California Governor Gavin Newsom has signed a pair of highly anticipated bills that will affect healthcare transactions involving private equity groups and hedge funds, effective January 1, 2026. The new legislation will expand the authority of the California Office of Health Care Affordability (“OHCA”) to review transactions previously excluded from reporting for their impact on healthcare costs and markets and will reinforce prohibitions on lay interference with the delivery of physician and dental services under the California’s corporate practice of medicine laws.
This legislation is an outgrowth of an effort that began in 2024 in response to concerns that investment in healthcare enterprises by private equity groups and hedge funds has had negative effects on the cost of providing care and has impaired the autonomy of healthcare professionals in delivering care. In the 2023-2024 Legislative Session, the California Legislature approved Assembly Bill 3129, that would have provided for review by the Attorney General of transactions in which private equity groups or hedge funds were involved and of certain management controls embedded in management services agreements with provider groups. Governor Newsom vetoed this legislation on the basis that he believed that the existing OHCA framework for review of transactions was preferable to a more direct role for the Attorney General.
Following the veto legislators introduced two bills in the 2024-2025 Legislative Session that collectively mirror key provisions of Assembly Bill 3129. Assembly Bill 1415 provides for OHCA review of transactions involving private equity groups and hedge funds that were previously outside of its jurisdiction and for OHCA to prescribe regulations for management services organizations to issue reports on healthcare costs, quality, equity and workforce stability that are required of provider entities in furtherance of OHCA’s mission to restrain growth in healthcare costs.
Senate Bill 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, or be delegated to 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.
Senate Bill 351 also contains prohibitions on the inclusion of clauses in management agreements between private equity groups or hedge funds and physician and dental 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.
Practical Considerations
This new legislation focuses very specifically on private equity groups and hedge funds, which are defined in very general and vague language. Supporters of Assembly Bill 3129, who crafted the language that was included in Assembly Bill 1415 and Senate Bill 351 were concerned that more precise definitions would create incentives to change the character of entities to avoid compliance with its provisions. Senate Bill 351 expressly extends the corporate practice restrictions to any situation in which a private equity group or hedge fund is “involved in any manner” with a physician or dental group. This implies that the law will apply to direct or indirect subsidiaries, even if the enterprise that manages the group is not itself a private equity group or hedge fund, as defined.
The targeted nature of these laws is emphasized by the fact that Assembly Bill 1415 exempts from OHCA review transactions involving management services organizations that are owned by a licensed hospital. Similarly Senate Bill 351 provides that a consultant that is not associated with a private equity fund or hedge is permitted to provide management services that are otherwise prohibited.
During the development of the existing regulations for OHCA review of transactions involving management services organizations were specifically excluded from coverage in response to public comments. To date only 32 transactions have been submitted for OHCA review and none have involved arrangements that will be covered by the expansion of review authority. Members of the Health Care Access and Information Board, which oversees OHCA, have expressed concern at the relatively low number of transactions submitted for review and intimated that deals that could affect healthcare costs are not being captured under the existing regulations. Since the definition of parties who must notify OHCA of reviewable transactions has changed, the agency is tasked by Assembly Bill 1415 with the development of regulations that will eliminate potentially duplicative reporting obligations. Practitioners advising private equity and hedge fund investors will need to reassess the feasibility of contemplated transactions that may be reportable to OHCA and evaluate whether the standards for OHCA to require a cost and market impact review of these deals (which can entail significant delay in closing) will change due to the involvement of these parties.
Many of the provisions in Senate Bill 351 are largely consistent with a traditional understanding of California’s corporate practice of medicine law, but restrictions on authority of a management organization to make decisions on administrative matters such as establishing parameters for managed care contracts or selecting medical equipment and supplies are not commonly understood to arise from existing statutory or case law. Since the law is not prospective, this will require that management organizations to review and evaluate whether existing provisions in their agreements comply with the new limitations. The legislation may also provide support for claims by physician or dental groups, as well as the professional associations that represent them in California, to challenge existing and future management arrangements that they believe to have become disadvantageous, on the basis that they violate the new law. Senate Bill 351 includes direction that its provisions intended to be broadly construed, and the expectation of the Legislature is that the Attorney General will play active role in restraining conduct prohibited by the law.
Lawyers advising investor groups and provider organizations will need to assess whether existing management agreements (and templates for future deals) are compliant with law and possibly have their clients amend agreements to conform to the new law. An area for concern is whether “control” by a private equity group or hedge fund would be deemed to exist if the management agreement contemplates joint decision-making with the physicians or dentists involved, as opposed to vesting sole authority in the management enterprise. The provisions prohibiting the exercise of control over the selection, hiring or firing of allied health staff or medical assistants may be inconsistent with many management services agreements under which some or all of these individuals are employed by the management entity, rather than the physician or dental group. If these arrangements need to be modified or abandoned, that could have a significant effect the underlying economics of the relationship. The resolution of these types of issues could call into question the feasibility of the management services organization model in some contexts.
Conclusion
California has now joined a growing number of states that have enhanced oversight on the role of private equity groups and hedge funds in the healthcare delivery system. In the near future we will see whether the new regime will have the impact of discouraging future transactions or force changes in approach that will conform to the laws.