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Less than a week after California Governor Gavin Newsom signed
SB 351 into law to
reinforce California’s prohibition on the corporate practice of
medicine, the Governor signed AB 1415, which will
bring a new scope of health care investors under regulatory
scrutiny for material transactions.AB 1415 will take effect on
January 1, 2026, providing the health care industry with less than
three months’ notice to prepare for the changes.As set forth
below, AB 1415 expressly defines a “noticing entity” to
include a hedge fund or private equity group and management service
organizations providing certain services.

Office of Health Care Affordability’s Expanded Role in
Oversight

AB 1415 broadens the scope of the Office of Health Care
Affordability (OHCA) oversight of health care transactions in
California, and expands the scope of the agency’s review of the
health care market. OHCA was established in 2022
in part to investigate anti-competitive consolidation among health
care entities and to monitor the rising cost of health care in the
state. Beginning in 2024, regulated health care entities were
required to notify OHCA 90 days in advance of entering into certain
material transactions.

Effective January 1, 2026, OHCA’s review process will
require “noticing entities” to provide notice of certain
types of material transactions between the noticing entity and a
health care entity or management services organization, or an
entity that owns or controls the health care entity or management
services organization. A “noticing entity” is defined as:
a private equity group or hedge fund; a newly created business
entity created for the purpose of entering into an agreement or
transaction with a health care entity; a management services
organization; and an entity that owns, operates, or controls a
provider.

What is a “Noticing Entity”?

AB 1415 provides several definitions to clarify the types of
organizations that are considered “noticing entities”
required to submit an OHCA notice. The broadest category of
noticing entities are management services organizations or
“MSOs,” which are defined to include entities that
provide management and administrative support services to a
provider in support of the delivery of health care services. The
definition of an MSO specifies that management and administrative
support services shall include provider rate negotiation, revenue
cycle management or both. An MSO also does not include an entity
that owns one or more licensed health care facilities. Notably,
this definition of an MSO indicates that the MSO must be providing
a specific type of management service to a health care provider
that is regulated by OHCA in order to be a “noticing
entity.” While the OHCA definition of a provider is broadly
drafted to encompass a range of health care providers, there are
some exceptions to the definition, which may limit the types of
MSOs that are required to submit an OHCA notice.

A “noticing entity” also includes a “hedge
fund” and “private equity group.” AB 1415 defines a
“hedge fund” as 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 fund. A “private equity
group” means an investor or group of investors who primarily
engage in the raising or returning of capital and who invest,
develop, dispose of, or purchase any equity interest in assets,
either as a parent company or through another entity the investor
or investors completely or partially own or control. Both the
definitions of a hedge fund and private equity group exclude
natural persons who contribute funds to the enterprise but do not
participate in the management of the assets of the entity, or in
any change in control of the entity.

Currently, transactions involving the change of control or sale
of assets by an MSO, private equity group, or hedge fund likely
avoid OHCA regulatory review. AB 1415 will make many of those
transactions reportable. Stakeholders will need to review their
existing operations to determine whether they meet the definition
of a “noticing entity” under the new law, and if any
future transactions will require a pre-closing filing with
OHCA.

National Trends

California’s new requirements for health care investment are
in line with the national trend of increasing state scrutiny of
health transactions. For example, Colorado, Connecticut, Oregon,
and Texas have recently proposed legislation that specifically
targets private equity and management service organizations. Massachusetts passed
legislation earlier this year, which, among other things, enhanced
the authority of the Massachusetts regulatory authorities to
scrutinize health care mergers, acquisitions, and other significant
market transactions.

What Happens Next?

OHCA will engage in a rulemaking process over the next several
months, which should clarify the filing obligations of noticing
entities under AB 1415. Stakeholders should monitor the rulemaking
process, and may consider submitting comments to OHCA for its
review during the rulemaking process.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.