On October 6, 2025, Governor Newsom signed into law Senate Bill 351 (SB 351), introducing new restrictions on private equity and hedge fund involvement in physician and dental practices across California. Effective January 1, 2026, this law directly targets non-clinical control over clinical decision-making, voids certain contractual provisions, and empowers the California Attorney General with robust enforcement tools, including injunctive relief and fee-shifting remedies. For private equity sponsors, SB 351 significantly increases compliance risks and requires a thorough reexamination of ownership, governance, and contracting structures for California-based platforms.

How SB 351 Differs from Existing Guidance

SB 351 stands apart from the Medical Board of California’s existing guidance on the corporate practice of medicine. While the Board’s website offers nonbinding guidance—derived from statutes and case law—applicable to any unlicensed person or entity, SB 351 is a binding statute that specifically targets private equity groups and hedge funds.

The Board’s guidance highlights various signs of impermissible control, such as ownership of medical records, setting fees, or directing referrals. In contrast, SB 351 creates clear, bright-line prohibitions that not only overlap with but also expand upon the Board’s examples. These include explicit limits on coding and billing decisions, payer contracting criteria, clinician productivity quotas, and speech or noncompete clauses. Violating terms are rendered void and unenforceable under the new law.

Enforcement of SB 351 is primarily assigned to the Attorney General, who can seek injunctive relief and recover attorneys’ fees. Meanwhile, the Board’s guidance informs professional discipline and licensing but does not create separate civil remedies.

Notably, SB 351 does not narrow existing corporate practice restrictions; instead, it codifies specific boundaries for private equity and hedge fund involvement, while still allowing unlicensed entities to provide non-clinical support—so long as licensed clinicians retain ultimate authority.

Scope and Covered Parties

SB 351 applies to any “private equity group” or “hedge fund” involved in any manner with a physician or dental practice doing business in California, including as an investor in the practice or as an owner of practice assets. The law provides detailed definitions and expressly excludes certain entities, such as hospitals and hospital systems (and their affiliates), public agencies, and traditional debt financiers like banks and credit unions. The law applies regardless of the practice’s corporate form—be it a sole proprietorship, partnership, foundation, or corporation.

Key Prohibitions

At its core, SB 351 prohibits private equity groups and hedge funds from interfering with the professional judgment of physicians or dentists in making clinical decisions and from exercising power over key practice functions that are inherently clinical. The prohibited actions include, among others, controlling any of the following:

• Clinical decision-making, including what diagnostic tests are appropriate, referrals and consultations, and treatment options;
• Ownership or the content of patient medical records;
• Selection, hiring, or firing of physicians, dentists, allied health staff, and medical assistants based on clinical competency or proficiency;
• Setting conditions for contracting with payers or with other physicians or dentists;
• Coding and billing decisions for patient care services;
• Approval of medical equipment and supply selection; and
• Productivity parameters, such as patient volume or clinician work hours.

The law also bars entering into any agreement or arrangement that would enable such interference or control. Any contractual provision that violates these prohibitions is void, unenforceable, and contrary to public policy.

Unenforceable Noncompete and Speech Provisions

SB 351 voids and renders unenforceable specific contractual provisions commonly used in management services organizations (MSOs) and roll-up transactions, including:

• Noncompete clauses that bar providers from competing with the practice after termination or resignation, except for enforceable sale-of-business noncompetes (which cannot function as employee noncompetes); and
• Clauses restricting providers from commenting on or criticizing the practice regarding quality of care, utilization, ethical or professional challenges, or revenue-increasing strategies used by private equity or hedge funds

The law preserves the enforceability of customary restrictions on disclosure of material nonpublic information that is not generally available to the public, so long as the restriction does not purport to prohibit disclosures required by law or the protected provider speech described above.

Practical Implications

For private equity sponsors, hedge funds, and their MSOs, SB 351 demands careful attention to governance documents, management agreements, and operational policies to ensure that clinical control remains solely with licensed providers. Physician and dental practices should maintain clear records of clinical governance actions and approvals to demonstrate compliance.

The law encourages shifting value-creation strategies away from clinical levers and toward operational improvements, technology enablement, site-of-service optimization (within clinical discretion), and payer contracting support that preserves clinical autonomy.

Recommended Next Steps

To prepare for SB 351’s effective date, California physician and dental practices with private equity or hedge fund investors should:

1. Inventory and review governing documents, management agreements, equityholder rights, employment and provider services agreements, and compliance policies for prohibited controls and clauses
2. Revise contractual restrictions on competition and speech, and ensure confidentiality provisions are narrowly tailored
3. Train executives, managers, and administrative personnel on the new legal boundaries, and establish escalation channels for clinical judgment concerns

By proactively aligning structures and practices, providers and sponsors can mitigate enforcement risk and preserve deal value under California’s new legal landscape.

Reed Smith will continue to track developments related to restrictions on private equity and hedge fund ownership in the medical practice space. If you have any questions about this law or topic, please do not hesitate to reach out to the authors of this article or to the health lawyers at Reed Smith.