On October 6, 2025 California Governor Gavin Newsom signed into law Senate Bill 351,[1] which prohibits private equity groups and hedge funds from interfering with the professional judgement of physicians or dentists in making healthcare decisions and from exercising power over specified clinical activities.
Summary of Specific Prohibitions
The law, to be effective January 1, 2026, specifically provides that a private equity group or hedge fund may not interfere with the professional judgement of physicians or dentists by:
- Determining what diagnostic tests are appropriate for a particular condition;
- Determining the need for referrals to another healthcare professional;
- Being responsible for the overall care of a patient; or
- Determining how many patients a physician or dentist may see in a given period of time or determining how many hours a physician or dentist may work.
In addition, neither private equity group or hedge fund investors may lawfully:
- Own medical records;
- Select, hire or fire clinical personnel based upon clinical competency;
- Determine third party payor contracting parameters for the practice;
- Make decisions regarding coding or billing for procedures; or
- Approve the selection of medical equipment or medical supplies for the practice.
The new law also prohibits the implementation of covenants not to compete in management agreements or service contracts in arrangements between physician or dental practice and a private equity group or hedge fund. In addition, these agreements may not preclude a practitioner from disparaging or commenting on the practice relative to quality of care or ethical matters.
SB 351 provides that the California Attorney General may secure injunctive relief and other equitable remedies to enforce the law, and may secure attorneys fees to remedy legal violations.
Law Makes Few Substantive Changes to California CPM Doctrine
California law has long required that only licensed physicians and dentists, or legal entities that are either general partnerships or professional corporations owned by physicians or dentists, may lawfully practice these professions.[2] What that means exactly has been a part of a well developed body of case law and interpretations of the California Medical Board, which previously combined to establish specific parameters for limiting layperson/lay company involvement in professional medicine that include all of the practice restrictions set forth in SB 351 (the so-called “Corporate Practice of Medicine Doctrine,” or “CPM”).
In addition, California has long disfavored covenants not to compete, limiting their application to certain sales of businesses.[3] SB 351 specifically provides that the law does not make void an “otherwise enforceable sale of business noncompete agreement,” thereby preserving previous exceptions to the California prohibition.
What this means is that the law does not make real changes to the legal rules governing activities of medical or dental practices or their investors. The provisions of SB 351 were already California law.
The one thing that is material to the legislation is that the Attorney General may now secure equitable relief to remedy legal violations of CPM, rather than limiting enforcement to Medical Board or Dental Board enforcement proceedings or private litigation.
Codification of Previous CPM Restrictions Strengthens Existing Law
While not making substantive changes to existing CPM laws, the legislature did put into statute (at least as it applies to private equity groups/hedge funds) what was previously only the subject of case law and regulatory agency interpretation. This makes a more predictable path to any changes to CPM than what previously existed.
Legislature Records Disapproval of Private Equity/Hedge Fund Investment in Healthcare
In recent years, the California Legislature has evidenced concern for investment in healthcare by private equity groups and hedge funds. The California legislative bill analyses for SB 351 reference certain studies that express quality concerns about private equity investment in healthcare. This explains why the legal prohibitions of SB 351 to be included in new sections of the California Health & Safety Code are limited to hedge funds (defined as “a pool of funds managed by investors for the purpose of earning a return on those funds”) and private equity groups (defined as “an investor or group of investors who primarily engage in the raising or returning of capital and who invests, develops, or disposes of specified assets”) despite the fact that existing CPM provisions apply more broadly. Last year, Governor Newsom vetoed AB 3129 (2024), which would have required certain healthcare transactions involving private equity groups or hedge funds to secure Attorney General consent before they were able to be consummated.
Conclusions
SB 351 does not expand the scope of CPM, and private equity and hedge fund investment in physician and dental practices may continue along established legal parameters. This means business as usual. It appears likely that legislation targeting these investors in the healthcare industry will continue. Conversely, the capital needs of healthcare providers in information technology investment and legal compliance will likely continue to make these investors attractive to physicians and dentists.
For questions about SB 351 and its impact, feel free to contact Jeanne Vance, Chair of Weintraub’s Healthcare Practice Group, or connect with any member of the Weintraub team for guidance.
[1] Bill Text – SB-351 Health facilities.
[2] Cal. Bus. & Prof. Code 2052; Cal. Corporations Code 13401.5.
[3] Cal. Bus. & Prof. Code 16600.
