Private Equity Group and Hedge Fund Bills Continue Through the California Legislature

California legislative activity focused upon private equity group and hedge fund health care transactions continues notwithstanding California Governor Gavin Newsom’s veto last fall of California Assembly Bill 3129 (AB-3129). As we discussed in previous posts here and here, AB-3129 would have authorized the California Attorney General (AG) to review certain private equity group and hedge fund health care transactions. In vetoing AB-3129, Governor Newsom stated that the California Office of Health Care Affordability (OHCA) is the appropriate agency for assessing proposed health care transactions and their cost and market impacts and AB 3129’s structure would have impeded this process.

Against this backdrop, in February 2025, Assembly Member Mia Bonta introduced Assembly Bill 1415 (AB-1415) and subsequently amended the bill in April 2025.  AB-1415 seeks to directly require private equity groups and hedge funds to notify OHCA of proposed health care material change transactions and affords OHCA review of such proposed transactions.  Separately, in February 2025, Senator Christopher Cabaldon introduced Senate Bill 351 (SB-351), which adopts the corporate practice and restrictive covenant prohibitions contained in AB-3129.

Both AB-1415 and SB-351 continue to work their way through the California legislature. On May 15, 2025, AB-1415 was voted out of the California Assembly (by a 42-16 vote) and sent to the Senate while SB-351 was placed in the Senate Appropriations Committee’s “suspense file” for further consideration in a closed hearing on May 12, 2025. As currently drafted, AB-1415 does not fundamentally alter OHCA’s pre-transaction review of health care entity material changes. Similarly, SB-351’s corporate practice and non-compete prohibitions align with existing California law. As such and given that the more comprehensive AB-3129 was voted out of the California legislature last year, there is a likelihood that both AB-1415 and SB-351 wind up before Governor Newsom with potential enactment effective January 1, 2026.

AB-1415 Update

During a California Assembly Health Committee hearing on April 22, 2015, Assembly Member Bonta stated that the intent of AB-1415 is to provide OHCA with access to the information needed to assess the impact of health care transactions and establish growth targets to address California’s rising health care costs. In that regard, Bonta noted that the current “health care entities” required to provide notice of certain material change transactions to OHCA do not include key players in the health care marketplace, including private equity groups, hedge funds, management services organizations (MSOs), and health systems. At the hearing, California hospital associations and insurance companies, among others, noted their opposition to AB-1415. These stakeholders primarily asserted that expansion of the definition of “health care entities” was premature given that OHCA had been operating for just over a year, and the bill could adversely impact health care investment and innovation.

Following a 11-3 vote at the April Assembly Health Committee hearing, AB-1415 was moved to the House Appropriations Committee. On April 24, 2025, AB-1415 was amended as described further below. On May 12, 2025, the amended AB-1415 was voted out of the California Assembly (by a 42-16 vote) and is now in the California Senate awaiting committee assignment for initial consideration.

Revised “Health Care Entity” Definition and New “Noticing Entity”

Under existing law, “health care entities” are required to provide 90-day prior notice to OHCA for certain material change transactions involving their assets or operations.  The term “health care entities” currently includes payors, fully integrated delivery systems, and individual providers such as hospitals, clinics, surgery centers, clinical laboratories, and imaging facilities.  As part of this notice to OHCA, “health care entities” are required to submit comprehensive information regarding the proposed transaction, including third-party entity information obtained from private equity groups, hedge funds, MSOs, and other third-party entities as applicable.

As originally drafted, AB-1415 would have added MSOs and parent entities of providers to the list of “health care entities” subject to OHCA’s notice requirements and separately required that private equity groups and hedge funds provide pre-transaction notices to OHCA. As amended, however, the bill removes MSOs and parent entities from the definition of “health care entities” and creates a new “noticing entity” definition to include MSOs, parent entities, private equity groups, hedge funds, and other entities created for the purpose of entering into agreements or transactions with “health care entities.” Under amended AB-1415, “noticing entities” are required to directly report to OHCA certain material change transactions between themselves and a health care entity.

The removal of MSOs and parent entities from the definition of “health care entity” is significant. Without the legislative amendment, MSOs and parent entities would have been required to provide OHCA with pre-transaction notice of certain material changes solely involving their assets or operations and wholly unrelated to any health plan, fully integrated health system, or provider. As amended, MSO-only or parent entity-only transactions (e.g., MSO or parent entity changes of ownership) are not subject to OHCA notice provided that no assets or operations of a “health care entity” are involved.

Management Services Organization Monitoring

Amended AB-1415 would allow OHCA to establish MSO data reporting requirements and add MSOs to the existing list of entities OHCA will research and evaluate to determine if OHCA’s transaction review provisions are sufficiently broad. The bill does not detail the nature or scope of these MSO data reporting requirements, but they likely would include information regarding the structure and substance of the relationship between MSOs and health care entities.

Clarification of “Health System” Definition

Under existing law, “health care entities” include certain individual defined providers, as noted above. As originally drafted, AB-1415 added “health systems” to the definition of “provider” subject to OHCA’s pre-transaction notice requirements. Amended AB-1415 revises the definition of “health system” to include a “combination of one or more hospitals and one or more health care providers” (rather than “physician organizations” as originally drafted) to ensure that “health care entities” do not include small physician groups.

No Substantive Revision to Private Equity Group and Hedge Fund Provisions

As noted above, there are no substantive revisions to the provisions regarding private equity groups, hedge funds, and newly created entities, and such entities are “noticing entities” in the revised bill. To the extent that the other party to a material change transaction is a “health care entity,” AB-1415 would require that private equity groups, hedge funds, and newly created entities provide direct pre-transaction notices to OHCA.

SB-351 Update

During a California Senate Judiciary Committee hearing on April 29, 2025, Senator Cabaldon described SB-351 as responding to Governor Newsom’s veto of AB-3129 by not including provisions regarding California AG review of material change transactions. Instead, Cabaldon stated that SB-351 adopts virtually verbatim the corporate practice prohibitions in AB-3129 with express authority for the California AG to seek injunctive relief and attorneys’ fees in the context of private equity group and hedge fund investment in California physician or dental practices. Specifically, the bill removes AB-3129’s reference to psychiatrists and prohibits private equity groups and hedge funds (excluding individuals or entities contributing to the group or fund) from exerting undue influence or control over the professional clinical judgment of physicians or dentists consistent with existing California law. Further, SB-351 would mirror AB-3129’s prohibitions against private equity groups and hedge funds entering into certain non-compete or non-disparagement clauses with physicians or dentists. (See our general discussion here regarding restricted covenants in private equity transactions.)

At the Senate Judiciary Committee hearing, dental groups opposed SB-351 by noting that corporate practice prohibitions already exist and that the targeted approach signals that private equity and hedge fund investment is unwelcome in California notwithstanding the benefits of access to capital, operational support, and ability to focus upon patient care. Following an 11-2 vote at the hearing, SB-351 was moved to the Senate Appropriations Committee. On May 12, 2025, SB-351 was placed in the Appropriations Committee “suspense file” for all bills having unbudgeted costs exceeding $150,000.  It is likely to be heard at a closed suspense file hearing on May 23, 2025.

Takeaways

The introduction of AB-1415 and SB-351 is further evidence of the scrutiny of private equity group and hedge fund health care sector investments, both in California and more broadly across the states. As of this publication, OHCA has reviewed twenty-two material change transaction notices, and to date none have been subject to full cost and market impact review (CMIR). AB-1415 seeks to further OHCA’s mission by broadening the scope of entities required to directly submit material change transaction notices to OHCA to include MSOs, parent providers, private equity groups, hedge funds, and certain newly created entities. Instead of receiving relevant “noticing entity” information indirectly from “health care entities,” California law would require “noticing entities” themselves to provide applicable transaction information directly to OHCA.

AB-1415 does not otherwise impact OHCA’s pre-transaction review of “health care entity” material changes, and “noticing entities” apparently would submit the same material change transaction notice information as currently required of “health care entities.” We do not yet know whether AB-1415, if enacted, would increase the burden upon OHCA in conducting its pre-transaction review or whether the likelihood of a full CMIR would be impacted.

SB-351 proposes to strengthen corporate practice and restrictive covenant prohibitions specifically in the context of private equity and hedge fund investment in physician and dental practices by providing the California AG with mandatory enforcement authority. As noted above, the corporate practice prohibitions incorporated from former AB-3129 are consistent with current California law and impose no new restrictions upon private equity groups or hedge funds. SB-351’s restrictive covenant prohibitions similarly mirror former AB-3129’s provisions. The non-compete restriction is consistent with existing California law and the non-disparagement restriction likely does not raise significant issues for private equity groups or hedge funds.

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