California Grants New Authority to Investigate Health Care Investments

A new California corporate practice of medicine law grants investigative and enforcement authority to the state Attorney General (AG). When the law goes into effect on January 1, it will mark the start of an era of increased scrutiny over private investment in California health care companies. The new law also codifies longstanding corporate practice of medicine prohibitions but notably fails to resolve a fundamental area of dispute between California investors and government agencies, which is sure to be the focus of future AG investigations—namely, the level of corporate involvement in medical and dental practices that constitutes impermissible control.

California’s corporate practice of medicine doctrine prohibits corporations from being licensed as health care professionals or directly employing health care professionals, and it is intended to prevent unlicensed persons from interfering with or influencing a health care professional’s independent professional judgment. This doctrine does not prohibit corporate involvement in the management of medical practices—for instance through unlicensed management service organizations (MSOs), which health care professionals often retain to provide non-clinical business support services. While it is well-settled that MSOs do not by their very nature violate the corporate practice of medicine, litigation has been testing the lines around what services MSOs can perform without impermissibly interfering with a health care professional’s independent professional judgment. Recent private equity and hedge fund investment in MSOs has heightened the scrutiny on these arrangements.

California’s new law (SB 351), effective January 1, 2026, enacts two key measures designed to strengthen California’s corporate practice of medicine doctrine: the law (1) codifies a prohibition on private equity groups or hedge funds (or MSOs that they control) from interfering with the professional judgment of physicians or dentists in the state; and (2) allows California’s AG to investigate and take direct action against private equity firms and hedge funds that violate the statute.¹ The new law does not ban MSOs; rather, it preserves corporate assistance and consulting where clinicians retain ultimate responsibility. The new law thus does little to resolve the central ambiguity that exists within California’s current corporate practice of medicine jurisprudence—i.e., what gives corporate investors impermissible control over clinical decision-making. For this reason, the more crucial element of the new law is the authorization of California’s AG to investigate and take enforcement action against private equity and hedge funds. When the law takes effect next year, we anticipate that the California AG’s office will seek to use its new authority to drive existing ambiguities towards resolutions that limit corporate involvement in medical and dental practices. Given this potential, it is critical for MSOs and their investors to evaluate practices and, if necessary, make changes and prepare litigation strategies.

As now codified, California law prohibits “interference” with the professional judgment of physicians or dentists in making health care decisions across several specified clinical areas including:

• 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.
• 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.

Similarly, California law, now codified, prohibits private equity firms or hedge funds from exercising “control” over certain specified activities related to a physician or dental practice including:

• 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 medical or dental practice enters contractual relationships with third-party payers.
• Setting the clinical competency or proficiency parameters under which a physician or dentist enters contractual relationships with other physicians or dentists for the delivery of care.
• Making decisions regarding the coding and billing of procedures for patient care services.
• Approving the selection of medical equipment and medical supplies for the physician or dental practice.

What the new law does not do is codify definitions of “interference” or “control” that would establish clear rules for parties seeking to engage in legitimate management services. This is a critical distinction because California law does not prohibit an MSO from assisting, or consulting with, a physician or dental practice with respect to the decisions and activities described above, provided that the physician or dentist retains the ultimate responsibility for, or approval of, those decisions and activities.

Given this landscape, MSO arrangements commonly contain language granting physicians or dentists “control” or “approval” over the business and clinical activities. The key question is whether the business arrangement works to maintain that clinical independence in practice. California courts already evaluate this question not based on the language of the agreement but on the totality of circumstances and substance of the arrangement. Thus, while MSOs can continue to provide most of the typical business support services they currently provide to health care entities, MSOs must ensure that they have a well-documented operational trail of the physician’s or dentist’s ultimate approval or responsibility for those decisions. This is especially true given the investigative and enforcement authority that California’s new law grants the AG.

Historically, California’s AG has had limited authority to enforce corporate practice of medicine restrictions. Violations were enforceable as the unlicensed practice of the applicable health care profession by the respective professional board (e.g., the Medical Board of California). The AG rarely obtained visibility into MSO arrangements unless the applicable professional board referred an inquiry to the AG. California’s new law extends the enforcement reach and tools available to the AG, entitling the AG’s office to directly investigate and seek injunctive relief and other equitable remedies for violations of the law.

We are confident that the new law’s expansion of AG authority will prove to be more significant than its codification of the corporate practice of medicine prohibitions. When the law goes into effect next year, we anticipate significant investigative attention to private equity and hedge fund involvement with medical and dental practices. We suggest developing a strategy for such investigations now, rather than waiting for the inevitable. Private equity groups and hedge funds should examine their MSO arrangements and corporate practice of medicine compliance practices with the expectation that next year the AG will be asking them to establish clearly that those arrangements do not venture into impermissible clinical “interference” or “control.”

¹ In addition, the law now prohibits private equity groups or hedge funds from including noncompete or non-disparagement clauses in their management agreements; MSOs should review their management agreements to ensure compliance.

This memorandum is a summary for general information and discussion only and may be considered an advertisement for certain purposes. It is not a full analysis of the matters presented, may not be relied upon as legal advice, and does not purport to represent the views of our clients or the Firm. David Deaton, an O’Melveny partner licensed to practice law in California; Stephen M. Sullivan, an O’Melveny partner licensed to practice law in California; Elizabeth M. Bock, an O’Melveny partner licensed to practice law in California; Eric Zabinski, an O’Melveny partner licensed to practice law in California; Noah Kornblith, an O’Melveny partner licensed to practice law in California; Zach Greenberg, an O’Melveny partner licensed to practice law in Arizona and California; David Smith, an O’Melveny partner licensed to practice law in California and New York; and Daniel R. Suvor, an O’Melveny partner licensed to practice law in California, contributed to the content of this newsletter. The views expressed in this newsletter are the views of the authors except as otherwise noted.

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