• California’s recently introduced proposed bill, Senate Bill 351 (“SB 351”), seeks to expand the state’s existing corporate practice of medicine (“CPOM”) doctrine by restricting private equity (“PE”) investment in practice management.
• SB 351 revives a controversial portion of failed Assembly Bill 3129, which sought to require PE and hedge fund investors to obtain written consent from the state attorney general for certain healthcare transactions.
• If enacted, SB 351 would both codify and expand California’s current CPOM doctrine, although it remains to be seen whether further legislative action will result in the grandfathering of existing arrangements as a means of mitigating the potential for increased CPOM enforcement risk.

Spurred by the Trump administration’s deregulatory actions, states appear poised to promulgate bills aimed at regulating healthcare investments, with some states—such as California—explicitly targeting private equity (“PE”). On February 12, 2025, California Senator Christopher Cabaldon introduced Senate Bill 351 (“SB 351” or the “proposed bill”), which aims to broaden the state’s existing corporate practice of medicine (“CPOM”) restrictions, placing limitations on PE’s role in practice management. Stakeholders will find the text of the proposed bill familiar: SB 351 revives a portion of last year’s controversial Assembly Bill 3129 (“AB 3129”) which, despite undergoing extensive revisions, was ultimately vetoed last September by Governor Gavin Newsom.

Looking Back at AB 3129. AB 3129 would have required PE and hedge fund investors to notify and obtain written consent from the state attorney general (“AG”) prior to a change of control or an acquisition involving a private equity group or hedge fund and a healthcare facility or provider group. The initial draft of AB 3129 also included expansive restrictions on practice management: it (i) prohibited PE groups and hedge funds from entering into arrangements that would effectively “control or direct” a physician practice, and (ii) created a blanket prohibition of arrangements between a physician and a PE group, hedge fund or entity under their direct control such as a management services organization (“MSO”) for which the PE group or hedge fund manages the day-to-day responsibilities of the physician practice in exchange for a fee.

After receiving significant pushback from stakeholders who voiced concerns that the proposed bill would upend existing MSO arrangements, legislators removed the practice management provision. AB 3129, as amended, was approved by the full legislature but vetoed by Governor Newsom: in his veto memo, the governor vocalized his support for efforts to increase regulatory oversight of the state’s healthcare system, but cited concerns regarding the redundancy of the bill, given the California Office of Health Care Affordability’s (“OHCA’s”) extant authority to review and evaluate healthcare transactions. The governor did not, of course, state his office’s position on the broadening of practice management restrictions—those bill provisions had been left on the cutting room floor.

Overview of the CPOM Doctrine and the Potential Impact of SB 351. CPOM is a legal principle that prohibits non-medical persons and entities from practicing medicine to ensure that clinical decision-making is focused on the best interests of the patient. In states that have adopted some form of CPOM, the doctrine may be codified in statutes, established by case law, or promulgated by medical board guidance. California has codified its CPOM prohibition primarily through Business and Professions Code § 2052 (which makes it unlawful for any person to practice medicine without a license) and § 2400 (which states that non-professional entities cannot practice medicine or employ physicians absent an enumerated exception). The statutory prohibition is reinforced by extensive CPOM guidelines promulgated by the Medical Board of California, which has been active in investigating and taking disciplinary action against physicians who enter into improper arrangements. Moreover, California courts have been poised to unwind aspects of the ubiquitous “friendly physician” arrangement: American Academy of Emergency Medicine Physician Group Inc. (“AAEM-PG”) recently settled a lawsuit against Envision Healthcare Corporation alleging, among other things, that the MSO exercised undo control over physicians’ clinical decision-making in violation of CPOM.

SB 351 includes provisions that, if enacted, would impact PE’s role in practice management. Echoing extant CPOM doctrine, the proposed bill prohibits a PE group “involved in any manner with a physician or dental practice . . . including as an investor” from interfering with the professional judgment of healthcare professionals in clinical decision making or having control over responsibilities that fall under the expertise of healthcare professionals, including with respect to: diagnostic testing, referrals, the number of patients seen, patient records, the hiring or termination of clinical staff, the selection of medical equipment and supplies, billing procedures and contracts with third-party payors. SB 351 also prohibits the use of non-compete and non-disparagement clauses in any contract involving (i) the management of a physician or dental practice by a PE group or hedge fund, or (ii) the sale of real estate or other assets owned by a physician or dental practice to a PE group or hedge fund; such prohibitions are not readily inferred from existing statutory or case law and would be an expansion of extant CPOM doctrine.

As currently drafted, SB 351 does not appear only prospectively applicable (i.e., to arrangements entered into after its effective date): without an explicit grandfather clause, existing arrangements would likely be subject to enforcement. Further, because the proposed bill entitles the AG to injunctive relief and other equitable remedies, the AG will be poised to actively oversee PE involvement in practice management and, in turn, provider groups that find their management arrangements disadvantageous will be better empowered to seek remedy.

Looking Ahead. The fate of SB 351 remains unclear. Because the proposed bill attempts to revive a highly contested and ultimately deleted portion of AB 3129, SB 351 is likely to again incite pushback from stakeholders. Legislators may respond by amending the proposed bill to ensure it will not upend existing MSO arrangements—for example, by allowing an MSO to negotiate payor contracts and set rate structures, by grandfathering existing arrangements, or by providing investors an opportunity to exit the market before the proposed bill takes effect. If SB 351 is approved by the full legislature, there is an outside chance that Governor Newsom would choose to veto, particularly given his lack of support for AB 3129. That said, as we have earlier discussed, the governor’s veto of AB 3129 was based on the perceived redundancy of creating two parallel healthcare transaction review processes: his office did not opine on practice management, the subject of SB 351.

This publication is for general information purposes only. It is not intended to provide, nor is it to be used as, a substitute for legal advice. In some jurisdictions it may be considered attorney advertising.