California Cracks Down: New Laws Governing the Corporate Practice of Medicine and PE Deals

California’s Governor Newsom recently signed into law two bills, Senate Bill 351 (“SB 351”) and Assembly Bill 1415 (“AB 1415”), which together highlight the State’s continued efforts to increase oversight of, and codify corporate practice of medicine limitations on, private equity (“PE”) and hedge fund involvement in the health care industry. Both laws take effect January 1, 2026, signaling a strong regulatory trend toward limiting unlicensed individuals’ and entities’ influence and increasing transparency in healthcare transactions.

SB 351 – Strengthening and Codifying Historical Corporate Practice of Medicine (CPOM) Guidance.

The provisions outlined in SB 351 largely mirror the longstanding guidance issued by the Medical Board of California regarding the appropriate separation between clinical and administrative decisions and activities pursuant to the state’s strict CPOM doctrine.

SB 351 prohibits PE firms and hedge funds from controlling clinical decisions and actions of physicians and dentists. More specifically, under the new law, PE firms, hedge fund investors, and management services organizations (“MSOs”) are prohibited from influencing medical decision-making, or entering into agreement or arrangements enabling the same, including:

• Determining the need for diagnostic tests or referrals or consultations with other licensed healthcare professionals;
• Controlling patient care options or plans;
• Deciding physician or dentist schedules; and
• Exercising control over any of the following:
• Ownership or contents of patient medical records;
• Selecting, hiring, or firing clinical personnel based on clinical competency;
• Coding, billing or payor contracting terms; or
• Approving selection of medical equipment or supplies for the practice.
• Restricts Contract Terms: Non-compete and non-disparagement clauses in management services agreements with physician or dental practices are void. This restriction does not apply to otherwise enforceable sale of business noncompete agreements.
• Enforcement: The Attorney General may seek injunctions, attorneys’ fees, and penalties for violations.
• Impact: MSO-PC structures remain permissible, but MSOs must strictly limit activities to administrative functions.

AB 1415 – Expanded Transaction Oversight under the California Health Care Quality and Affordability Act.

We previously wrote on California’s existing California Health Care Quality and Affordability Act, which provides the Office of Health Care Affordability (“OHCA”) with oversight authority to review material change transactions involving health care entities and conduct cost and market impact reviews of proposed transactions. AB 1415 expands the authority of OHCA by updating the pre-transaction notification requirements and general oversight to include PE firms, hedge funds, and MSOs.

• Pre-Transaction Notice: PE firms, hedge funds, and MSOs must now provide 90 days’ advance notice to the Office of Health Care Affordability (OHCA) for material transactions.
• Cost and Market Impact Review (CMIR): OHCA may delay closing and refer deals to the Attorney General for antitrust or compliance concerns.
• Disclosure Requirements: Detailed financial and governance information must be submitted.
• Impact: Expect longer timelines and heightened scrutiny for acquisitions, mergers, and MSO arrangements. Increased compliance burden for PE firms, hedge funds, and MSOs.

Key Takeaways for PE Firms and Hedge Funds

1. Plan for Extended Timelines: OHCA review can add months to deal closing.
2. Ensure Compliance: Review MSO agreements to eliminate any clinical control provisions. Review agreements to ensure they do not include prohibited non-compete or non-disparagement provisions. Be aware of such prohibitions as you enter into new arrangements with physician and dental practice.
3. Prepare for Transparency: Be ready to disclose ownership, governance, and financial details during the OHCA review processes.
4. Avoid Clinical Influence: Investors must not dictate medical decisions, staffing, or billing practices.
5. Monitor Trends: California’s approach is likely a model for other states—anticipate similar laws nationwide.

Action Steps:

• Conduct a compliance audit of current MSO agreements.
• Build regulatory review timelines into transaction planning.
• Engage legal counsel early to navigate OHCA and CPOM requirements.

For more information or assistance with compliance strategies, please contact your Quarles attorney or:

• Bailey Walden: 602-229-5432 / bailey.walden@quarles.com
• Amy Cotton Peterson: 602-229-5530 / amy.cottonpeterson@quarles.com