California passes law to regulate private equity activity in healthcare
This week, California Gov. Gavin Newsom signed into law a bill that aims to curb predatory investing in healthcare by setting some new rules for how private equity groups and hedge funds can operate patient care clinics in the state.
Senate Bill 351 regulates private equity investments in primary physician practices, dental care businesses and specialty care clinics, requiring entities that acquire patient care groups to comply with laws improving labor rights and care quality.
For example, the bill forbids investor-owned healthcare entities from enforcing most noncompete clauses that limit the ability of clinicians to seek new work. It further would ban groups from placing gags on employees—meaning companies are not allowed to hold workers legally accountable if they blow the whistle on unscrupulous practices.
Notably, California already has whistleblower protection laws in place, as well as a sweeping ban on noncompete clauses for employment. However, it's limited to contracts signed in 2022 or later, meaning older clauses are still valid.
It’s not clear how much SB 351 changes the status quo, as typically only noncompetes on high-level executives are enforceable in the state.
There are numerous other facets to the law that restrict hiring practices, regulate the ownership of patient records, and forbid conflicts of interest when contracting with third parties. SB 351 also empowers the state attorney general’s office to step in to enforce the law when violations occur, which includes filing lawsuits to seek damages and issuing injunctions.
In an analysis, attorneys writing for National Law Review said contracts will need to be reviewed for compliance with SB 351, which definitely contains some changes that will impact care delivery, and it does contain new language governing provider and dental practices—a lot of the bill is just extending existing California statutes.
“While the new law does create new statutory requirements governing hedge fund and private equity group involvement in the management of physician and dental practices, those requirements largely reflect existing California case law and Medical Board of California guidance,” the authors wrote.
Preserving some autonomy
As for the patient care piece, the bill attempts to rein in practices that would limit patient options as a cost-saving measure, diminishing patient and provider autonomy. For example, SB 351 forbids clinics owned by private equity firms from refusing to perform certain diagnostic tests, or limiting treatment options for patients in a way that goes against established protocols and provider advice.
Commenting on the law, watchdog activist group the Private Equity Stakeholder Project (PESP) said SB 351 is an “important step toward strengthening California’s protections against corporate control of medical and dental practices,” agreeing that the new law will help protect patients.
“Private equity and other corporate investors have been allowed to use loopholes in state law to influence care delivery through management service organizations and dental service organizations. Greater oversight of these arrangements is important for protecting clinical standards, preserving provider autonomy, and ensuring accountability,” Michael Fenne, senior policy coordinator at PESP, said in a statement.
“By reinvigorating California’s commitment to prohibiting corporate medicine, SB 351 prioritizes the health of patients and communities over short-term investor returns, and reflects a growing trend among states working to curb the risks of private equity,” he added.
SB 351 goes into effect at the beginning of 2026.
Chad is an award-winning writer and editor with over 15 years of experience working in media. He has a decade-long professional background in healthcare, working as a writer and in public relations.