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On Monday, October 6, 2025, California Governor Gavin Newsom signed SB 351, which serves to codify and reinforce California's already strict rules for health care investment, specifically related to the corporate practice of medicine and dentistry. SB 351 will go into effect on January 1, 2026.
What does SB 351 do?
SB 351 prevents private equity groups and hedge funds from interfering with a provider's professional judgment in making health care decisions. More specifically, only physicians and dentists can own or determine the content of medical records, make employment decisions involving health care providers, negotiate and enter into payor agreements or professional service agreements with other providers, make billing and coding decisions, and approve medical equipment and supplies to be used in the practice.
SB 351 also bans practice management contracts involving private equity groups or hedge funds from including clauses that would bar providers in the practice from (i) competing with the practice in the event of such provider's termination or resignation or (ii) disparaging or commenting on the practice in any manner related to issues involving quality of care, utilization, ethical or professional challenges in the practice of medicine or dentistry, or revenue-increasing strategies used by the private equity group or hedge fund.
The scope of SB 351 is limited to private equity or hedge fund involvement with a physician or dental practice and does not extend to private equity or hedge fund involvement with other types of professional practices in California.
Additionally, SB 351 permits the use of contractual provisions that prohibit disclosure of material nonpublic information about the private equity group or hedge fund as well as enforceable non-compete clauses related to any potential sale of the business.
Revisions from the Proposed Version
A few key amendments have been made from the originally proposed legislation that we previously analyzed on our blog, "California: Private Equity Management of Medical Practices Again Appears in Proposed Legislation." The definitions of "private equity group" and "hedge fund" now exclude the following entities: public agencies, creating a carve-out for clinics; outpatient settings; health facilities; hospitals or health systems; and ambulatory surgical centers owned, operated, managed, controlled by, or otherwise affiliated with government entities.
Incorporates Prior Proposed Legislation
SB 351 contains some of the practice management provisions that were included in AB 3129, previously analyzed in our blog, "California: Five Things You Need to Know About AB 3129," vetoed by Governor Newsom in 2024. In the event of a violation of the corporate practice of medicine laws, SB 351 gives the state Attorney General authority to seek injunctive relief and other equitable remedies a court deems appropriate as well as related attorney's fees from investors in medical practices, rather than just the medical practitioners themselves.
Implications
The passing of SB 351 illustrates the continued focus of legislatures to limit private equity and hedge fund involvement with the provision of health care. It is notable that SB 351 does not follow Oregon's recent approach under Oregon Senate Bill 951 and House Bill 3410. Oregon's approach imposes new hurdles and prohibits mechanisms typically utilized by management services organizations, often backed by private equity companies or hedge funds, to provide administrative services to medical practices.
SB 351 does not require practices owned by private equity companies or hedge funds to change their ownership structures. However, medical and dental practices currently owned by private equity companies or hedge funds should review their agreements to assess whether any modifications should be made to comply with SB 351.
SB 351 does not prohibit ownership by a physician in a management services organization backed by a private equity company or hedge fund. However, SB 351 does reinforce the current prohibition on the corporate practice of medicine in California, continuing to significantly reign in the strength of management services agreements, limit the control private equity corporations and hedge funds have over medical and dental providers, and promote competition by creating a mechanism for detection, oversight, and enforcement of the corporation practice of medicine laws. Management services organizations should review their agreements to assess whether any modifications should be made to comply with SB 351.
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