TL;DR — Key Takeaways

• SB 351, signed October 6, 2025, took effect January 1, 2026. It codifies California’s Corporate Practice of Medicine doctrine specifically for private equity and hedge fund involvement in physician and dental practices. [VERIFY: H&S Code §§ 1190 and 1191.]
• Private equity can still own management services organizations and provide non-clinical services. PE cannot interfere with clinical judgment, control hiring/firing of clinicians, set patient volume, or own medical records.
• Non-compete and non-disparagement clauses against providers in PE-backed MSAs are now void. Sale-of-business non-competes (in genuine acquisitions) remain enforceable.
• The California Attorney General has new express authority to seek injunctive relief and recover attorney’s fees for SB 351 violations.
• Existing arrangements were not grandfathered. PE-backed practices needed to audit their structures and contracts before the January 1, 2026 effective date.

What Does SB 351 Prohibit Private Equity From Doing in California Medical Practices?

SB 351 codifies a specific list of prohibited control points. Private equity groups, hedge funds, and entities they control directly or indirectly cannot interfere with the professional judgment of physicians or dentists in making clinical decisions, and cannot exercise control over a defined set of practice functions.

Specifically, PE-backed entities cannot determine what diagnostic tests are appropriate, set treatment plans, decide patient referrals, or determine the number of patients a clinician will see or hours they will work. They cannot own or determine the content of patient medical records. They cannot select, hire, fire, or evaluate clinicians based on clinical competency. They cannot set coding and billing parameters or contracting terms with payers in a way that drives clinical decisions. [VERIFY: confirm full prohibited-conduct list as enacted in H&S Code § 1190.]

The list is non-exhaustive. The statute also includes a general prohibition on interference with professional judgment, which gives the Attorney General latitude to challenge other arrangements that compromise clinical autonomy.

Can a Private Equity Firm Still Own an MSO in California?

Yes. SB 351 does not ban PE ownership of MSOs. The statute regulates what PE-controlled entities can do, not whether they can exist.

An MSO owned by a PE firm can still provide non-clinical services to a physician practice, charge a management fee at fair market value, and participate in the upside of operational efficiency. What it cannot do is exercise control over the clinical functions listed in SB 351 or use the MSA as a vehicle for that control.

The friendly PC structure remains the operating framework for compliant PE healthcare investment in California. The structure now requires more careful drafting and stronger separation between the PC and the MSO than it did before SB 351.

What Contracts Does SB 351 Void in PE-Backed Healthcare Arrangements?

SB 351 expressly voids and renders unenforceable certain contractual provisions in PE-backed or hedge-fund-backed medical and dental practice arrangements.

Non-compete clauses against providers. Provisions barring physicians or dentists from competing with the practice after termination or resignation. The exception is for sale-of-business non-competes that are otherwise enforceable under California law — meaning genuine practice acquisitions where the seller has received consideration for goodwill. Employee non-competes have been broadly unenforceable in California under BPC § 16600 already; SB 351 closes a perceived gap by addressing PE-structured arrangements specifically.

Non-disparagement clauses. Provisions preventing providers from commenting on quality of care, utilization of care, ethical or professional challenges, or revenue-increasing strategies used by the PE group or hedge fund. The statute carves out customary confidentiality clauses that protect material nonpublic business information, as long as those clauses do not block legally required disclosures or the protected provider speech the statute defines.

Contracts that include the prohibited clauses are void to the extent of the violating provisions. The rest of the contract may remain enforceable depending on severability.

How Does SB 351 Affect Existing MSO Management Agreements?

Existing agreements were not grandfathered. SB 351 applies to all in-effect agreements as of January 1, 2026, regardless of when they were signed.

PE-backed MSO arrangements should have undergone full audit before the effective date and should now have active compliance frameworks. Arrangements that included the prohibited clauses needed to be amended or restated.

The audit should review (1) provisions that grant the MSO control over the prohibited clinical and operational functions, (2) non-compete and non-disparagement clauses, (3) compensation structures (FMV documentation, percentage-of-revenue analysis), and (4) governance documents that may give PE indirect control over clinical decisions through PC governance, friendly physician arrangements, or board observer rights.

Practices that haven’t yet completed this audit are operating with active legal exposure. Counsel can prioritize remediation based on risk.

What Is the California Attorney General’s Enforcement Role Under SB 351?

SB 351 grants the Attorney General express authority to enforce the statute. The AG can seek injunctive relief, seek other equitable remedies, and recover attorney’s fees and costs incurred in remedying violations. [VERIFY: confirm exact enforcement provisions as codified.]

This is a meaningful change. Under prior law, CPOM enforcement relied primarily on Medical Board discipline of individual physicians and on private litigation. SB 351 gives the AG a direct civil enforcement path against the PE group, hedge fund, or controlled entity, without needing to wait for an individual complaint.

Enforcement priorities will become clearer over time as the AG begins to use the new authority. Early signals from the AG’s office and from companion legislation (AB 1415, which expanded OHCA reporting) suggest meaningful examination of PE healthcare arrangements going forward.

What Compliance Steps PE-Backed Practices Should Take

Audit governance documents. PC bylaws, MSO operating agreements, governance and voting arrangements between physicians and PE.

Audit MSAs. Identify and remove prohibited clauses; verify FMV compensation; confirm scope of services excludes clinical functions.

Review provider employment agreements. Remove non-competes and non-disparagement clauses where SB 351 voids them; preserve sale-of-business non-competes where enforceable.

Document clinical autonomy. Memorialize that clinical decisions are made by physicians, including referrals, patient volume, hours, and treatment plans. Records of the PC’s decision-making independence are protective.

Update marketing and investor communications. Materials that imply PE control over clinical operations create regulatory exposure even if the contracts are clean.

Build ongoing compliance. SB 351 is not a one-time fix. Continuing operational practices have to align with the statute, and rulemaking from the AG’s office and OHCA is expected.

AB 1415: The Companion Reporting Law

AB 1415, signed alongside SB 351 in October 2025, took effect January 1, 2026. It expands the Office of Health Care Affordability’s authority to review healthcare transactions involving MSOs, private equity, and hedge funds, and to collect data on their role in cost, quality, and access. [VERIFY: confirm exact AB 1415 codification and reporting thresholds.]

Practices and investors planning California transactions should now build OHCA review into deal timelines. The notice and review process applies to material change transactions as defined in the statute, and the lead time can be 90 days or more depending on the transaction structure.

AB 1415 does not require formal pre-approval, but the review can affect timing and creates a public record that didn’t exist before.

This article is for general information and is not legal advice. For guidance on your specific situation, contact Bay Legal, PC at 650-668-8000 to schedule a consultation.