Highlights
- The California Legislature recently passed two bills, Assembly Bill (AB) 1415 and Senate Bill (SB) 351, that are substantially similar to AB 3129, which was ultimately vetoed by California Gov. Gavin Newsom in 2024. The newly passed bills will now go to Gov. Newsom's desk.
- AB 1415 would significantly expand the Office of Health Care Affordability's (OHCA) oversight of healthcare transactions involving private equity, hedge funds and management services organizations, but would still not provide OHCA with a consent right.
- SB 351 would codify California's existing Corporate Practice of Medicine doctrine, provide direct enforcement authority to the California Attorney General and limit the viability of certain restrictive covenants for healthcare providers, in each case with a focus on private equity structures.
From the West Coast Healthcare Desk
The California Legislature passed Assembly Bill (AB) 1415 on Sept. 8, 2025, which would require many management service organizations (MSOs) and other private equity and hedge fund groups to report certain healthcare transactions to the Office of Health Care Affordability (OHCA).
The Legislature also passed Senate Bill (SB) 351 on Sept. 12, 2025, codifying an existing, strict Corporate Practice of Medicine (CPOM) regime and restrictive covenant limitations, as well as providing the California Attorney General (AG) with direct enforcement power regarding such restrictions. SB 351, like AB 1415, takes aim at private equity-backed MSOs and dental service organizations (DSOs) and places significant guardrails on the relationships such organizations have with their supported medical and dental practices.
AB 1415
Since the inception of OHCA's transaction review authority, its applicability to transactions involving private equity companies, hedge funds and their platform companies was not clear. In 2024, the California Legislature passed AB 3129, a law that would have required private equity and hedge funds and in some cases, their platform companies, to obtain the California AG's consent before closing certain healthcare transactions in California. However, Gov. Newsom vetoed AB 3129 in September 2024, citing redundancy with OHCA's existing framework and authority and explaining that it would be "more appropriate for OHCA to oversee these consolidation issues as it is already doing much of this work."
AB 1415 appears to be a response by the California Legislature to Gov. Newsom's veto justification.
OHCA's transaction review authority currently does not include MSOs. OHCA had tried to include them through rulemaking processes but was not successful. AB 1415 is the latest effort to subject MSOs to OHCA's authority and defines MSOs as entities that provide "management and administrative support services for a provider in support of the delivery of health care services, excluding the direct provision of health services." Such services may include, without limitation, "provider rate negotiation, revenue cycle management, or both."
Moreover, under AB 1415, MSOs would be designated as "noticing entities" (and excluded from the definitions of "health care entity" and "provider") under a new Section 4 CA. Health & Safety Code §127507(c)(2). Noticing entities would be subject to reporting obligations under a yet-to-be-defined regulatory framework. Noticing entities would also include special-purpose entities that are formed specifically to transact – these noticing entities would need to report transactions involving the transfer or control of a "material" portion of a healthcare provider's assets or operations. Notably, however, the term "material" is left open to regulatory interpretation.
Finally, under AB 1415, MSOs would be required to provide operational data to OHCA under Section 3 3. HSC § 127501.5. as part of the agency's research and policy initiatives. The exact data requirements, however, remain undefined. OHCA would use such data to study the impacts of management structures and consolidation on healthcare costs, quality, equity and workforce stability.
SB 351
As Holland & Knight previously reported, SB 351 was initially a near carbon copy of the CPOM codifying portions of AB 3129, a bill that sought to significantly limit private equity involvement in medical and dental practices. As mentioned, Gov. Newsom vetoed that bill citing redundancy with California's existing transaction reporting framework but made no mention of the CPOM or restrictive covenant sections. However, the "redundancy" reasoning would still apply to these sections since 1) the California Medical Board, courts and private litigants have enforced CPOM restrictions against both provider practices and MSOs, including in the 2024 Art Center Holdings case, for decades and 2) California has historically already prohibited many employment-restrictive covenants.
In short, SB 351 prohibits private equity groups and hedge funds from making or influencing clinical decisions in medical and dental practices. It bars nonclinical control over treatment plans, staffing decisions, medical records and financial arrangements that could impact care delivery. Finally, the bill also restricts noncompete and non-disparagement clauses in contracts involving medical and dental practice acquisitions.
However, following its introduction in February 2025, SB 351 underwent two key amendments during the legislative process that distinguish it from AB 3129.
First, "natural persons" who contribute funds to a private equity group, but otherwise do not participate in management, were expressly exempted from the definition of "private equity group," which previously would have (presumably) captured direct/indirect passive investors in such groups.
Second, and most significant, a new section was added to SB 351 (1191(h)) that clarifies the bill does not prohibit any unlicensed persons or entities from "assisting" or "consulting with" physician or dental practices on management and business decisions as long as the licensed provider (as applicable) retains "ultimate responsibility for, or approval of" such decisions. This clarification was welcomed by the industry since it provides more flexibility for MSOs and DSOs to operate in the state. However, there are still significant concerns by stakeholders that foot faults under the statute and related enforcement action could still occur, dampening investment, exit multiples and financing terms.
What's Next?
AB 1415 and SB 351 now head to Gov. Newsom's desk for either signature into law or veto.
As with AB 3129, questions of redundancy remain, particularly with respect to SB 351. As discussed in previous Holland & Knight alerts, California has rigorously enforced the CPOM doctrine for decades, and MSOs have been accused of participating in unfair business practices by participating in arrangements that result in CPOM violations. Cal. Bus. & Prof. Code § 17200 et seq. These actions can be coordinated by the California Department of Consumer Affairs (DCA), which oversees the licensure boards, and the office of the AG, which supports DCA. Private litigation enforcing CPOM could also unwind existing relationships to resolve business disputes.
By contrast, AB 1415 appears to have been influenced by Gov. Newsom's justification for vetoing AB 3129. Instead of giving the AG new powers, the legislature is now trying to strengthen OHCA's existing oversight, aligning with the governor's previous reasoning. Additionally, AB 1415 answers (in the affirmative) what has, to date, been an open question: whether MSOs are subject to OHCA's transaction review authority. However, the bill does not define the transaction notice or data reporting requirements and provides no justification for why MSOs should be treated differently. Given the extent of operations of MSOs in the state, this could present an unnecessary administrative burden and unknown costs on MSOs in the future, which could impact their support of healthcare providers. It could also raise questions from MSO's investors and financers that cannot be answered until either the legislature amends the bill or OHCA conducts a rulemaking. The industry played a significant role in past rulemaking activity involving MSOs.
Key Takeaways
- Whether Gov. Newsom will veto one or both of AB 1415 and SB 351 is an open question. AB 1415 appears to have incorporated Gov. Newsom's veto reasoning for AB 3129 with respect to private equity transactions, but it leaves many unanswered questions for MSOs.
- By contrast, SB 351 remains largely similar to many of the provisions in AB 3129, which are arguably redundant given California's existing and active (albeit uncodified) CPOM regime. This may hinder SB 351's chances of avoiding a veto.
- In the event the bills are signed into law, private equity firms, hedge funds and MSOs operating in California should prepare for greater transparency and scrutiny and closely monitor forthcoming OHCA regulations that could affect deal structures and timelines. Additionally, stakeholders and investors should prepare for the possibility that structural changes to existing platforms and business models may be necessary to comply with the new laws.
- Reach out to your Holland & Knight attorneys for assistance with making these changes or submitting transaction notices under the new standards.
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