California Implements Stricter Investment Regulations in Healthcare
California is setting a new precedent in healthcare investment oversight with the recent enactment of two key pieces of legislation, AB 1415 and SB 351. Signed into law by Governor Gavin Newsom, these measures introduce stricter regulations for private equity groups, hedge funds, and management services organizations (MSOs) operating in the state’s healthcare sector. The laws, which will take effect on January 1, 2026, aim to enhance transparency and accountability while safeguarding the professional autonomy of healthcare providers.
Expanding Oversight and Defining Boundaries
AB 1415 significantly broadens the authority of the Office of Health Care Affordability (OHCA), requiring more transactions involving private equity groups, hedge funds, and MSOs to undergo regulatory review. The scope of these reviews includes transactions that "sell, transfer, lease, exchange, option, encumber, convey, or otherwise dispose of a material amount of the health care entity’s or MSO’s assets" or transfer operational control. This measure also mandates MSOs to notify OHCA of such transactions, potentially affecting a wide array of entities, including those providing services like payroll or software solutions.
Key questions remain, however, about how the law will be enforced. For instance, the definition of what constitutes an MSO could be interpreted broadly, potentially encompassing entities not traditionally thought of as MSOs. The law also leaves room for OHCA to establish future data-reporting requirements, which may include detailed information about the organizational structures, investors, and financial performance of private equity and hedge fund entities.
In parallel, SB 351 enhances the enforcement of California’s corporate practice of medicine (CPOM) doctrine. It codifies existing standards while further restricting the influence of private equity and hedge funds in medical and dental practices. The legislation prohibits unlicensed entities from interfering with professional healthcare decisions, such as patient treatment, diagnostic testing, and referral needs. Contracts that violate these provisions, including those containing noncompete or non-disparagement clauses, will be deemed void and unenforceable.
Uncertainty Looms in Implementation
While these laws address longstanding concerns about the role of private investment in healthcare, much depends on how regulators will interpret and implement the new requirements. For example, OHCA has yet to clarify the thresholds for transaction reviews or specify what data MSOs will need to report. Without clear and narrowly tailored guidance, there is concern that OHCA may face an overwhelming number of submissions, potentially straining its resources.
The legislation’s impact may extend beyond private equity and hedge funds, requiring many healthcare stakeholders to reassess their ownership and contracting arrangements. Entities involved in management services or administrative support for healthcare providers might need to evaluate whether their operations fall under OHCA's expanded review authority.
Compliance and Legal Challenges Ahead
The passage of these bills marks a significant shift in how California regulates healthcare investments. SB 351 explicitly bars unlicensed entities from controlling key aspects of clinical care and practice management. While private equity and hedge funds may still consult or assist healthcare providers, ultimate decision-making authority must remain with licensed professionals. The legislation also voids contracts that enable such entities to exert undue influence over patient care.
According to SB 351, the California Attorney General will have the authority to seek injunctive relief or other remedies to enforce these new restrictions, including recovery of costs and attorneys’ fees. This, combined with the regulations introduced by AB 1415, could lead to increased litigation and enforcement actions in the healthcare sector.
Preparing for Change
As these new requirements approach their enforcement date, California healthcare providers, private equity groups, and hedge funds are advised to proactively review their contractual and ownership structures. Special attention must be paid to compliance with both AB 1415’s expanded transaction notification requirements and SB 351’s prohibitions on professional interference. Stakeholders should also monitor OHCA’s regulatory updates to better understand the full scope of compliance obligations.
With these sweeping changes, California is positioning itself at the forefront of healthcare investment regulation, aiming to balance the role of private capital with the need to protect patient care and provider autonomy. Yet, as the laws’ implementation unfolds, the clarity and effectiveness of these regulations will ultimately determine their impact on the state’s healthcare landscape.