In October, California Governor Gavin Newsom signed into law two bills that create additional hurdles for investors in healthcare businesses. AB 1415 and SB 351 are both set to take effect on January 1, 2026, and transacting parties that do business in the Golden State should be sure to understand their impact.
AB 1415
Assembly Bill 1415 amends California's existing material change transaction law to expand the definition of "noticing entities" to explicitly cover, among others, private equity groups, hedge funds, and management services organizations (MSOs). These "noticing entities" are required to provide written notice to the Office of Healthcare Affordability (OHCA) at least 90 days prior to entering into any transaction with a healthcare entity or MSO involving either (a) the sale, transfer, lease, or disposal of a "material amount" of assets; or (b) the transfer of control, responsibility, or governance of a "material amount" of the company's operations. AB 1415 seems likely to prompt additional filings to OHCA, which is vested with the authority to review the proposed transaction. And if OHCA opts to conduct a Cost and Market Impact Review, the transaction could be delayed by months.
SB 351
Senate Bill 351 codifies California's prohibition on the corporate practice of medicine and dentistry and expressly prohibits hedge funds and private equity groups from taking actions that would interfere with physicians' or dentists' professional judgment or clinical decision making. Examples of actions explicitly prohibited by SB 351 include hedge funds or private equity (a) selecting, hiring, or firing professional staff; (b) making decisions regarding coding and billing procedures; (c) determining how many patients professional staff may see or how many hours professional staff may work; and (d) approving the selection of medical equipment and supplies for the practice. SB 351 also includes restrictions on a hedge fund's or private equity group's ability to enter into non-compete or non-disparagement agreements with departing or resigning providers.
Takeaway
Taken together, AB 1415 and SB 351 make clear that California regulators are placing investments in healthcare businesses under the microscope. Specifically, transacting parties utilizing the PC/MSO or "friendly physician" model, which has become the preferred transaction structure for healthcare investors, cannot simply "rinse and repeat" what may be permissible in other states.
These recent developments in California are part of a growing trend across the country of increased scrutiny of investments in healthcare businesses. As this trend continues to develop, obtaining proper legal advice is essential, and Venable's Healthcare Group and Private Equity teams are ready to provide support and counsel when you need it.