SB 351 Explained: How California’s New Law Impacts Practice Ownership

What is California’s SB 351? 

California has become the second state to directly regulate private equity and hedge fund involvement in physician and dental practices. Governor Newsom signed Senate Bill 351 into law on October 6, 2025, creating new restrictions on how corporate entities can participate in healthcare delivery across the state.

The law takes effect January 1, 2026. For practice owners with private equity investment, or those operating under Management Services Organization (“MSO”) models with corporate backing, this means you have about two and a half months to review your agreements and ensure compliance. Portions of existing contracts may be void and unenforceable under the new law.

States’ Growing Oversight of Private Equity in Healthcare

If you've been following California healthcare policy, SB 351 shouldn't come as a major surprise. California has consistently been at the forefront of healthcare regulation, particularly around patient protection and provider autonomy. This fits squarely within that broader regulatory philosophy.

Oregon enacted similar restrictions just months earlier with SB 951 in June 2025, becoming the first state to take this approach. Oregon's law went further by completely prohibiting MSO ownership in clinical entities and eliminating minority ownership structures that were previously common.

States are increasingly focused on the influence of corporate capital in healthcare delivery, particularly regarding clinical decision-making. From the legislative perspective, the concern is that profit motives may conflict with patient care priorities. With California being a nationwide trendsetter, other states may follow with similar legislation.

Who the Law Covers

SB 351 defines "private equity group" and "hedge fund" narrowly, with important exclusions that may affect whether the law applies to you.

A "private equity group" is defined as an investor or group of investors who primarily engage in raising or returning capital and who invests, develops, or disposes of specified assets. The definition excludes:

• Passive investors who contribute funds, but don't participate in management or control

• Hospitals and hospital systems (and their affiliates)

• Public agencies and their affiliated healthcare settings

• Traditional debt financing providers like banks and credit union.

A "hedge fund" means a pool of funds managed by investors for earning a return, regardless of strategies used. Similar exclusions apply for passive investors, hospitals, public agencies and debt financing providers.

What SB 351 Actually Does

The law prohibits private equity groups and hedge funds from interfering with clinical judgment or exercising control over key operational decisions in physician and dental practices. This applies regardless of how the arrangement is structured, whether the private equity group or hedge fund is an investor, asset owner or management company.

The statute focuses on two main areas: clinical autonomy and operational control.

Clinical Autonomy Under SB 351

On the clinical side, private equity groups and hedge funds cannot interfere with professional judgment in healthcare decisions. They can't determine what diagnostic tests are appropriate, decide when referrals are needed, control treatment options or dictate how many patients a provider must see in a given timeframe. Treatment decisions need to be driven by medical standards rather than business performance targets.

Operational Control Under SB 351

The operational restrictions go beyond pure clinical decisions into areas that directly impact patient care. Private equity groups and hedge funds cannot own or control patient medical records. They're prohibited from making hiring and firing decisions for physicians, dentists and clinical staff based on clinical competency. They can't set parameters for insurance contracting or determine clinical competency standards for provider relationships. They are also restricted in their ability to make decisions about coding and billing procedures or control approval of medical equipment and supplies.

The statute does however allow unlicensed entities to consult with or assist practices on these matters, provided that physicians and dentists retain ultimate responsibility and approval authority. This gray area between consultation and control is where practices will face the most compliance uncertainty.

Contract Provisions Now Unenforceable

The new law will apply to all existing contracts. That means on January 1, 2026, any contract provision that enables the prohibited interference or control is now void and unenforceable. This applies to Management Services Agreements, Operating Agreements and investor rights documents. If your agreements give investors or an MSO authority over the restricted areas, those provisions are no longer legally binding.

The law specifically targets restrictive covenants. Management contracts or asset sale agreements involving private equity groups or hedge funds cannot include clauses preventing providers from competing with the practice after departure or from commenting publicly on quality of care, utilization practices, ethical challenges or revenue strategies employed by the investor.

There are two carve-outs. The law doesn't affect otherwise enforceable sale-of-business noncompete agreements, though it clarifies these cannot operate as employee noncompetes. Contracts can still protect material nonpublic information about the private equity group or hedge fund, as long as these provisions don't prohibit legally required disclosures or provider commentary on patient care issues.

Enforcement Authority Under SB 351

The Attorney General has broad enforcement authority under SB 351. The AG can seek injunctive relief, other equitable remedies and recover attorney's fees and costs incurred in remedying violations.

This enforcement mechanism allows the state to proactively pursue violators without waiting for individual complaints. Practices and investors could face costly litigation and court orders requiring them to restructure their arrangements.

Why SB 351 Matters Beyond California

While SB 351 is a California law, its implications extend far beyond the state’s borders. California often sets the tone for healthcare regulation, and the bill signals increased scrutiny on private equity and hedge fund involvement in clinical practices nationwide. 

Practice owners, investors, and MSOs in other states should take note: similar legislation may emerge elsewhere, especially in states closely monitoring the intersection of corporate investment and clinical decision-making. 

For healthcare owners outside California, understanding the restrictions SB 351 imposes can help guide current and future investment arrangements, anticipate compliance challenges, and ensure that clinical autonomy remains protected regardless of location.

What Practice Owners Should Do Before January 1

Practice owners with private equity investment or MSO support should review key documents: 

• Management Services Agreements (MSAs) 

• Operating Agreements 

• Investor Rights Documents 

  
  

Identify provisions that may be void or unenforceable under SB 351. Pay particular attention to clauses giving investors or the MSO authority over clinical staffing, patient volume requirements, billing decisions or treatment protocols.

Private equity groups and investors with California holdings may find that current contracts contain provisions that are no longer legally valid and governance structures that need redesigning to comply with the new requirements.

Contact our team for a comprehensive structure review. We have extensive experience with MSOs, DSOs and private equity groups across the country on corporate practice of medicine compliance and are helping clients navigate both the California and Oregon laws.

The regulatory landscape is shifting. Getting your structure compliant before January 1, 2026, protects your investment and keeps your practice operational without disruption.