In a prior post, I discussed the general outlook on the remaining shelf life of the favorite PE end-run around the corporate practice of medicine doctrine, the so-called “friendly physician” model MSOs.
Today, we’ll look at what appears to be the accelerated unraveling, although not yet the death knell, of the friendly physician model in California.
But even if you don’t do business in California, if you’re in one of the other 30+ states prohibiting the corporate practice of medicine, you can be sure that your state Attorney General is aware of what’s happening in California and is likely salivating to go after alleged violators and their bank accounts, that is, those entities and individuals running friendly physician based MSOs.
But first a very short recap of the friendly physician end run: Most states prohibit a corporation from practicing medicine. That’s called the corporate practice of medicine doctrine. But capital wanted into medicine anyway, and a structure emerged to thread the needle. A licensed physician would own the professional entity on paper. A management services organization or “MSO”, owned by the investors, would sit alongside it and, through a web of agreements such as a management contract, a stock transfer restriction, and broad reserved powers, direct nearly everything that mattered. Therein lies the problem.
Now on to California.
In late June 2026, California’s Attorney General announced a settlement with Carbon Health Technologies, Inc. and a slew of affiliated medical groups, as well as with the company’s cofounder and former CEO. Among the allegations was that Carbon Health violated the state’s prohibition against the corporate practice of medicine through its MSO/friendly physician structure with its affiliated medical groups.
A settlement, even one like that with Carbon Health, doesn’t create precedent (and there’s no admission of wrongdoing) although the case is interesting in that it involves a stipulated judgment of immense value to those engaged in and/planning MSO structures. That’s because, in addition to $4.4 million to be paid by the Carbon Health entities, and another $100,000 to be paid by the cofounder and former CEO, the proposed judgment lays out, in some detail, exactly which features the Attorney General sees as evidence of unlawful corporate control via an injunction against:
i. Having a management services agreement that grants the management services organization complete authority over advertising, payor negotiations, selection of medical equipment, and the hiring, firing, and compensation of licensed medical professionals.
ii. Granting a management services organization any ownership interest in a professional corporation, including through an assignable option agreement which grants the management services organization the right to acquire such ownership interests for its own account.
iii. A revolving credit agreement that requires affiliated professional corporations to seek financing exclusively from the management services organization at an above market rate, provided that the management company will be permitted to take a first priority lien in certain of the affiliated professional corporation’s assets with conventional lender restrictions.
Those elements are, by the way, standard fare in many friendly-physician MSO arrangements. The second element, which is commonly referred to as a stock transfer agreement or a continuity agreement, is the central feature of every friendly physician deal. It allows the MSO to restrict, and in fact, direct, to whom the physician transfers ownership of the professional corporation.
The California Attorney General called the Carbon Health a first-of-its-kind settlement, which is true if you’re counting physician practices. However, two months earlier, the AG’s office ran the same play against Aspen Dental for $2.3 million under the corporate practice of dentistry, the sibling doctrine that governs the same structural question.
Translate the legal effect: no other MSO-PC arrangement in California is bound by a single word of this settlement. Technically. That said, it’s a free blueprint of precisely which structural features will likely get you sued. A settlement can’t be cited as precedent. It can absolutely be used as a checklist.
Meanwhile, actual precedent in California might be set in another case known as Art Center Holdings pending before the California Court of Appeal. The facts are almost clinically simple. Dr. Mark Surrey owned 100% of Southern California Reproductive Center. He signed a continuity agreement with a PE-backed management company, promising that if their management arrangement ever ended, he’d relinquish his shares to a physician of the management company’s choosing.
A dispute arose between Dr. Surrey and the management company over its directive that a physician employee be terminated. When Surrey pushed back, the management company exercised its rights under the stock transfer, or continuity, agreement and pushed Surrey out in favor of a friendlier physician.
A lawsuit ensued and the trial court found in favor of the Surrey-controlled professional corporation because it held that the management company’s contractual right to make clinical personnel decisions was direct interference with the practice of medicine, and because “even the presence of such agreements violate California’s ban on the unlicensed practice of medicine because medical doctors are placed in an untenable position—comply with the demands of their corporate partners even when involving medical decisions, or be removed and stripped of your ownership shares without any recourse.” [Emphasis added.]
The management company appealed and, on March 30, 2026, the Attorney General filed an amicus brief. The AG argues that the mere right on the part of an unlicensed entity to replace a physician-owner with a physician of its own selection, means the corporation “effectively owns and controls all aspects of the practice.” The California Medical Association filed a competing amicus brief, urging the court to look at facts and circumstances instead of drawing a bright line as the AG urges.
That case, unlike Carbon Health, will produce a real, published, appealable answer. If the court adopts the Attorney General’s categorical position, every continuity, succession, or stock-transfer-restriction agreement in the state is exposed overnight, regardless of how conservatively it was drafted. If the court adopts the California Medical Association’s facts-and-circumstances approach, you’ll get more room to maneuver. But “more room” is thinner comfort than it sounds.
So here is where that leaves you: the friendly PC model has not been declared illegal in California. It has also not been declared safe. Nobody closed a door. The Attorney General is seemingly charging admission if you go through it. And physicians, like Dr. Surrey, are also pushing back on the legality of the structure.
Some Timely Tips For You
No matter what state you’re in, if it has a prohibition on the corporate practice of medicine:
- Audit your own or your management partner’s structure for the four features the Carbon Health judgment specifically flagged: continuity agreements, a captive PC, exclusive above-market financing, and reserved MSO powers over hiring, scheduling, or clinical and billing decisions.
- Look hard at your continuity or succession agreement. If your management company, and not you, gets to name your successor if the relationship ends, that is precisely the mechanism under attack. It tells you where the enforcement energy is pointed next. If you run a management company, you have the same problem, just in reverse.
Note that if you’re outside of California, the absence of a ruling in your state is not the absence of risk. As the California AG’s suit against Carbon Health demonstrates, the absence of a ruling is precisely what lets enforcement continue, unreviewed, one settlement at a time.
If you want to talk through whether your structure, or your management partner’s, would survive scrutiny, I welcome the conversation. You can reach me at markweiss@weisspc.com.
