Various doctor equipment at a desk

The California legislature, under SB 642, is considering further restrictions on the Corporate Practice of Medicine that is sure to have significant effects in the private equity healthcare space.

New Requirements

The bill, if passed, requires the shareholders of a medical corporation to have ultimate control over the assets and business operations of the practice and would prohibit any lay entity from impinging on that control, including, specifically, through stock transfer restriction agreements.

Like other states, California has a strict corporate practice of medicine prohibition which restricts non-doctors from owning or operating medical practices. The “Private Equity-Friendly PC” model is used by lay entities to invest in healthcare practices by managing the non-clinical operations of the practice while the friendly professional corporation and its doctor-shareholders oversee the clinical operations.

Noteworthy Restrictions

At the heart of many of these arrangements is a stock restriction agreement where the lay entity can restrict who the doctor-shareholders of the medical corporation can transfer their shares. Of course, the doctors entering into the business arrangement must acquiesce to the enterprise, thus the “friendly PC” nomenclature.

What’s Next?

With an ever-increasing presence of private equity-backed companies in healthcare, the passage of SB 642 will upend many healthcare operations in California. Operators will have to determine if the passage of the law would affect their current arrangement.

For dentists and Dental Service Organization operators in California, it is important to note that the current iteration of the bill only references medical corporations. With that said, what happens in the medical field usually trickles down to the dental industry. DSO operators are unlikely to be spared in the future if SB 642 passes and will have to rethink how they set up their legal contracts moving forward.