California has recently implemented significant legislative changes aimed at regulating health care transactions, reflecting a growing trend to increase oversight in the sector. On October 6, Governor Gavin Newsom signed Senate Bill 351 (SB 351), which reinforces the state’s corporate practice of medicine doctrine and imposes new restrictions on the influence of private equity and hedge funds within health care organizations. Following closely on October 11, Assembly Bill 1415 (AB 1415) was signed, broadening the scope of parties required to provide pre-transaction notice to the Office of Health Care Affordability (OHCA). These legislative changes aim to enhance state oversight of health care transactions and create additional legal and operational hurdles for acquiring or selling health care entities in California.
Understanding AB 1415: Expanded Notification Requirements
AB 1415 is a critical update to the California Health Care Quality and Affordability Act. It empowers the OHCA with enhanced authority to evaluate health care markets and transactions. Here are the key provisions of this legislation:
Identification of Noticing Entities: The law defines hedge funds, private equity groups, and management services organizations (MSOs) as “Noticing Entities.” Entities falling under this classification are now mandated to submit pre-transaction notices to the OHCA concerning any significant agreements or arrangements involving health care entities or MSOs.
90-Day Notification Requirement: Noticing Entities are required to provide a 90-day advance notification for transactions where they either sell, transfer, lease, or otherwise dispose of a substantial amount of assets of a health care entity or MSO, or transfer control over a significant portion of the organization’s assets or operations.
- Data Submission for Market Studies: In addition to notification, MSOs must now submit relevant data and information necessary for OHCA to conduct insightful market analyses.
It’s worth noting that this year’s enactment of AB 1415 comes after a similar bill faced a veto in the previous legislative session. Unlike its predecessor, AB 1415 directs the notification to OHCA instead of the Attorney General, and crucially, it does not grant the state government veto authority over proposed transactions. However, the Attorney General retains the ability to pursue litigation to block transactions on antitrust grounds.
Exploring SB 351: Restrictions on Corporate Control
SB 351 significantly bolsters existing regulations surrounding corporate influence over medical and dental practices, particularly concerning alternative investment firms such as hedge funds and private equity groups. The legislation stipulates several prohibitions, including:
Restrictions on Professional Judgment: The law explicitly forbids hedge funds and private equity groups from interfering with physicians’ or dentists’ clinical decisions, particularly regarding diagnostic tests, treatments, or referrals.
Operational Control Limitations: It is illegal for these entities to:
- Hire or fire medical staff based on clinical competency.
- Set engagement parameters between providers and third-party payers.
- Approve selection of medical equipment and supplies.
- Make decisions regarding coding or billing practices.
- Own patient medical records.
- Impose non-compete or non-disparagement clauses on providers.
Although SB 351 focuses primarily on hedge funds and private equity firms, it does not alter existing regulations that prevent any corporate interference in medical practice outside the confines of these investment entities.
Both AB 1415 and SB 351 will take effect on January 1, 2026, granting health care companies and investors ample time to evaluate existing management agreements and anticipated transactions for compliance.
Contextualizing California’s Legislative Actions
The recent developments in California reflect a broader initiative across the United States to regulate private equity’s involvement in health care and enforce stricter transaction notification mandates. Similar legislative actions have been observed in states such as New York, Oregon, Indiana, and Massachusetts, with at least 15 states actively claiming health care-specific transaction requirements. Furthermore, Colorado and Oregon introduced the Uniform Antitrust Pre-Merger Notification Act, which necessitates notifying the state Attorney General about transactions in any industry. This Act has been proposed in at least five other states.
The growing list of state-level regulations comes in response to concerns over the implications of private equity’s influence on health care quality, affordability, and access. Stakeholders argue that excessive outside investment may compromise standards of care, particularly in an institution as critical as health care, where patient outcomes should take precedence.
Implications for Health Care Stakeholders
For health care organizations, these legislative changes mean an increased compliance burden and new hurdles in executing strategic transactions. Entities must navigate not only the operational barriers posed by the new laws but also the evolving regulatory landscape as states ramp up oversight efforts.
Challenges for Compliance
Regulatory Complexity: With the introduction of nuanced definitions and requirements, health care entities will need to ensure that their internal processes are in line with the new regulations, which may involve extensive legal consultations and potential operational restructuring.
Burden of Evidence: The necessity to furnish substantial information and data to the OHCA raises questions about the resources needed to ensure compliance, potentially diverting attention away from core operational objectives.
- Impact on Investment: The restrictions on private equity involvement may deter investment in health care technology, infrastructure development, and other innovative approaches, leading to potential stagnation of growth in critical areas.
Future Outlook
As California implements these strictures, the long-term consequences for health care stakeholders may take time to unfold. While the intention behind these regulations is to protect patient care and promote affordability, they simultaneously present challenges that health care entities must adapt to in a rapidly changing industry.
In conclusion, California’s newly enacted AB 1415 and SB 351 reinforce the state’s commitment to overseeing health care transactions and curbing external influences that may undermine quality and access. As other states follow suit, the trends initiated by California’s legislation may shape the future of health care operations, potentially prioritizing patient outcomes over profitability in an increasingly complex regulatory environment. Health care companies should proactively assess their transactional strategies and operational governance to remain compliant and competitive in this evolving landscape.
