Recently, the California Legislature introduced two bills that may impact private equity healthcare investments in the state, including formalizing corporate practice restrictions and requiring advance notice for certain healthcare transactions. Senate Bill 351, which mirrors portions of last year’s Assembly Bill 3129, proposes to restrict certain management agreement provisions with physician and dental practices, but it would not include A.B. 3129’s state attorney general consent requirement in connection with private equity transactions. Separately, Assembly Bill 1415 proposes to require that private equity funds and their affiliates file advance notice before entering into certain healthcare transactions.
If passed, S.B. 351 and A.B. 1415 represent a continuing trend among states to regulate healthcare investments by private equity funds. California has enacted several such restrictions in recent years, including requirements for transactions subject to the California Office of Health Care Affordability’s (OHCA’s) material transaction notice requirements (discussed here and here). Last year, Gov. Gavin Newsom vetoed A.B. 3129 with its attorney general transaction consent requirements, noting in his veto message that California had already enacted legislation to establish OHCA, which he believed “would be more appropriate … to oversee these consolidation issues.” Both bills appear to internalize feedback from last year’s veto, resulting in narrower, more targeted bills that work in tandem with existing legal frameworks.
Application to Hedge Funds and Private Equity Groups
S.B. 351’s and A.B. 1415’s trigger for applicability is the involvement of any “hedge fund” or “private equity group” that the legislation defines as follows:
- “Hedge fund” means a pool of funds managed by investors for the purpose of earning a return on those funds, regardless of the strategies it uses. The definition includes a pool of funds managed or controlled by private limited partnerships but does not include natural persons or entities that contribute funds but do not otherwise participate in management of the hedge fund or its assets. It also does not include entities that solely provide or manage debt financing secured in whole or in part by the assets of a healthcare facility, such as a bank or credit union.
- “Private equity group” means an investor or group of investors who primarily engage in the raising or returning of capital and who invest, develop or dispose of specified assets. The definition does not include natural persons or entities that contribute funds but do not otherwise participate in management of the private equity group or its assets.
S.B. 351’s Proposed Restrictions on Practice Management Activities
As drafted, S.B. 351 would prohibit hedge funds and private equity groups involved in any manner with a physician or dental practice doing business in California (including via ownership of assets or as an investor in a practice) from interfering in or exercising control over healthcare decisions. Like the language proposed in A.B. 3129, S.B. 351 codifies existing corporate practice of medicine guidance issued by the Medical Board of California. Investor-backed platforms often will have already taken into account the proposed statutory prohibitions, including prohibitions on practice management companies determining what diagnostic tests are appropriate, how many patients a physician or dentist will see during a given period, the content of patient medical records, and the selection of medical equipment and supplies that the practice uses.
Further, the proposed language in S.B. 351 would limit restrictive covenants and non-disparagement provisions in management services agreements, real estate purchase agreements, and asset purchase agreements between physician or dental practices doing business in California and a hedge fund, private equity group, or entity controlled directly or indirectly, in whole or in part, by a hedge fund or private equity group. S.B. 351 does not prohibit otherwise enforceable sale-of-business noncompete agreements, but an agreement subject to S.B. 351’s restriction may not operate as an employee noncompete agreement. This is similar to language proposed in A.B. 3129, except that A.B. 3129’s language related to physician and psychiatric practices. To enforce S.B. 351’s prohibitions, the California attorney general would be entitled to injunctive relief, equitable remedies and attorney’s fees.
In its current form, S.B. 351 does not attempt to prohibit hedge fund- and private equity group-backed platforms from entering into management services contracts or other arrangements with physician and dental practices, provided that such arrangements comply with the proposed statute’s restrictions and requirements. S.B. 351 does not require additional notice to or consent from the California attorney general to close a transaction.
A.B. 1415’s Proposed Revisions to Existing OHCA Transaction Notice Requirements
As proposed, A.B. 1415 would amend the existing OHCA advance notice requirements for material change transactions so that the requirements would also apply to hedge fund and private equity groups investing in, managing or exercising control over healthcare entities through management services arrangements. OHCA began accepting transaction notices in April 2024 through its Notice of Material Change Transaction portal. If passed, A.B. 1415 would increase the number of entities subject to the notice requirements under the same process rather than creating a separate process for notice to the attorney general as proposed under A.B. 3129.
The amendments include a revision to the definition of “health care entity” in the existing OHCA statutes to include management services organizations, which are defined as entities that provide administrative services including, but not limited to, utilization management, billing and collections, customer service, provider rate negotiation, and network development for a provider. The bill also proposes revising the definition of “provider” to include private and public entities, and to include health systems and entities that own, operate or control another provider (such as a physician organization, health facility, clinic or ambulatory surgery center), regardless of whether the entity is currently operating, providing healthcare services, or has a pending or suspended license.
Based on the current language, a hedge fund, private equity group, or entity created for the purpose of entering into agreements or transactions with a healthcare entity would need to provide 90 days’ notice in advance of a transaction involving a healthcare entity when the transaction involves a sale, transfer, lease, or disposition of a material amount of the healthcare entity’s assets or a transfer of control, responsibility, or governance of a material amount of a healthcare entity’s assets or operations. A.B. 1451 would expand the existing definition of healthcare entities to encapsulate hedge fund and private equity group healthcare investments. As with S.B. 351, this provision does not include a consent requirement from the California attorney general, although additional transactions reported to OHCA may then be put in front of the attorney general or require additional market consolidation reports that could further delay transaction timelines.
Conclusion
The current legislative efforts provide a narrower, more tailored approach from last year’s vetoed transaction legislation in California. If passed, both bills would still expand scrutiny and available remedies over private equity and hedge fund investments and transactions. If S.B. 351 passes, relevant stakeholders and entities that participate in management arrangements with hedge funds and private equity groups will need to ensure that the terms of those arrangements comply with existing corporate practice restrictions and the legislation’s language. If A.B. 1415 passes, private equity groups, hedge funds and the affiliated healthcare entities that they create would also be subject to the OHCA transaction notice requirements and the additional transaction timeline process that OHCA creates.
McGuireWoods’ consulting services and integrated healthcare transactions teams, which bring together regulatory, corporate and antitrust expertise, have significant experience navigating corporate practice-of-medicine restrictions and state healthcare filings. Our lawyers closely track guidance and developments in this area to provide clients with informed strategic advice, from considering the regulatory burden associated with acquiring individual targets to achieving approval by state regulators.