or hedge funds to ensure they are compliant with SB 351’s provisions.
SB 351 is set for hearing in April 2025.
About Snell & Wilmer
Founded in 1938, Snell & Wilmer is a full-service business law firm with more than 500 attorneys practicing in 17 locations throughout the United States and in Mexico, including Los Angeles, Orange County, Palo Alto and San Diego, California; Phoenix and Tucson, Arizona; Denver, Colorado; Washington, D.C.; Boise, Idaho; Las Vegas and Reno, Nevada; Albuquerque, New Mexico; Portland, Oregon; Dallas, Texas; Salt Lake City, Utah; Seattle, Washington; and Los Cabos, Mexico. The firm represents clients ranging from large, publicly traded corporations to small businesses, individuals and entrepreneurs. For more information, visit swlaw.com.
