California bill would give physician owners power over private equity

A bill under consideration in the California State Legislature could put power in the hands of physician owners of physician practices, JDSupra reported Jan. 27.

California Senate Bill 642 would, if enacted, restrict the use of the stock restriction agreement and similar arrangements used in the "friendly professional corporation" model, the report said. The model is often used in California by hospital systems and private equity firms as a way to have control over physician groups' operations without violating the state law that prohibits the corporate practice of medicine.

Under the model, the health system or private equity firm owns the non-clinical assets and leasehold interest of the practice and operates the day-to-day non-clinical functions of the practice, including negotiating payor contracts, billing and collecting.

The stock restriction agreement, also known as a succession agreement, restricts the sale, transfer or exchange of ownership interest in the practice. Any such action must be approved by the health system or private equity firm, ensuring the practice has a continuous and close tie to its controlling entity.

SB 642 would restrict such agreements, shifting management and control of medical practices to its physician owners, shareholders and directors, the report said. It would also prohibit the practice's shareholders and leadership from being replaced, removed or controlled by any lay entity.

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