California Codifies Restrictions on Corporate Practice of Medicine and Other Private Equity Arrangements with Providers

On October 6, 2025, California Governor Gavin Newsom signed Senate Bill 351 (SB 351 or the Bill) into law, codifying certain prohibitions on the corporate practice of medicine and the use of certain restrictive covenants in the ownership and management of physician and dental practices. SB 351 aims to ensure that clinical decisions are exclusively made by licensed healthcare providers.

Covered Entities

SB 351 applies to hedge funds and private equity groups (collectively, “Covered Entities”). A hedge fund is a pool of funds managed by investors for the purpose of earning a return, including a pool of funds managed or controlled by private limited partnerships. A private equity group is an investor or group of investors who primarily engage in the raising or returning of capital and who invest, develop, or dispose of specified assets.

The Bill does not apply to (a) individuals or entities that contribute, or promise to contribute, funds to Covered Entities but otherwise do not manage or control such Covered Entities; (b) hospitals or hospital systems, or any entity managed or controlled by a hospital or hospital system; or (c) public agencies, including, but not limited to, clinics, outpatient settings, health facilities, or ambulatory surgical centers directly or indirectly owned, operated, managed, controlled, or affiliated with a public agency.^[1]

Corporate Practice Restrictions

SB 351 prohibits Covered Entities from interfering with a physician’s or dentist’s clinical decision-making or exercising ultimate control over or being delegated certain powers.^[2]

Under the Bill, interference with clinical decision-making includes the determination of:

• what diagnostic tests are appropriate for a particular condition;
• the need for referrals to, or consultation with, other healthcare professionals;
• the ultimate overall care of a patient; and
• how many patients a physician or dentist shall see in a given period of time or how many hours a physician or dentist shall work.

Exercising ultimate control over or being delegated the following powers is prohibited:

• ownership or determining the content of patient medical records;
• selecting, hiring, or firing healthcare professionals based on clinical competency;
• setting the parameters under which a healthcare professional or practice shall enter into agreements with third-party payors;
• making decisions regarding the coding and billing of procedures; and
• approving the selection of medical equipment and supplies for a physician or dental practice.

However, unlicensed persons or entities may assist or consult with a physician or dental practice regarding the above powers, provided that the healthcare professional retains ultimate responsibility for or approval to exercise such powers.

Limitations on the Enforceability of Certain Restrictive Covenants with Covered Entities

SB 351 also bans the use of certain restrictive covenants in agreements between Covered Entities and California healthcare providers. If a Covered Entity or any entity controlled^[3]by a Covered Entity contracts with a California physician or dental practice to manage the practice or purchase the practice’s real estate or other assets, the contract may not prevent any provider in that practice from (a) competing with the practice upon the provider’s termination or resignation; or (b) commenting on the practice’s quality of care, utilization of care, ethical or professional challenges, or revenue-increasing strategies employed by the Covered Entity.

The above restrictions do not apply to restrictive covenants that appear in otherwise enforceable sale-of-business or confidentiality agreements, though the agreement may not prohibit a provider from disclosing confidential information that is required by law or making comments described in subclause (b) above.

Closing Thoughts

SB 351’s corporate practice restrictions reflect longstanding guidance from the Medical Board of California and are unlikely to materially change how well-advised hedge funds and private equity groups approach transactions with California physician or dental practices. The Attorney General may seek injunctive relief and other remedies that a court deems appropriate to enforce the Bill and is entitled to recover attorneys’ fees and costs incurred in remedying any violation, though it is not yet clear how and in what context SB 351 will be enforced.

The Bill accomplishes its legislative aims via additions to the California Health and Safety Code and takes effect on January 1, 2026.

For more information or assistance with navigating the ever-changing regulations affecting the ownership and management of physician and dental practices, please reach out to Banee Pachuca (Partner, Houston), Eric Knickrehm (Partner, Washington D.C.), Ryan Greenberg (Associate, Houston), Meredith Heim (Associate, Chicago), or your Winston & Strawn relationship attorney.

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[1] Further, SB 351 specifies that the definition of “hedge fund” includes entities that solely provide or manage debt financing secured in whole or in part by the assets of a healthcare facility, including, but not limited to, banks and credit unions, commercial real estate lenders, bond underwriters, and trustees.

[2] The Bill also prohibits entering into any contract or other agreement or arrangement with a physician or dental practice that would enable a Covered Entity to engage in such interference or control.

[3] Control may be direct or indirect and in whole or in part.