New Year, Same Bill: California Reintroduces Bill Aimed at Healthcare Private Equity Investment

The California Senate on Feb. 12, 2025, introduced SB351 – a bill nearly identical to a portion of AB3129 from the previous legislative session. The bill, largely aimed at codifying corporate practice of medicine (CPOM) and restrictive covenant restrictions for private equity-supported medical and dental practices, comes despite Gov. Gavin Newsom's veto of AB3129 in September 2024. The introduction of SB351 comes after a recent wave of CPOM legislation being offered this year in other states such as Connecticut, Oregon and Vermont. (See Holland & Knight's previous alert, "A Year-End Report for Healthcare Antitrust and What to Expect Later in 2025," Jan. 23, 2025.)

What Is SB351?

SB351 seeks to place parameters on management service organizations (MSOs) and dental service organizations (DSOs) that are backed by private equity groups and hedge funds in their support arrangements with medical and dental practices. It introduces Division 1.7 to the Health and Safety Code, defining "hedge fund" and "private equity group" and prohibiting these groups from interfering with healthcare providers' "professional judgment." "Professional judgment" under this law would include decisions regarding diagnostic tests, referrals, patient care and the number of patients seen. The bill would also bar such investors from controlling (or being delegated the power to control) patient medical records, approving the selection of medical equipment and medical supplies, hiring or firing based on clinical competency, and setting contractual parameters with third-party payers or other healthcare providers. As previously reported, the industry is familiar with these limitations, as they largely mirror guidance already displayed on the California Medical Board's website.

Much like AB3129, SB351 would prohibit private equity groups and hedge funds from entering into certain restrictive covenants. It would void any contractual clauses that prevent healthcare providers from competing with their employing or engaging practice after cessation of employment or engagement, as well as from commenting on the practice's quality of care and ethical challenges. The proposed legislation emphasizes that clinical decision-making should remain solely with licensed healthcare providers, safeguarding against non-licensed persons or entities exerting influence over delivery of care.

Does SB351 Have Teeth?

The bill authorizes the California attorney general to seek injunctive relief and recover attorneys' fees and costs for enforcing these provisions. This enforcement right would be material, as it could permit direct enforcement for CPOM noncompliance against the private equity investors and their management company subsidiaries.

Is It Redundant?

The "redundancy" rationale behind Newsom's veto of AB3129 is still prevalent in this draft of the legislation, however. 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 an arrangement that results in a CPOM violation. Cal. Bus. & Prof. Code § 17200 et seq. These actions can be coordinated by the Department of Consumer Affairs (DCA) that oversees the licensure boards and the attorney general who supports DCA. Private litigation enforcing CPOM could also unwind existing relationships to resolve business disputes. Furthermore, as Holland & Knight has extensively profiled, the Office of Healthcare Affordability (OHCA) is the agency currently tasked with studying the effects of healthcare consolidation in California (including transactions involving physician practices) and has been busy reviewing transactions.

A few questions come to mind as this bill makes its way through the legislative process: Will the industry participate in the legislative process to the extent that it did last year? With the bill focused on CPOM, could there be more support from certain stakeholders in the industry, making this bill one to watch in 2025? However, the text is nearly the same as a portion of AB3129, so the question for legislators, and eventually Newsom, will be: Is SB351 still redundant?

Holland & Knight continues to monitor this and other similar legislation. For questions, please contact the authors.

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