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:
- Non-physicians owning medical practices
- Non-physician entities employing physicians to provide medical services
- Lay corporations exercising control over medical judgment, patient selection, or clinical protocols
- Financial arrangements that give non-physicians indirect control over medical decision-making
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:
- Physician-owned professional corporation (PC) provides all medical services
- MSO (investor-owned entity) provides non-clinical administrative services under MSA
- MSO fees are reasonable fixed amounts or percentage of revenue, not tied to specific patient referrals
- Physician PC retains full control over hiring/firing clinical staff, treatment protocols, patient acceptance
- Physician PC can terminate MSA without losing clinic infrastructure or patient base
- MSA clearly delineates MSO's administrative role vs. physician's clinical autonomy
❌ Problematic MSO Model:
- MSO makes clinical staffing decisions (hires/fires physicians, NPs, MAs)
- MSO dictates treatment protocols, patient volume targets, or procedure mix to maximize revenue
- MSO controls patient scheduling, determines which patients are seen
- MSO fee structure incentivizes unnecessary procedures or high-volume/low-quality care
- Physician cannot realistically terminate MSA—MSO controls facilities, equipment, patient records, billing systems
- MSO represents itself publicly as the healthcare provider, relegating physician PC to back-office role
| Control Factor | CPOM-Compliant ✓ | 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%) | Percentage of gross revenue exceeding 50%; per-patient or per-procedure fees |
| Marketing & Branding | Physician PC is prominently identified as medical provider | MSO brand dominates; patients believe MSO is their healthcare provider |
| Termination Rights | Physician PC can terminate MSA with 90-180 days' notice and continue operating | Physician PC cannot realistically terminate—MSO owns facilities, equipment, patient lists |
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:
- Aggressive management fees: PE-backed MSOs often charge 40-60% of gross revenue, far exceeding the value of administrative services provided
- De facto control: PE firms exercise control through MSA provisions, board seats, or economic pressure
- Rollup consolidation: PE acquires multiple practices, creates regional "networks," and negotiates payer contracts—activities that may constitute practicing medicine without a license
- Exit pressure: PE investment horizons (3-7 years) create pressure to maximize short-term revenue, potentially compromising care quality
- Physician license suspensions for aiding/abetting corporate practice
- Practice shutdowns and receiverships
- Criminal referrals for willful CPOM violations
- Multi-million dollar restitution orders