California CPOM violations, management services agreements, fee-splitting, private equity deals, and unwinding non-compliant arrangements
California's Corporate Practice of Medicine (CPOM) doctrine prohibits non-physicians from owning or controlling medical practices. This 100+ year-old principle aims to preserve physician independence, prevent financial conflicts of interest, and ensure medical decisions are made based on patient welfare rather than corporate profit motives.
The explosion of private equity investment in healthcare—dermatology, ophthalmology, gastroenterology, pain management, urgent care—has created a sophisticated work-around: the Management Services Organization (MSO). MSOs provide administrative, marketing, billing, and staffing services to physician-owned professional corporations under Management Services Agreements (MSAs). When structured properly, MSO arrangements comply with CPOM. When structured improperly—or when MSOs exercise de facto control over medical decision-making—they violate California law and create substantial legal exposure.
Business & Professions Code § 2400: "No person, firm, partnership, association, or corporation, or any other entity shall practice medicine or surgery unless licensed by the Medical Board or the Osteopathic Medical Board."
California courts interpret § 2400 broadly to prohibit:
Why California Is Strict: Many states have relaxed or abolished CPOM restrictions, but California maintains one of the nation's strictest interpretations. The Medical Board actively enforces CPOM, viewing violations as threats to patient safety and physician professionalism.
Compliant MSO Model:
Problematic MSO Model:
| Control Factor | CPOM-Compliant MSO ✓ | CPOM Violation Risk ✗ |
|---|---|---|
| Hiring/Firing Clinical Staff | Physician PC decides which physicians, NPs, PAs, RNs to hire; MSO may handle HR paperwork | MSO controls physician hiring, sets compensation, terminates physicians without PC input |
| Treatment Protocols | Physician PC develops clinical protocols based on medical standards; MSO has no input | MSO mandates specific treatment algorithms, product usage, or procedure quotas to increase revenue |
| Patient Selection | Physicians decide which patients to accept/decline based on clinical judgment | MSO screens patients for insurance status or ability to pay; directs physicians to prioritize high-margin cases |
| Fee Structure | Fixed monthly fee or reasonable percentage of net revenue (e.g., 20-30% for comprehensive admin services) | Percentage of gross revenue exceeding 50%; per-patient or per-procedure fees (illegal fee-splitting under B&P § 650) |
| Marketing & Branding | Physician PC is prominently identified as medical provider; MSO acknowledged as administrative partner | MSO brand dominates; patients believe MSO (not physician PC) is their healthcare provider |
| Termination Rights | Physician PC can terminate MSA with 90-180 days' notice and continue operating independently | Physician PC cannot realistically terminate—MSO owns facilities, equipment, patient lists, proprietary systems |
Private equity firms have invested billions in California physician practices, particularly in specialties with high procedure volumes and ancillary revenue (dermatology, ophthalmology, GI, pain management, dental). PE firms cannot directly own medical practices, so they use MSO structures. Key concerns:
Fact Pattern: Private equity firm acquires dermatology practice by purchasing the real estate, equipment, and patient lists. Forms physician PC (owned by existing physicians) and MSO (owned by PE). MSA grants MSO "sole discretion" to hire and terminate all clinical staff, including physicians, NPs, and PAs. Physicians become employees of MSO, not PC.
CPOM Issue: By employing physicians directly, MSO is practicing medicine. Physicians must be employed by physician-owned PC, not lay-owned MSO. This structure violates B&P § 2400.
Additional Problems:
Fact Pattern: MSO pays physician PC 50% of net collections. MSO separately pays individual physicians production bonuses tied to procedure volume (e.g., $X per Mohs surgery, $Y per cosmetic filler syringe sold). Physicians face pressure to maximize procedures to meet income expectations.
CPOM Issue: While percentage-based MSO fees are not per se illegal, compensation structures that incentivize unnecessary treatment create ethical and legal problems:
Fact Pattern: MSO conducts "utilization review" and determines that practice's Botox usage is "below benchmarks." MSO directs physicians to offer Botox to all patients over 35 during routine visits and sets monthly Botox revenue targets. Physicians who resist are threatened with termination or compensation reductions.
CPOM Issue: MSO is dictating clinical decision-making (when to offer Botox) based on financial rather than medical criteria. This is corporate practice of medicine—lay entity controlling medical judgment.
Ethical/Legal Consequences:
Fact Pattern: Physician "sells" practice to PE-backed MSO. MSA establishes physician PC owned by selling physician, but MSO:
Physician realizes MSO model is unethical or unprofitable and wants to leave but cannot take patients or continue operating independently.
CPOM Issue: MSA creates de facto control by MSO even though physician "owns" PC. Physician's inability to terminate MSA and continue practicing demonstrates that MSO, not physician, controls the practice.
Unwinding Options:
B&P § 650: Prohibits paying or receiving "any consideration, compensation, or remuneration" for patient referrals or for securing patronage. Violators face license discipline, civil penalties, and potential criminal prosecution.
While § 650 is often discussed in the context of specialist-to-specialist referrals, it also applies to MSO arrangements where payments are structured as kickbacks for patient referrals or based on specific patient services.
| Fee Structure | Legal Analysis | CPOM / § 650 Risk |
|---|---|---|
| Fixed monthly fee (e.g., $25,000/month for admin services) | Legal if fee reasonably reflects value of services provided | Low risk—no linkage to specific patients or procedures |
| Percentage of net revenue (e.g., 25% of collections for billing, marketing, HR, facilities) | Generally legal if percentage is reasonable and MSO provides substantial services | Moderate risk if percentage exceeds value of services (40-60% fees may be suspect) |
| Percentage of gross revenue exceeding 50% | Questionable—suggests MSO is extracting profit rather than charging for services | High risk—may be disguised ownership or fee-splitting |
| Per-patient fees (e.g., $50 per new patient referred by MSO marketing) | Illegal under B&P § 650—direct payment for patient referrals | Very high risk—clear fee-splitting/kickback violation |
| Per-procedure fees (e.g., $200 per Mohs surgery, $100 per colonoscopy) | Illegal under B&P § 650—payment tied to specific services, incentivizing overtreatment | Very high risk—violates both § 650 and federal AKS |
| "Marketing fees" for patient leads | Illegal if fee is per-patient or contingent on patient converting to paying customer | High risk—disguised referral fee |
California MSO arrangements must comply with both federal and state law:
Federal Anti-Kickback Statute (AKS): Prohibits offering or receiving remuneration to induce referrals for services covered by federal healthcare programs (Medicare, Medicaid). Violations are felonies. Safe harbors exist for certain MSO arrangements if properly structured.
Federa Stark Law (Physician Self-Referral Law): Prohibits physician referrals for designated health services (DHS) to entities with which the physician has a financial relationship, unless an exception applies. Covers lab, imaging, PT, and other ancillary services.
California B&P § 650: Broader than federal law—applies to all patient referrals (not just Medicare/Medicaid) and has fewer safe harbors. An arrangement compliant with federal AKS may still violate California § 650.
California's Physician Ownership and Referral Act (PORA, B&P § 650.01): Limits physicians' ability to self-refer to ancillary service entities they own (imaging, labs, PT). Physicians must comply with disclosure requirements and ownership percentage limits.
In MSO contexts, PORA issues arise when:
Physicians trapped in problematic MSO arrangements—whether due to CPOM concerns, oppressive economics, or ethical conflicts—face significant barriers to exiting:
Legal strategies for unwinding:
Legal Theory: MSA is void ab initio (void from inception) because it violates B&P § 2400. A contract that violates public policy is unenforceable.
Requirements:
Remedy: Court declares MSA void; physician need not pay termination penalties or comply with non-compete; MSO must return any fees that exceed fair market value of services actually provided.
Risks: If MSA is void, MSO may demand return of any "acquisition payment" or signing bonus paid to physician; physician may face Medical Board investigation for participating in CPOM violation.
Legal Theory: MSA is unconscionable (one-sided, oppressive) or induced by fraud (MSO misrepresented level of support, revenue projections, or autonomy physician would retain).
Reformation vs. Rescission: Reformation modifies contract to make it enforceable; rescission voids it entirely. Reformation may be preferable when physician wants to continue relationship but on fairer terms.
Typical Reforms:
Approach: Physician (or attorney on physician's behalf) files Medical Board complaint documenting CPOM violations and requesting investigation. Medical Board subpoenas MSA and conducts investigation.
Outcomes:
Risks: Physician may face discipline for participating in CPOM arrangement; whistleblower physicians sometimes face retaliation (firing, defamation, frivolous lawsuits).
Approach: Physician proposes financial settlement to terminate MSA early—e.g., pay MSO $X lump sum (less than termination penalty) in exchange for release from MSA and non-compete.
When Viable:
Date: [Current Date]
To: [MSO Entity Name]
[MSO Address]
Attn: Chief Executive Officer and Legal Counsel
From: [Physician Name], M.D. / [Professional Corporation Name]
[Address]
RE: NOTICE OF RESCISSION – MANAGEMENT SERVICES AGREEMENT VIOLATES CALIFORNIA'S CORPORATE PRACTICE OF MEDICINE DOCTRINE
Dear [MSO Representative]:
On behalf of [Professional Corporation Name], I hereby rescind the Management Services Agreement dated [MSA Date] (the "MSA") on grounds that it violates California's prohibition on the corporate practice of medicine and constitutes illegal fee-splitting under Business & Professions Code § 650.
Background: On [MSA Date], [PC Name] entered into the MSA with [MSO Name]. Under the MSA, [MSO] provides administrative services including billing, marketing, HR, and facilities management in exchange for [X]% of gross revenue. At the time of signing, we believed this arrangement complied with California law. However, over the [time period], it has become clear that [MSO] exercises de facto control over clinical decision-making in violation of Business & Professions Code § 2400.
CPOM Violations Under the MSA:
1. MSO Control Over Clinical Staffing: Despite the MSA's nominal designation of [PC Name] as employer of all clinical staff, [MSO] in practice:
2. MSO Mandates Treatment Protocols to Maximize Revenue: [MSO] has repeatedly directed clinical staff to:
These directives are based on financial optimization, not medical standards, and constitute corporate practice of medicine—lay control of clinical judgment.
3. Economic Structure Prevents [PC Name] From Terminating MSA: The MSA grants [MSO]:
While the MSA nominally allows [PC Name] to terminate with 180 days' notice, doing so would leave us with no facilities, no patient records, no billing infrastructure, and a 5-year non-compete preventing us from practicing within [geographic radius]. This is de facto MSO ownership of the practice, violating § 2400.
Fee-Splitting Violation (B&P § 650): The MSA's [X]% gross revenue fee structure, combined with [MSO]'s control over patient volume and procedure mix, constitutes illegal fee-splitting. [MSO] effectively receives a percentage of every patient encounter and procedure, incentivizing it to maximize patient volume and high-margin procedures regardless of medical necessity.
Legal Basis for Rescission: Under California law, contracts that violate public policy (including B&P §§ 2400, 650) are void and unenforceable. We need not continue performing under a void contract. Moreover, Business & Professions Code § 2400's purpose—protecting physician independence and patient welfare—supports rescission as the appropriate remedy.
DEMAND: Within 30 days of this letter, [MSO] must:
Consequences of Non-Compliance: If [MSO] does not agree to rescission and the terms above, we will:
We take no pleasure in this action. However, continuing under an unlawful MSA exposes us to Medical Board discipline and compromises our ability to exercise independent medical judgment. We must prioritize patient welfare and legal compliance.
Please confirm your response within 30 days.
Sincerely,
[Physician Name], M.D.
On behalf of [Professional Corporation Name]
cc: [PC's Legal Counsel]
Date: [Current Date]
To: [Professional Corporation Name]
[PC Address]
Attn: [Physician Owner]
From: [MSO Name]
[MSO Address]
RE: DEMAND FOR PAYMENT – UNPAID MANAGEMENT SERVICES FEES UNDER MSA
Dear [Physician]:
This letter demands immediate payment of unpaid management services fees owed by [PC Name] to [MSO Name] under the Management Services Agreement dated [MSA Date].
Outstanding Balance:
Despite multiple invoices and payment reminders, these fees remain unpaid. Your emails citing "concerns about the MSA's legality" do not excuse performance. Under California contract law, parties must perform while disputes are resolved unless a court grants relief.
Services Provided by MSO: During the period of non-payment, [MSO Name] continued to provide the following services as required under the MSA:
[PC Name] has benefited from these services while refusing to pay, constituting unjust enrichment.
Response to [PC]'s CPOM Allegations: Your recent communications allege that the MSA violates California's corporate practice of medicine doctrine. These allegations are without merit:
1. [PC] Retains Full Clinical Control: The MSA explicitly vests all clinical decision-making authority in [PC Name]. [MSO] provides administrative and operational support only. We do not hire or fire physicians, dictate treatment protocols, or control patient selection. Those allegations are false.
2. Our Fee Structure Is Standard: The [X]% revenue share is consistent with market rates for comprehensive MSO services in California. Independent valuation (attached) confirms our fees are reasonable for the scope of services provided.
3. [PC] Can Terminate MSA: Section [X] of the MSA allows [PC] to terminate with 180 days' notice. While certain assets (facilities, equipment) are owned by [MSO] and would not transfer upon termination, [PC] is free to lease alternative space and purchase equipment. This is standard for MSO arrangements and does not constitute CPOM.
DEMAND FOR PAYMENT: [PC Name] must pay $[Total] within 10 business days of this letter. Payment should be remitted via wire transfer to [account information].
Consequences of Non-Payment: If payment is not received by [Deadline Date], we will:
We do not wish to disrupt patient care, but [PC]'s refusal to honor its contractual obligations leaves us no choice. We are prepared to work with [PC] on a payment plan if cash flow is the issue, but we cannot continue providing services without compensation.
Please contact me immediately at [phone/email] to arrange payment or discuss resolution.
Sincerely,
[MSO Representative Name]
[Title]
Enclosures: Outstanding invoices; MSA; independent valuation of MSO services
MSO and corporate practice of medicine disputes involve complex healthcare regulatory issues, high-stakes economics, and sophisticated business structures. Physicians trapped in problematic MSO deals and investors seeking to enforce MSAs need counsel who understands California's CPOM doctrine, Medical Board enforcement, and the business realities of private equity healthcare transactions.
I represent California physicians, professional corporations, MSO investors, and landlords in CPOM disputes, MSA litigation, and regulatory defense. My practice combines healthcare regulatory law with complex commercial litigation to achieve practical outcomes for clients.
MSO disputes involve millions of dollars, physician livelihoods, and substantial regulatory exposure. Whether you're a physician seeking to exit a problematic MSA or an MSO enforcing contractual rights, I can help you navigate California's CPOM framework and achieve a resolution that protects your interests.
Send me your MSA, correspondence regarding the dispute, and financial information (revenue, MSO fees paid). I'll evaluate CPOM compliance, identify leverage points, and outline a strategy for demand letters, negotiation, or litigation.
Hourly or contingency representation available depending on case type. CPOM compliance audits $3,500-$7,500. MSA unwinding often contingency (percentage of termination penalty savings). Attorney's fees sometimes recoverable under MSA provisions.