For years, the friendly professional corporation model has been one of the core structures behind investment in medicine.
The basic idea is familiar: a physician owns the professional corporation that employs clinicians and holds the medical licenses. A management services organization, or MSO, sits beside the PC and handles the non-clinical side of the business: billing, marketing, staffing logistics, technology, real estate, capital, and business operations.
A management services agreement connects the two. Ancillary agreements, often including stock transfer restriction agreements or continuity agreements, give the MSO a way to protect the platform if something goes wrong with the physician-owner relationship.
For many investors and operators, those physician-removal rights have long been treated as ordinary risk management. California is now signaling that they may be among the most dangerous provisions in the entire structure.
Over roughly ninety days in the spring and summer of 2026, the California Attorney General moved on three fronts. In late March, his office filed an amicus brief in an appellate case testing whether a physician-removal right, standing alone, violates the corporate practice of medicine.
In May, the office settled corporate-practice-of-dentistry claims against Aspen Dental. And on June 26, the Attorney General announced a settlement with Carbon Health that required more than a penalty. It required the company to tear down and rebuild its ownership structure.
For MSO-backed healthcare platforms, the message is not subtle. California is taking a closer look at who really controls the practice.
The Broader Enforcement Picture
This did not happen in a vacuum. California spent 2025 and early 2026 tightening the statutory framework around nonphysician control of healthcare. One of the most visible examples was SB 351, which took effect at the start of 2026 and targets private-equity and hedge-fund influence over medical and dental practices.
The enforcement wave is the Attorney General putting that legislative posture into practice.
But the most important point is not simply that California is watching private equity. The more meaningful signal is that California is looking at control. Who controls the physician-owner? Who controls staffing? Who controls advertising? Who controls payor negotiations? Who controls the economics of the practice? And do the documents match the way the business actually operates? Those questions matter far beyond Carbon Health.
The Carbon Health Settlement
Carbon Health Technologies is a technology-enabled primary, urgent, and virtual care company founded in the Bay Area in 2015. By the time of the settlement, it operated more than eighty clinics across eight states, with more than fifty in California, delivering care through a network of affiliated physician corporations.
Carbon Health used a friendly PC model, but the specific terms at issue sat toward the aggressive end of the spectrum. The removal, equity-capture, and financing mechanics were more sweeping than what a well-advised platform typically uses. Those structure issues also came alongside consumer-facing allegations involving misled and misbilled patients.
That combination is what makes the settlement instructive. The lesson is not that the mainstream MSO-PC structure is now unsafe. The lesson is that a structure that pushes the standard levers to their limit, while patients are allegedly being harmed, is the kind of arrangement the Attorney General is prepared to unwind.
The State’s Theory
The state’s theory, laid out in a complaint filed alongside the proposed judgment in Los Angeles County Superior Court, was that the corporate entity, which held no medical license, effectively owned and controlled every aspect of the affiliated practices.
The alleged control was contractual. Carbon Health’s management agreements allowed the MSO to replace the physician-owner of a clinic with a physician of the MSO’s choosing. At the same time, the physician-owner could not fire the MSO without risking the loss of the practice.
The state characterized the practices as captive, the physician’s loyalties as divided, and clinical judgment as subordinated to the MSO’s financial interests. It also alleged that unlicensed officers were actually directing staffing, advertising, and insurance negotiations.
That is the core corporate practice of medicine concern: the documents may say the physician owns the practice, but the state looks at who controls the practice in reality.
Why the Consumer Allegations Mattered
The consumer-facing allegations sharpened the case. The investigation found that Carbon Health misrepresented insurance coverage, sometimes telling patients they were in-network when they were not, which produced surprise out-of-network bills. It also found billing problems, including a hidden automatic credit-card charging term, duplicate charges for the same service, overcharges, and delayed refunds.
Those allegations mattered because they gave the Attorney General a consumer-protection vehicle to litigate what was fundamentally a structural CPOM concern.
That strategy is important for other platforms. California did not need to bring the case only as a licensing theory. It paired the structure issue with consumer-protection and false-advertising claims, which can carry remedies that a bare licensing theory might not.
The Penalties Were Not the Main Point
The financial terms were significant: $4.4 million in penalties against the Carbon Health entities and $100,000 against co-founder and former CEO Eren Bali personally.
The individual liability is worth noting. Attaching a penalty to a founder, rather than allowing the corporate form to absorb everything, sends a direct accountability signal to the people who design and operate these structures.
But the money was not the headline. The injunctive relief was. The settlement permanently enjoins Carbon Health from operating under several specific arrangements and requires the company to rebuild its corporate structure so that a nonmedical management company can no longer own or control physician-owned practices. Physicians must hold genuine independent control over clinical decisions and how the practices are run.
What California Treated as Over the Line
The provisions the state singled out are a useful guide to what California now views as problematic. First, management agreements that hand the MSO complete authority over advertising, payor negotiations, medical-equipment selection, and the hiring, firing, and compensation of clinicians. In other words, an MSA so comprehensive that nothing meaningful is left to the physician.
Second, MSO ownership rights in the professional corporation, including assignable option agreements that allow the MSO to acquire the PC’s equity for its own account. The state treated that equity-capture mechanism as ownership by another name.
Third, exclusive financing arrangements that force affiliated PCs to borrow only from the MSO, and to do so at above-market rates. In the state’s view, financing terms can become a control lever just as much as governance terms.
The settlement also required Carbon Health to stop misleading insurance advertising, revise patient consent forms and contracts to remove unclear or unlawful billing terms, and correct its billing practices.
Why the Legal Framing Matters
Two features of the legal framing deserve close attention. First, the state anchored the CPOM issue in Business and Professions Code sections 2052 and 2400, the general corporate-practice prohibitions, rather than only in SB 351. That matters because SB 351 is aimed at private equity and hedge funds. By relying on the general statutes, the Attorney General made clear that a platform does not need a private-equity sponsor to draw scrutiny. Any MSO-PC arrangement can be reviewed.
Second, the state pursued the matter through California’s consumer-protection and false-advertising laws rather than as a standalone CPOM cause of action. That gives the enforcement theory more practical force because consumer-protection claims can bring penalty and injunctive tools that a narrower licensing theory may not.
One caveat matters. This was a proposed settlement, entered as a compromise of disputed claims, subject to court approval, and without any admission of liability. It does not bind other courts or other companies. Carbon Health had also filed for Chapter 11 restructuring while the investigation was pending, which complicates any attempt to read the settlement as a clean statement of law.
What it does provide is a clear window into how the current California Attorney General thinks about these structures and what remedies he is willing to demand.
The Art Center Appeal
If the Carbon Health settlement shows what the Attorney General is willing to do at the settlement table, the Art Center appeal shows the legal question he is trying to win in court.
Art Center Holdings, Inc. v. WCE CA Art, LLC is pending before California’s Second Appellate District. The case presents an issue no California court has squarely decided: does the mere existence of a contractual right allowing an MSO to remove and replace a PC’s physician-owner violate the corporate practice of medicine, even if the MSO never exercises that right?
The underlying dispute grew out of a fertility practice. The physician-owner alleged that the MSO forced a transfer of the PC’s stock under a continuity agreement that gave the MSO sole and absolute discretion to remove the physician shareholder and install a replacement at will. The physician also alleged that the removal came in part because the physician refused to fire certain clinicians, which put a concrete clinical-control fact pattern beneath the broader legal question.
The trial court granted a receivership to move ownership back to the physician, concluding that the continuity agreement itself gave the MSO impermissible control. In the trial court’s framing, the very presence of that kind of agreement was a problem because it placed physicians in the position of either complying with corporate demands or risking the loss of their practice.
The Two Competing Views
On appeal, two amicus briefs frame the debate. The Attorney General argues for a categorical rule. His position is that an agreement giving an unlicensed corporation the right to replace a PC’s physician-owner with a doctor of the corporation’s choosing is unlawful on its face. On that view, the removal right does not need to be exercised to be unlawful. Its existence is the violation.
The California Medical Association argues for a fact-driven rule. The CMA’s position is that friendly PC arrangements are common, legitimate, and useful for aligning physicians with lay business partners, and that CPOM enforcement should depend on the actual facts. Courts should look at whether improper influence over clinical decision-making exists in substance, rather than condemning an entire category of contract provisions in the abstract.
That divide is the whole ballgame. Nearly every serious MSO-PC and DSO-PC structure in California relies on some form of stock transfer restriction, assignable option, or continuity provision to protect investor capital and preserve continuity of care if a physician-owner dies, becomes disabled, or leaves.
If the appellate court adopts the Attorney General’s categorical reading, those provisions could become presumptively unenforceable, and many existing structures could become non-compliant overnight, regardless of how the parties behave in practice. If the court adopts the CMA’s approach, those provisions may survive, but they will likely invite closer factual scrutiny of how control is actually exercised. A decision is pending, and it will matter well beyond the parties.
Why Carbon Health and Art Center Belong Together
Read side by side, the Carbon Health settlement and the Art Center appeal reinforce each other. Carbon Health is the enforcement action. Art Center is the attempt to convert the enforcement theory into binding precedent.
Both matters center on the same issue: physician-removal and equity-capture mechanics that make the friendly PC model financeable in the first place. Both also reflect a consistent thesis from the Attorney General: control over who owns and staffs the practice is control over the practice itself, no matter how the paperwork is labeled.
There is also an important limit. Neither the settlement nor the amicus brief declares the friendly PC model dead. Neither treats every MSO-PC structure as a per se violation. Carbon Health involved terms that concentrated clinical, staffing, and ownership control in the unlicensed entity to an unusual degree, alongside conduct that allegedly harmed patients. The more accurate reading is that structures that push standard levers past their proper limits, and drift outside the boundaries of California law, will face heightened and increasingly creative enforcement.
The friendly PC is not banned. The overreaching friendly PC is the target.
Why the Art Center Appeal Is the Wildcard
The Art Center appeal is the wildcard because it could move the line for everyone. The Attorney General’s categorical position would sweep in provisions that are common even in conservatively structured platforms, not just aggressive ones. That means Carbon Health should not make a well-advised operator panic, but the pending appeal is a reason even conservative operators cannot assume the current boundaries will hold.
For healthcare investors, MSOs, DSOs, telehealth platforms, medical groups, and MSO-backed healthcare businesses operating in California, this is the development to watch.
Practical Takeaways for MSO-Backed Healthcare Platforms
For platforms operating in California, and for those in states that tend to watch California, several practical points follow.
Revisit Removal and Equity-Capture Provisions First
Stock transfer restriction agreements, assignable options, and continuity or succession agreements are exactly where the Attorney General is looking. If your structure lets the MSO unilaterally replace the physician-owner or capture PC equity for the MSO’s own account, that is the highest-priority provision to reexamine.
Do Not Overload the Management Services Agreement
An MSA that gives the MSO complete authority over hiring, firing, compensation, advertising, payor negotiations, and equipment selection is the profile the state described in Carbon Health.
The goal should be genuine, documented, and actually exercised physician authority over clinical and clinical-adjacent decisions. A recital that no one follows is not enough.
Watch the Financing Terms
Exclusive, above-market financing from the MSO to the PC was called out specifically. Intercompany financing should look like arm’s-length financing. If financing is being used as a control mechanism, the arrangement becomes more vulnerable.
Assume General CPOM Statutes Apply
Carbon Health was resolved under the general corporate-practice prohibitions, not only under SB 351. The absence of a private-equity sponsor is not a safe harbor. Platforms without fund sponsors can still face scrutiny if the structure gives a nonlicensed entity too much control.
Expect Consumer-Protection Theories
The Attorney General used false-advertising and consumer-contract claims as the vehicle. Insurance-coverage representations, automatic-charging terms, billing accuracy, consent forms, and refund practices are enforcement surfaces in their own right. They can also carry structural CPOM claims along with them.
Remember That Documentation Is Necessary, But Not Sufficient
A clean set of documents will not save a structure if the operational reality tells a different story. The recurring theme across these developments is that actual control matters as much as contract language. If an unlicensed entity is effectively running the practice, the paperwork will not be enough.
What MSO-Backed Platforms Should Do Now
None of this requires abandoning the MSO-PC model. It requires making sure the model does what it claims to do: keep medical judgment with the physicians while allowing capital and management to do the work they are allowed to do.
The firms most exposed are the ones whose structures assume no one will ever look closely.
In California, someone is now looking closely.
LumaLex Law advises healthcare investors, MSO-backed platforms, telehealth companies, clinics, wellness businesses, and healthcare operators on MSO-PC structures, corporate practice of medicine risk, physician agreements, management services agreements, regulatory diligence, and platform restructuring.
If your healthcare platform uses a friendly PC model, now is the time to review whether the documents, economics, and day-to-day operations actually support the legal structure.
FAQ
What is a friendly PC model?
A friendly PC model is a structure where a physician owns the professional corporation that provides medical services, while an MSO handles non-clinical business functions such as billing, marketing, staffing logistics, technology, real estate, and capital.
Is California banning the friendly PC model?
No. The better reading is that California is targeting overreaching friendly PC structures, not banning the model entirely. The concern is whether the MSO has too much control over physician ownership, staffing, clinical-adjacent decisions, and practice operations.
Why does the Carbon Health settlement matter?
The Carbon Health settlement matters because California required the company to rebuild its ownership structure so that a nonmedical management company could no longer own or control physician-owned practices. It also showed how consumer-protection allegations can be used alongside CPOM concerns.
What is the Art Center appeal about?
The Art Center appeal asks whether the mere existence of a contractual right allowing an MSO to remove and replace a PC’s physician-owner violates California’s corporate practice of medicine doctrine, even if the MSO never exercises that right.
What should MSO-backed healthcare platforms review now?
Platforms should review physician-removal rights, equity-capture provisions, management services agreements, financing terms, consumer-facing billing and insurance representations, and whether day-to-day operations match the legal structure.
Disclaimer: This article is provided for general informational purposes only and does not constitute legal advice or create an attorney-client relationship. Telehealth and healthcare rules vary by state and change frequently. Consult qualified counsel about your specific facts.
