The California Legislature Revisits Limitations on and Oversight of PE Involvement in the Health Care Industry

Lawmakers in California remain dedicated to increasing oversight and placing limitations on private equity (PE) and hedge fund involvement in the health care industry. However, the jury is still out as to whether these new measures will be implemented. Last session, we followed California Assembly Bill 3129 (“AB 3129”), which was ultimately vetoed by Gov. Gavin Newsom in September 2024.¹ AB 3129 would have added requirements for PE groups and hedge funds to notify and obtain approval from the CA Attorney General (the “AG”) prior to executing transactions involving certain health care entities. Additionally, AB 3129 codified Medical Board of CA guidance regarding the corporate practice of medicine (“CPOM”) and the prohibitions on unlicensed entities’ interference with the professional judgment of physicians, dentists, and psychiatrists. However, Governor Newsom vetoed AB 3129 citing redundancy with the CA Office of Health Care Affordability’s (“OHCA”) health care transaction review process and stating that it would be more appropriate for OHCA to oversee these transactions.

Despite the Governor’s veto, efforts have renewed to implement oversight measures very similar to those proposed in AB 3129. However, the transaction notification process and the CPOM prohibitions have now been divided into two separate bills that are being spearheaded in the different legislative houses. CA Assembly Member Mia Bonta introduced Assembly Bill 1415 (“AB 1415”) on February 21, 2025.² In accordance with Governor Newsom’s feedback, AB 1415 would update the current California Health Care Quality and Affordability Act, to add “management services organizations” to the definition of “health care entity” and include additional definitions such as “private equity group” and “hedge fund.” Under the proposed language, the existing requirements to provide OHCA with written notice of certain health care agreements and transactions at least 90 days prior to execution, would expand to include those qualifying arrangements and transactions involving management services organization, PE groups, and hedge funds.

Additionally, on February 12, 2025, CA Senator Christopher Cabaldon introduced Senate Bill 351 (“SB 351”).³ Once again, SB 351 seeks to limit management services relationships between PE groups and hedge funds, and medical and dental practices by codifying the well-known Medical Board of CA guidance. Practically identical to the provisions in AB 3129, minus the reference to psychiatric practices, SB 351 prohibits management services organizations, which are often backed by PE groups and hedge funds, from exercising decision-making authority and power over choices involving, among others:

• Coding and billing;
• Appropriate diagnostic tests;
• The need for referrals and consultations;
• The hiring and firing of medical staff and allied health staff based on clinical competency or proficiencies;
• The number of patients a practitioner sees; and
• The selection of medical equipment and supplies.

SB 351 also includes the previously proposed language regarding certain unenforceable contracts. Specifically, the bill renders contracts void and unenforceable if the contract between a physician or dental practice and a PE group or hedge fund includes a clause barring a provider in the practice from (a) competing with the practice in the event of termination or resignation, or (b) from disparaging, opining, or commenting on the practice with respect to certain issues such as quality of care, or ethical or professional challenges. Under the proposed language, the AG would be entitled to injunctive relief and attorney’s fees and costs for enforcement.

Former Assembly Member Jim Wood, who introduced AB 3129, was a strong proponent for overseeing PE and hedge fund involvement in the CA health care industry and was responsible for backing such movements in the past. Assembly Member Wood decided not to run for reelection and his term ended in 2024. Thus, while there may have been some hope for a break in the action, it is clear that remaining legislators continue to prioritize this topic. As such, those PE groups and hedge funds looking to expand into or within the CA health care industry and those with current arrangements that may fall under the limitations placed on friendly-PC arrangements in SB 351, should continue to monitor these developments in California. Nevertheless, it is a good time to ensure any current management services contracts are in compliance with Medical Board of California guidance as a means of getting ahead of the potential passage of SB 351.

What’s next? AB 1415 was referred to the Assembly Committee on Health on March 13^th and SB 351 was scheduled for initial hearing on April 21st. Therefore, these bills still have a way to go, but if AB 3129 is any indicator, the bills may move relatively quickly through the legislative process, and it will be up to Governor Newsom to decide if the updated bills address his prior concerns. We will continue to monitor for substantive updates. If you have any questions related to these bills or other legislation of this kind, reach out to your Quarles attorney or:

• Amy Cotton Peterson: 602-229-5530 / amy.cottonpeterson@quarles.com
• Bailey Walden: 602-229-5432 / bailey.walden@quarles.com

END NOTES

¹ Link to prior articles on AB 3129.

² Please see CA AB 1415, available here.

³ Please see CA SB 351, available here.