Corporate Practice of Medicine

California, like more than a majority of U.S. States, has long prohibited the corporate practice of medicine, ie, the provision of professional medical services by unlicensed persons and nonprofessional entities. In practice, the prohibition prevents general business entities from employing or contracting with physicians (and other licensed providers) to provide professional medical services on their behalf. Under CPOM, professional services can only be provided by individual licensees or by professional entities whose owners, directors, officers and service providers are licensed professionals. The stated rationale for the prohibition is that enforcing it prevents non-licensees from exerting undue influence on the delivery of professional services and minimises the effect of the profit motive on healthcare delivery.

In order to participate in the medical industry, unlicensed investors have developed a model under which they formed support entities, generally called management services organisations (“MSOs”), that contract with professional entities to provide the non-clinical portions of the business, including office space, non-clinical staff, business office services such as accounting, reporting, billing, collections, marketing and branding. MSOs charge a fee for providing these services. While receiving services from MSOs, the professional practice continues to provide all services that fall within the statutory definition of professional services. The scope and type of services to be provided by the MSO and the professional practice are set forth in a written agreement between the parties.

Over time, the above-described model has become the typical structure for lay investment in medical practices in California and other CPOM states. To establish the relationship, the MSO often purchases the assets of target medical practices in a transaction that provides liquidity to the owners and requires the practice or a new entity aligned with the MSO, to enter into a long-term management arrangement. These professional entities are generally referred to as “friendly PCs.” This model established a structure for large-scale acquisition of medical practices by financial investors and is often associated with the so-called “corporatisation” of healthcare. This structure is also used for small- and mid-market transactions involving strategic or friends-and-family investments.

Statutory Limitation of Private Equity

On 1 January 2026, Senate Bill 351 (“SB 351”) became effective in California. SB 351 restricts private equity and hedge fund investment in medical and dental practices.

Definitions

“Private equity group” means an investor or group of investors who primarily engage in the raising or returning of capital and who invests, develops or disposes of specified assets.

“Hedge fund” means a pool of funds managed by investors for the purpose of earning a return on those funds, regardless of the strategies used to manage the funds. Hedge funds include, but are not limited to, a pool of funds managed or controlled by private limited partnerships.

Statutory restrictions

Under SB 351, the private equity group or hedge fund is prohibited from interfering with the professional judgment of physicians and dentists by:

• determining what diagnostic tests are appropriate for a particular condition;
• determining the need for referrals to or consultation with, another physician, dentist or licensed health professional;
• being responsible for the ultimate overall care of the patient, including treatment options available to the patient; and
• determining 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.

Further, the private equity group or hedge fund is prohibited from exercising control over any of the following:

• owning or otherwise determining the content of patient medical records;
• selecting, hiring or firing physicians, dentists, allied health staff and medical assistants based, in whole or in part, on clinical competency or proficiency;
• setting the parameters under which a physician, dentist or dental practice shall enter into contractual relationships with third-party payers;
• setting the parameters under which a physician or dentist shall enter into contractual relationships with other physicians or dentists for the delivery of care;
• making decisions regarding coding and billing procedures for patient care services; or
• approving the selection of medical equipment and medical supplies for the physician or dental practice.

In addition, the management agreement between a private equity group or hedge fund-associated MSO and a professional medical or dental practice may not include non-competition or non-disparagement provisions, which are described as being against public policy.

SB 351 explicitly grants the California Attorney General the power to enforce these prohibitions via injunctive relief and other equitable remedies and to recover attorneys’ fees and costs incurred in remedying any violation.

Ownership restrictions in professional corporations

When enacted, the substance of SB 351was not new to health law practitioners, although the prohibitions had not previously been codified. All of the specific restrictions had been the subject of Medical Board Guidance and many had been recited in court decisions regarding CPOM. That said, its prohibition on selecting, hiring or firing professionals has been widely considered to implicate one of the signature features of the friendly PC model: the MSO’s ability to cause the transfer of the PC stock to a holder designated by the MSO.

Such transfer agreements (variously called succession agreements, continuity agreements or stock transfer restriction agreements) had not previously been explicitly identified by the California Medical Board as CPOM violations, thereby enabling their use for decades by buyers of medical practices and not only by private equity buyers. Medical practices typically have a large number of contracts with other parties, including payer contracts. In an acquisition, being able to leave the existing practice entity and its contractual arrangements in place by merely changing ownership causes less disruption than terminating the management agreement with a no longer friendly PC, which would require replacing all of the original entity’s contractual relationships. Transferring ownership of the PC rather than all of its agreements leaves the legal entity in place and requires no new contracts, subsequently permitting a transition without delay.

In its most benign form, the transfer right protects the business in the event of the death, incapacity or loss of license of a sole shareholder of the professional corporation. In practice, however, the MSO often:

• outright prohibits the professional corporation’s shareholder from transferring the stock and reserves; and
• reserves the right to cause the transfer of ownership of the professional corporation for any reason.
• CPOM advocates described this element of the model as the ultimate exercise of control over medical practice and as equivalent to MSO ownership of the medical practice.

California Attorney General Activity

Aspen Dental Management, Inc.

On 7 May 2026, California Attorney General Rob Bonta announced a settlement with Aspen Dental Management, Inc. (“Aspen Dental”) for violation of California’s ban on the corporate practice of dentistry. Aspen Dental is a private equity-backed national dental management company with 19 locations in California. The Attorney General alleged that Aspen Dental installed dentist-owners and unlawfully interfered with the dental practices it managed. In the settlement, which must still be approved by the court, Aspen Dental agreed to pay USD2 million in penalties and to provide USD300,000 in restitution to patients.

The most significant part of the settlement, however, was Aspen Dental’s agreement to an injunction containing 12 specific undertakings, which include not engaging in several customary features of the MSO/friendly PC model:

• not replacing any practice owner with another dentist of Aspen Dental’s choosing;
• not requiring practice owners to effectively give up ownership of any dental practices if they decide to terminate their contractual relationship with Aspen Dental;
• not basing management fees on revenue;
• discontinuing the use of and refraining from enforcing any existing contractual provision that restricts where any licensed clinician may practice or be employed; and
• clearly and conspicuously identifying the practice owner’s name when creating, publishing or disseminating advertisements.

The press release announcing the settlement quotes Attorney General Bonta: “With this settlement, my office is making clear that patient care must remain in the hands of licensed professionals.”

ART Center Holdings, Inc.

To a similar effect was the Attorney General’s Amicus Curiae brief submitted on 30 March 2026 in a pending California Court of Appeals case, ART Center Holdings, Inc. v. WCE CA ART, LLC. Although the issue on appeal in the case is the appropriateness ofthe trial court’s appointment of a receiver and not CPOM, the Attorney General used the Amicus brief as a vehicle to assert: “When an agreement gives an unlicensed corporation the right to replace the physician-owner of a medical practice with a different physician of its choice, the corporation effectively owns and controls all aspects of the practice.”

Further, “[n]onphysicians cross the line into CPOM by either exercising control over the medical practice or retaining the right to do so.” By this statement, the Attorney General has made it clear, as he did in the Aspen Dental case, that, in his view, the existence of a contractual right to control ownership of the professional entity, even if not exercised, constitutes a CPOM violation. This goes further than any California statute to date, including SB 351, which prohibits an MSO from making employment decisions regarding professionals based on clinical competency but does not address ownership or employment action based on non-clinical factors.

AB 3129

In 2024, the California legislature passed Assembly Bill 3129 (“AB 3129”), which was squarely aimed at private equity and hedge fund transactions involving healthcare entities.

AB 3129 required advance notice to the Attorney General of “the direct or indirect acquisition in any manner, including, but not limited to: lease, transfer, exchange, option, receipt of a conveyance, creation of a joint venture or any other manner of purchase, by a private equity group or hedge fund of a material amount of the assets or operations or a change of control, of a healthcare facility, provider group or provider doing business in this state.”

The statute required 90 days’ advance notice of the transaction to the Attorney General. The Attorney General then had the option to consent to, give conditional consent to or not consent to the transaction. The statute directed the Attorney General to make the determination based on a public-interest standard, taking into account price, quality, choice, accessibility and the availability of healthcare services for Californians.

The bill was ultimately vetoed by California Governor Newsom and never went into effect. The authority granted to the Attorney General under AB 3129 would have expanded the Attorney General’s existing authority over transactions affecting nonprofit entities in the state to transactions involving for-profit entities, involving private equity groups and hedge funds. AB 3129 contained the same definitions of private equity group and hedge fund as SB 351 did a year later and contained the same limitations on the amount of control a private equity group or hedge fund could lawfully exercise over a medical practice. The primary difference was the grant of power to the Attorney General to either impose conditions on a proposed transaction or to deny consent outright.

OHCA and Pre-Transaction Notice Requirements

California has an existing pre-transaction notice regime that does not involve the Attorney General, at least not directly. Beginning 1 April 2024, certain healthcare entities in California were required to provide 90 days’ advance notice of material change transactions to California’s new Office of Health Care Affordability (“OHCA”). OHCA has three stated primary responsibilities:

• slow healthcare spending growth;
• promote high-value system performance; and
• assess market consolidation.

Reporting entities are defined as healthcare entities:

• with annual revenue of at least USD25 million or that owns or controls California assets of at least USD25 million; or
• with annual revenue of at least USD10 million or California assets of USD10 million and is involved in a transaction with another healthcare entity that has USD25 million in revenue or California assets; or
• located in or serving at least 50% of patients who reside in a health professional shortage area.

Excluded from the definition of “healthcare entity” are physician organisations with fewer than 25 physicians.

Reportable transactions include the following:

• the fair market value of the transaction is USD25 million or more and the transaction concerns the provision of healthcare services;
• the transaction is likely to increase the annual revenue of any healthcare entity party by at least USD10 million or 20%;
• the transaction involves the sale, transfer, lease, exchange, option, encumbrance or other disposition of 20% or more of the assets of any healthcare entity in the transaction; or
• the transaction involves a transfer or change in control, responsibility or governance.

If the transaction involves any of the subject parties and one or more of the listed transactions, a healthcare entity must file a notice at least 90 days prior to the closing date. Notably, not all of the listed transactions have minimum dollar thresholds, meaning that even small transactions with large enough parties or involving parties in a health professional shortage area, are reportable.

The notice must include comprehensive information about the proposed transaction, as well as forward-looking reporting on:

• post-transaction changes to ownership;
• competition; and
• employee staffing, wages and working conditions.
• Upon a complete submission, OHCA determines whether it will conduct a cost and market impact review.

Regardless of the results of a cost and market impact review, OHCA has no power to block or refuse consent to a transaction. Its primary power and ability to affect transactions is the potential delay that its process imposes on a transaction. Upon initial submission, OHCA has 45 days to determine whether to initiate a cost-and-market impact review. If OHCA determines to conduct a cost and market impact review, OHCA has 90 days to complete the review, plus one 45-day extension if necessary. These periods can be lengthened, however, if OHCA requests additional information, in which case the running of the waiting period is tolled until the requested additional information is provided and there is no limit on OHCA’s ability to request additional information. OHCA is also authorised to require the parties subject to a cost and market impact review to reimburse OHCA for fees and expenses incurred in connection with OHCA’s review.

Effective 1 January 2026, California added private equity groups, hedge funds and MSOs to the list of entities that must provide pre-transaction reports to OHCA. Private equity groups and hedge funds are defined in the same way as in SB 351. A management services organisation is defined as “an entity that provides management and administrative support services for a provider in support of the delivery of healthcare services, excluding the direct provision of health services. Management and administrative support services shall include provider rate negotiation, revenue cycle management or both.”

OHCA’s pre-transaction notice requirement is not limited to transactions involving licensed professionals; it also applies to facilities such as hospitals, ambulatory surgery centres, clinical laboratories and imaging facilities. In that respect, OHCA’s impact is significantly broader than SB 351, which, by its terms, codifies CPOM for California physicians and dentists. Under current OHCA requirements, therefore, private equity purchasers of a range of healthcare businesses will be required to undergo OHCA’s pre-transaction review and to endure the significant delays inherent in that process.

Further, for transactions involving physicians, OCHA will be able to review potential transactions for CPOM requirements. Section 127507 of the Health and Safety Code (regarding OHCA pre-transaction review) provides: “[t]his article does not narrow, abrogate or otherwise alter the corporate practice of medicine doctrine, which expressly prohibits the practice of medicine or control of medicine, medical corporations, medical partnerships or physician practices by entities or individuals other than licensed physicians and surgeons.” In addition, it notes “This article does not limit the Attorney General’s review […] of any healthcare agreement or transaction under any state or federal law.”

As a result, it is anticipated that the agreements between an MSO buyer and the selling practice will be subject to an additional level of governmental scrutiny.

Conclusion

It is clear that California lawmakers and its Attorney General view private equity and hedge funds with suspicion, if not outright hostility, because of their perceived pernicious effect on the delivery of healthcare in California. It is also clear that enforcement of CPOM is one of the main tools being used to limit the involvement of private equity and hedge funds in the healthcare industry. Nonetheless, California remains a large and thriving healthcare market and investors have devised strategies over the years to address aspects of California law viewed as unfriendly to business, including California’s employee-friendly employment laws and the State’s limitations on the enforceability of covenants not to compete and solicit. It is too early to determine what effect California’s latest moves will have on healthcare M&A in the state going forward, but there is little doubt that they will affect the structure of such transactions.