New California Health Care Transaction Rules Are Here: SB 351 and AB 1415 Are Now Effective
On January 1, 2026, two new California laws went into effect that will impact transactions involving health care entities. SB 351, which largely codifies existing corporate practice of medicine (CPOM) restrictions, prohibits private equity groups and hedge funds from interfering with the professional judgment of licensed health care professionals or exercising certain forms of control over the operation of health care entities, including through the use of management services organizations (MSOs). AB 1415 extends existing reporting obligations to private equity groups and hedge funds when they engage in certain transactions involving health care entities. These new laws are the result of several years of state efforts to limit the influence of private equity groups and hedge funds in the health care market.
Together, SB 351 and AB 1415 create a tighter regulatory environment for California health care deals. SB 351 narrows the enforceability of post-transaction non-compete and non-disparagement provisions and provides the California Attorney General with a clear framework to enforce CPOM restrictions against private equity groups and hedge funds. AB 1415 imposes reporting obligations and California Office of Health Care Affordability (OHCA) review rights that could delay deal timelines in 2026.
SB 351
Although SB 351 largely codifies existing CPOM restrictions, it sharpens those restrictions in several ways. For example, the statute explicitly applies such restrictions to "private equity groups" and "hedge funds." The statute defines a "private equity group" broadly 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." Similarly, it defines a hedge fund broadly as "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." In each case, the definition excludes the natural persons or entities that contribute funds to such private equity group or hedge fund but do not otherwise participate in its management or in any change of control of it or its assets.
Consistent with existing CPOM restrictions, the statute restricts private equity groups and hedge funds from interfering with the professional judgment of physicians by prohibiting them from performing certain activities, including any of the following:
- 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.
It further restricts private equity groups and hedge funds from exercising control over any of the following activities:
- 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 physical or dental practice shall enter into contractual relationships with third-party payers.
- Setting the clinical competency or proficiency 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.
SB 351 also renders void any non-compete and non-disparagement provision in any contract involving the management of a physician or dental practice or the sale of real estate or other assets owned by a physical or dental practice. However, this restriction does not invalidate a sale of business non-compete agreement that is otherwise enforceable under California law, so long as such agreement does not operate as an employee non-compete agreement. Therefore, a purchaser of a professional corporation can still enter into a non-compete agreement with a licensed professional under the narrow California law exception, which requires that in connection with the non-compete agreement, the licensed professional must either sell all of its equity in the business or sell the goodwill of the business along with its assets. In that case, a non-compete agreement that is limited to the geographic area of the business is valid, so long as the purchaser of the equity or assets and goodwill continues to operate the business in a similar fashion. From a strategic perspective, this likely means that professional corporations will continue to be able to enter into non-compete agreements with former "friendly" physician owners.
SB 351 also does not invalidate confidentiality provisions prohibiting the disclosure of material nonpublic information about private equity groups or hedge funds that is not generally available to the public, except to the extent that such provisions prohibit health care providers from commenting on the quality of care, utilization of care, ethical or professional challenges, or revenue-increasing strategies employed by the private equity group or hedge fund.
To enforce these provisions, SB 351 empowers the California Attorney General to seek injunctive relief and other equitable remedies as a court deems appropriate and entitles the Attorney General to recover attorney's fees and costs incurred in remedying violations.
AB 1415
AB 1415 amends California's existing Health Care Quality and Affordability Act to bring private equity groups, hedge funds, and MSOs within its existing reporting and review framework. The Act currently requires "health care entities" to provide written notice to OHCA 90 days prior to entering into certain "covered transactions" that do either of the following: (i) sell, transfer, lease, exchange, option, encumber, convey, or otherwise dispose of a material amount of the health care entity's assets to one or more entities; or (ii) transfer control, responsibility, or governance of a material amount of the assets or operations of the health care entity to one or more entities.
While private equity groups, hedge funds and MSOs were already indirectly subject to the OHCA reporting requirements when entering into covered transactions with health care entities, AB 1415 amends the Act to impose an independent reporting requirement on them when entering into a covered transaction with a health care entity, an MSO, or an entity that owns or controls the health care entity or MSO. And while the Act does not provide OHCA the authority to block a transaction, it does provide OHCA with the authority to, upon receiving notice of a covered transaction, initiate a "cost and market impact review" of the transaction, which could delay closing well beyond the end of the 90-day notice period.
Deal teams should plan for enhanced review of health care transactions and should expect increased scrutiny of administrative service agreements and other transaction documents starting in 2026.
For more information on the new laws and their impact on certain transactions, please contact Laura Nelson, David Jenson, or the Stinson LLP contact with whom you regularly work.
