Private equity firms whose value-creation playbooks depend on centralized operational control and embedded veto rights now face compatibility questions with California’s new healthcare investment rules. Krista Cooper and Laura Carrier of Bass, Berry & Sims examine what the restrictions, which came online in January, mean for deal structures and ongoing operations, particularly for investors whose typical approaches to vendor selection, staffing benchmarks and billing policies must be reframed to preserve clinical autonomy.
California has raised the regulatory bar for anyone who invests in, manages or partners with healthcare entities in California. In October, California Gov. Gavin Newsom signed two bills — AB 1415 and SB 351 — into law, both of which went into effect Jan. 1, 2026. These bills create new pretransaction notice obligations, broaden oversight of management services organizations (MSOs) and dental services organizations (DSOs) and limit the ways private equity firms and hedge funds can influence clinical practices. They will change the playbook for deals and ongoing investment management in California for investors, MSOs and practicing clinicians.
AB 1415
AB 1415 expands the list of parties who must file pretransaction notices with the state’s Office of Health Care Affordability (OHCA) and brings MSOs squarely into the oversight frame. Starting Jan. 1, 2026, in addition to healthcare entities being required to file pretransaction notices with OHCA, a new category of “noticing entities” are also required to file written notices with OHCA before closing a material change transaction.
“Noticing entities” is defined to include: (1) private equity groups; (2) hedge funds; (3) MSOs; (4) newly formed entities created to enter into arrangements with providers; and (5) any entity that owns, operates or controls a provider. While the time period for this pretransaction notice will be confirmed through future regulation, it is expected that it may mirror the existing 90-day notice timeline for healthcare entities.
Critically, AB 1415 will not only extend OHCA’s pretransaction notice requirements to the new category of noticing entities but will also expand the types of transactions that require notice. While healthcare entities need only give notice of material change transactions with other healthcare entities, noticing entities will be required to give notice of material change transactions with: (1) healthcare entities, (2) MSOs and (3) entities that own or control a healthcare entity or an MSO.
In addition, AB 1415 also mandates that OHCA establish requirements for MSOs to submit data as a part of OHCA’s research on healthcare cost, quality, equity and workforce stability. These yet-to-be-defined reporting requirements and the consistent focus on MSOs throughout both AB 1415 and SB 351 signal that OHCA plans to closely scrutinize the activities of MSOs in California.
SB 351
SB 351 codifies California’s existing corporate practice of medicine (CPOM) restrictions while also specifically applying the restrictions to private equity- and hedge fund-backed MSOs and DSOs. SB 351 restricts private equity groups and hedge funds from involvement with clinical judgment and the exercising of certain managerial controls over physician and dental practices. Contractual provisions that allow for impermissible control over a physician or dental practice would be found void and unenforceable. The bill does clarify that unlicensed individuals can still assist or consult a physician or dental practice, provided that a physician or dentist retains the ultimate responsibility for or approval of the list of decisions and activities.
SB 351 also invalidates contractual provisions in certain agreements if they would prevent a provider from competing with an MSO/DSO-run practice in the event of termination or resignation or if they would prevent a provider from disparaging or commenting on a practice with respect to quality of care or revenue-increasing strategies employed by the MSO/DSO. Notably, bona fide sale-of-business noncompetes and provisions protecting the confidentiality of material nonpublic information remain enforceable. Under SB 351, California’s attorney general is empowered to seek injunctive relief and recover enforcement costs for violations.
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Read moreDetailsImpact on transactions
Starting in 2026, noticing entities will be required to file written notice with OHCA before the anticipated closing date of a material change transaction with a healthcare entity or an MSO. Healthcare investors should therefore expect earlier and broader predeal notice requirements and longer lead times when entering into material transactions with a healthcare entity or MSO in California.
Investors should plan additional due diligence and closing timelines accordingly and treat OHCA notice, where required, as a key gating item. Before entering into a transaction, healthcare investors should weigh whether their typical value-creation playbooks — which may include centralized operational control, productivity targets and tight governance models — are compatible with California rules.
If California is material to an investment strategy (either because the target has assets or clinicians in California or because the investor plans to scale a model into California), investors should perform a regulatory fit assessment early, model post-close governance that preserves clinical autonomy and consider alternative protections that don’t depend on control over clinical operations.
Changing operational playbooks
If an operating model depends on management control or embedded veto rights, those arrangements should be reviewed to determine whether they require careful reworking to avoid running afoul of SB 351’s limits on nonclinical control.
Investor-backed MSOs and DSOs should start by identifying clauses that could be considered management controls over clinical decisions, which likely need to be converted into consultative or advisory rights. New language can be drafted in order to preserve commercial protections for investors (e.g., information rights, certain performance covenants and contractual remedies for financial breach) while steering clear of rights that would be interpreted as clinical interference. For example, provisions that previously gave an investor the final decision on vendor selection, staffing benchmarks keyed to productivity or approval rights over billing policies will need to be reframed so final clinical and billing decisions rest with licensed clinicians or practice leadership.
Similarly, instead of rigid noncompetes or antidisparagement clauses, consider narrowly tailored commercial nonsolicitation agreements or severance-based retention structures that meet business goals without running afoul of the new laws.
Bottom line
California’s AB 1415 and SB 351 make clear the state’s priorities: protect clinical decision-making and keep unlicensed actors from directing healthcare delivery. These new laws reflect a broader trend by states to police how outside capital interacts with front-line clinical care. The stated policy goal is to keep clinical decisions in the hands of licensed providers and prevent nonclinical owners from prioritizing profits in ways that could affect care. For investors and deal teams, the practical upshot is to anticipate structuring friction, new compliance obligations after closing and possible limits on contractual protections historically used by investors.
These changes won’t stop investment in healthcare, but they probably will change how investments are structured and managed in California.
Krista Cooper
Laura Carrier
