Healthcare Investments Flash Alert (Part I): Latest Developments for Investors on U.S. Corporate Practice of Medicine

This OnPoint is the first of two alerts for investors in the healthcare and healthcare-adjacent sector, which continues to draw interest as an attractive and impactful area for investment activity for private equity firms, real estate investment trusts (“REITs”) and other investors. Part One is focused on active U.S. state law developments regarding the corporate practice of medicine doctrine. Part Two will address a corollary state law construct: mini-HSR laws.

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A spring bill introduced in the North Carolina Senate is an example of an emerging nationwide legislative trend among U.S. states with long-developed frameworks for the corporate practice of medicine doctrine (“Corporate Practice Rules” or “CPOM”) and CPOM’s analogs in dentistry, veterinary, or other regulated health professions. This critical bill, “An Act to Restore the Supremacy of Medical Providers’ Professional Judgment and to Prohibit the ‘Corporate Practice of Medicine’”¹ (“NC SB570”), would broaden North Carolina’s already robust CPOM doctrine. If enacted, NC SB570 could upend the way physicians outsource their practices’ non-clinical work, which could significantly alter private equity investors’ healthcare investment strategies and even affect their existing healthcare portfolio investments in the state.

NC SB570 is one of the latest in a series of state legislative measures being proposed or passed nationwide aimed at curbing “corporate” ownership or control of medical, dental, and/or veterinary practices. As in other active CPOM states, many investors, prohibited by Corporate Practice Rules from owning medical practices themselves, rely on management services organizations (“MSOs”) to handle such practices’ non-clinical and administrative work and, increasingly, to aggregate multiple practices under one corporate umbrella.² NC SB570 would prohibit practicing physicians from simultaneously owning shares of the MSO that provides non-clinical services to their practices.  

While these types of laws are not new, what largely differentiates recently proposed bills in a variety of states is their particular emphasis on private equity firms’ and REITs’ roles in healthcare, both as independent, direct investors and as investors via MSOs. These laws generally fall into two categories: (1) expansion/codification of CPOM (as in NC SB570), and/or (2) pre-merger notification laws focused on healthcare transactions, i.e., “mini-HSR” or “baby HSR” laws. This OnPoint focuses on CPOM, while Part II will focus on the mini-HSR laws.

Corporate Practice Rules

By way of brief background, Corporate Practice Rules have long aimed to “prohibit[] corporations from practicing medicine or employing a physician to provide professional medical services.”³ Concerns that a focus on profit will trump quality patient care have led at least 30 state legislatures to codify (or propose codifying) their Corporate Practice Rules as a limitation on financial sponsor investments in healthcare.⁴ Though which entities and people are limited by Corporate Practice Rules varies from state to state, such rules or laws generally proceed from the premise that only licensed clinicians, and not corporations, should influence patient care decisions. Because Corporate Practice Rules of many states prevent non-physicians from directly investing in medical practices, some private equity firms have historically navigated this prohibition by establishing MSOs that handle medical practices’ administrative, non-clinical work for a fee. MSOs and/or REITs also often purchase the real property or leasehold from medical practices to comply with state Corporate Practice Rules while sharing in the profits of a medical practice through compliant arrangements crafted by healthcare counsel.

Who Is Targeted by These Laws and What Impact Will They Have?

As some states have taken the position that arrangements with MSOs, private equity firms and REITs might encroach on practitioners’ professional judgment, proposed legislation seeks to expand or introduce new Corporate Practice Rules targeting these businesses’ involvement with medical (or, in some cases, dental and/or veterinary) practices. NC SB570 is a strong example of a bill seeking to limit private equity’s purported influence over medical practices, yet some bills go further. Introduced on February 12, 2025, Senate Bill 351⁵ in California (“CA SB351”) expressly places restrictions on private equity firms, hedge funds, and any entity that is at least partially owned by a private equity firm or hedge fund.

CA SB351’s measures are stricter than those of NC SB570, as it prohibits any arrangement that would permit the above-mentioned parties from “interfer[ing] with the professional judgment of physicians or dentists in making health care decisions. . . .”⁶ CA SB351 broadly defines activities that could “interfere” with professional judgment—including making decisions related to staffing, patient records, billing practices, and selection of medical equipment. Additionally, California’s state attorney general would have authority to seek injunctive relief and recover attorneys’ fees to cure any arrangements found to contravene the bill. In other words, the attorney general could be empowered by CA SB351 to force practitioners and their MSO partners to unwind the arrangements.

Although there are similarities among proposed state Corporate Practice Rules around the U.S., there is some variance as to whether the laws would impact existing arrangements in addition to those formed after a bill is enacted. A bill introduced in Connecticut (Senate Bill 1507 (“CT SB1507”)) contains two sections that each would affect investments and management contracts with medical practices. Part of CT SB1507 is similar to CA SB351 in that it prohibits any arrangements that allow MSOs to influence the professional judgment of medical professionals. Another part, however, differs from NC SB570 and CA SB351 in that it limits REITs in addition to private equity firms as to how they may invest in or contract with medical practices. CT SB1507 would bar private equity firms and REITs from investing, directly or indirectly, in medical practices starting October 1, 2025.⁷ REITs and private equity firms could continue to hold ownership interests in medical practices prior to that date; however, they would not be permitted to increase their investments after that date. This raises questions as to whether current transactions that are “open”—e.g., those that have a right of first refusal for a private equity firm to acquire the rest of a business—are likely to be barred along with de novo acquisitions. On a plain reading of the bills, they would be.

Notably, there is no grace period for coming into compliance with NC SB570, CA SB351, or the MSO provision of CT SB1507. Once enacted, state regulators could immediately impose fines or seek injunctive relief to cure the violations, potentially forcing private equity firms and REITs to divest, reform their contractual arrangements, or to take other requested remedial action.

Takeaways

The growing efforts to lessen corporate influence in medical practices underscores a broader national trend that could reshape healthcare investments and operations. Corporate Practice Rules have existed in many states for decades, but as state lawmakers endeavor to modernize their purview and increase their impact, the next generation of Corporate Practice Rules could radically reshape physicians’ abilities to obtain funding and operational support from private investors. As states continue to propose and enact newer and broader Corporate Practice Rules, private equity firms and REITs should keep an open line to their sophisticated advisors to stay informed and be prepared to adapt their investment strategies and manage compliance and commercial risks.