Last fall, private equity and hedge fund investors were given a reprieve from the prospect of increased oversight of healthcare transactions when California Governor Gavin Newsom unexpectedly vetoed Assembly Bill 3129 (AB 3129). That bill would have required review and approval by the California Attorney General of certain healthcare transactions involving private equity groups and hedge funds and imposed limitations on contractual relationships between investors and healthcare providers. On February 12, 2025, Senator Christopher Cabaldon (D-Sacramento) introduced Senate Bill 351 (SB 351), which revives aspects of AB 3129 relating to relationships between private equity groups and hedge funds and physician and dental practices, reinforcing California’s existing corporate practice of medicine and corporate practice of dentistry bars.
SB 351 provides that private equity groups and hedge funds “involved in any manner” with a physician or dental practice may not interfere with the exercise of professional judgment of physicians or dentists as to: (a) the determination of what diagnostic tests are appropriate for a particular condition, (b) the need for referrals or consultation with another physician, dentist, or licensed health professional, (c) responsibility for the overall care of patients and treatment options and (d) determination of how many patients are seen or the number of hours per day a physician or dentist works. In addition a private equity group may not exercise control over certain administrative aspects of professional practices, including (a) the ownership of or determination of the content of medical records, (b) the selection, hiring, or termination of physicians, dentists, allied health staff, and medical assistant based, in whole or in part, on clinical competence or proficiency; (c) the parameters for contractual arrangements with third-party payors, (d) the parameters for contractual relationships with other providers for the delivery of care, (e) decisions on coding and billing for professional services, and (f) selection of medical equipment and supplies.
In addition, SB 351 would also enact prohibitions on clauses in management agreements between private equity groups or hedge funds and physician, dental, or psychiatric practices that explicitly or implicitly preclude a professional departing from the practice from competing with the practice or from making disparaging comments or expressing opinions concerning issues of quality of care, utilization, ethical or professional challenges or revenue increasing strategies employed by a private equity group or hedge fund.
This legislation is not prospective in the sense that it would apply only to arrangements entered into after it is enacted. Rather it creates a basis for enforcement based on conduct which occurs after the bill becomes law. It also makes explicit specific limitations on the authority of a private equity group or hedge fund—such as establishing parameters for managed care contracts or selecting medical equipment and supplies—that are not readily inferred (or inferred at all) from existing statutory or case law. If enacted SB 351 may require that existing management services agreements be reviewed and possibly modified to be consistent with the law.
Practical Considerations
SB 351 reflects lawmakers’ ongoing concerns that investments by private equity groups and hedge funds have engendered detrimental impacts on the costs and delivery of healthcare services. The new provisions are intended to be broadly construed, and the expectation is that the Attorney General will play active role in restraining conduct prohibited by the law. The bill may also provide support for claims by physician or dental groups to challenge existing and future management arrangements that they believe to have become disadvantageous.
The definitions of “private equity group” and “hedge fund” are copied from AB 3129 and are very general and vague. Supporters of AB 3129 were concerned that more precise definitions would create incentives to change the character of acquisition entities to avoid compliance with its provisions. What the definitions do not address is that the structure of many private equity groups and hedge funds contain layers of subsidiary enterprises below the actual investment pool that serve as holding companies, or in some cases, operating companies that manage healthcare entities. The broad “involved in any manner” language (which was also included in AB 3129) may be read to imply that the restrictions imposed by SB 351 will apply to direct or indirect subsidiaries of private equity groups or hedge funds, even if the management enterprise is not itself a private equity group or hedge, as defined.
An important distinction between AB 3129 and SB 351 is that the latter is limited to physician and dental practices and excludes psychiatric practices. The reason for this difference is not explained in the preamble to SB 351.
It is too early to assess the prospects for enactment of SB 351, but since the operative language of the bill was borrowed from AB 3129—which enjoyed overwhelming support in the last Legislative Session—it may not undergo substantial amendment or face opposition. Further, since it does not include provisions for Attorney General review of private equity and hedge fund transactions, which were the focus of Governor Newsom’s veto of AB 3129, it may be acceptable to the Governor if passed.