California Governor Gavin Newsom has just signed into law Senate Bill 351, 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. 

The bill was passed with strong majorities by both the state Assembly and Senate. It prohibits those investors from interfering in healthcare decisions, including those related to billing and coding, at physician or dental practices that they back. It also gives the state new authority to pursue violators. The law will be effective January 1, 2026.

The key provisions

SB 351 specifies that private equity groups and hedge funds (and controlled fund entities or affiliates thereof) may not:

• interfere with the professional judgment of physicians or dentists in healthcare decisions, including with diagnostic tests, treatment options, patient volume, or referral requirements; or
• exercise control over or be delegated the power to:
  • own or determine the content of medical records, make hiring and firing decisions involving healthcare providers;
  • set the parameters of physicians, dentists or practices entering into payer contracts;
  • set parameters of physicians and dentists entering into professional service contracts with other physicians and dentists;
  • make billing and coding decisions; and
  • approve the selection of medical equipment and supplies for practices.

In addition, neither private equity groups or hedge fund investors may:

• 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.

This latter prohibition would not affect the validity of otherwise enforceable sale of noncompetes, though, or valid prohibitions on the disclosure of material nonpublic information about the private equity firm or hedge fund.

State-based initiatives

Similar legal prohibitions exist in dozens of states, but many doctors, nurses, and policymakers would like to see them as strong as California’s new one – and Oregon’s, which is quite similar to SB 351 and goes even further as it would place additional restrictions on the use of succession agreements and related arrangements often used by private equity and other organizations investing in healthcare companies.

They believe such laws would provide a buffer against private equity’s powerful influence in the sector.

And there’s a body of research showing that patients fare worse under private-equity ownership. For example, hospital emergency departments owned by private equity have higher patient death rates than those not owned by private equity, according to a paper published in September by researchers at Harvard Medical School, the University of Pittsburgh, and the University of Chicago.

On the flip side, some private-equity and hedge fund firms and the trade groups advocating for them contend that their investments help medical providers expand care and improve treatment, and that the new law might force private-equity firms to restructure or even abandon some medical investments in the state. 

They point to deeper problems in the healthcare system, such as consolidation by hospitals and insurers, for some of the issues they say these laws are pinning on private-equity investment.

Rising private-equity investments in healthcare

“I am grateful for the governor’s signature to ensure that patients are receiving medical care prescribed by their doctors, not from private-equity investors,” said state Senator Christopher Cabaldon, who introduced the bill.

Rising private-equity investment in healthcare “demands modern enforcement tools, not to restrict investment, but to make sure it doesn’t hurt patient outcomes or drive up the cost of care,” said Cabaldon, who represents a district in the north of the state that stretches from the San Francisco Bay Area to West Sacramento.

But why are such investments happening and even growing in number in the first place? It’s likely because of the high cost of technology and compliance expertise required in the highly regulated healthcare sector, one commentator said.

“Providers need the resources these investors can bring – so 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,” said Jeanne Vance, Chair of Weintraub’s Healthcare Practice Group.