Entities subject to the prohibitions in SB 351

SB 351 applies to hedge funds, private equity groups, and their downstream affiliates.

The law defines “hedge fund” 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.

It defines “private equity group” as an investor or group of investors that primarily engage in the raising or returning of capital and that invest, develop, or dispose of specified assets.

The definitions of “hedge fund” and “private equity group” both include carveouts for:

• Passive investors
• Entities that solely provide or manage debt financing secured by assets of a healthcare facility
• Hospitals, hospital systems, and their affiliates
• Public agencies and their affiliated healthcare operations.

Actions prohibited by SB 351

The actions prohibited by SB 351 largely mirror the California Medical Board’s existing guidance. SB 351 prohibits hedge funds and private equity groups involved in any manner with a physician or dental practice in the state from interfering with the professional judgment of physicians or dentists in making healthcare decisions, including:

• 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.

SB 351 also prohibits hedge funds and private equity groups from exercising control over the following activities but permits private equity groups and hedge funds to assist or consult with physician or dental practices with respect to these decisions, as long as the physician or dentist retains ultimate responsibility for these decisions and 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 within which a physician, dentist, or physician or dental practice may enter into contractual relationships with third-party payers
• Setting the clinical competency or proficiency parameters within which a physician or dentist may enter into contractual relationships with other physicians or dentists for the delivery of care
• Making decisions regarding the coding and billing of procedures for patient care services
• Approving the selection of medical equipment and medical supplies for the physician or dental practice.

SB 351 prohibits private equity groups, hedge funds, and their downstream affiliates from entering into any agreement or arrangement that enables interference with the clinical judgment of physicians or dentists. This provision may raise concerns about certain ownership or management structures that allow a private equity group or hedge fund, or its subsidiaries, to replace a friendly physician under specific conditions.

SB 351 continues the trend of limiting the use of restrictive covenants by prohibiting use of noncompetition or nondisparagement clauses in contracts involving the management of a physician or dental practice by a private equity group or hedge fund, or the sale of real estate or other assets owned by a physician or dental practice to a private equity group, hedge fund, or their affiliates. The statute allows for “otherwise enforceable” noncompetition agreements associated with the sale of a business, as well as nondisclosure obligations that prohibit disclosure of material nonpublic information about the private equity group or hedge fund, provided said disclosure is not required by law.

Key takeaways

• Private equity groups and hedge funds should evaluate existing management services arrangements with California physician and dental practices to ensure they do not allow for interference with the healthcare decisions of physicians or dentists or grant impermissive control over practice operations. For example, it is possible that stock transfer restriction agreements that grant a management company broad authority to replace the shareholder of a physician practice would run afoul of SB 351. In an unpublished 2024 decision, a California court held that replacing a physician as the friendly physician pursuant to a stock transfer restriction agreement for refusing to fire another physician was violative of the CPOM prohibition because the decision to replace the physician was a rebuke to the physician’s sole clinical-decision-making authority. SB 351 permits unlicensed entities to assist or consult with a physician or dental practice regarding certain activities related to the practice as long as the licensed physician or dentist retains the ultimate responsibility for such decisions and activities.

• Private equity firms and hedge funds should reassess their contractual relationships with physicians and dentists to evaluate the enforceability of existing noncompete and nondisparagement provisions. They should also consider incorporating confidentiality clauses that safeguard against the disclosure of material nonpublic information, as allowed by SB 351.

• Governor Newsom has yet to sign a second bill, Assembly Bill (AB) 1415, that similarly targets private equity and hedge fund involvement in healthcare. AB 1415 would significantly expand the California Office of Health Care Affordability transaction review process and could cause significant delays for healthcare transactions in California. Governor Newsom has until October 12, 2025, to sign or veto AB 1415.

For more information on the bill, please see our prior client alerts:

• California State Legislature further amends AB 1415 and SB 351.
• California Senate amends AB 1415 to reinsert MSO reporting requirements.
• California amends AB 1415, bill that expands OHCA’s healthcare transaction review authority.
• California AB 1415 aims to expand OHCA’s healthcare transaction review authority.