Carbon Health Settlement Adds to California’s Growing Scrutiny of MSO/Friendly-PC Arrangements

California’s corporate practice of medicine (CPOM) doctrine has long restricted non-physicians and nonprofessional entities from practicing medicine or controlling medical decision-making. Recent developments show increased regulatory focus on how the doctrine applies to modern MSO/PC or “friendly PC” structures.

The California Attorney General’s recent settlement involving Carbon Health Technologies, Inc., its affiliated medical groups, and Carbon Health’s co-founder and former CEO resolves the Attorney General’s allegations involving corporate practice of medicine violations, false advertising, consumer contracting issues and billing practices. At the time of the Attorney General’s June 26, 2026 announcement, the settlement was subject to court approval, and the judgment submitted with the settlement states that it may be entered as a compromise of disputed claims and defenses, without trial or adjudication and without the defendants admitting liability or wrongdoing.

These developments are part of a broader California trend involving MSO/PC structures, private equity and hedge fund involvement in healthcare, and related enforcement and oversight efforts, reflecting continued scrutiny of arrangements that may implicate professional control. (Carbon Health Settlement Announcement; Carbon Health Complaint; Carbon Health Proposed Judgment)

At a Glance

The Carbon Health settlement does not establish binding appellate precedent or a new rule for California MSO/PC or “friendly PC” arrangements. It was reached without an admission of liability and remains part of a developing regulatory landscape.

The settlement reflects a broader pattern of California scrutiny of MSO/PC structures, including issues involving private equity and hedge fund participation, continuity and replacement rights, transaction oversight and professional control in healthcare practices.

For healthcare organizations, the key takeaway is that regulators are increasingly focused on whether MSO/PC arrangements preserve meaningful physician or dentist control or instead allocate effective control to MSOs or investor-affiliated entities through contractual, financial, operational or branding mechanisms.

Organizations using MSO/PC structures in California should review governing documents and operational practices, including provisions relating to ownership and replacement rights, management authority, termination rights, financing, staffing, payer contracting, billing, advertising and patient communications.

Background: MSO/PC Structures and California’s CPOM Doctrine

California’s corporate practice of medicine (CPOM) doctrine restricts unlicensed individuals and entities from practicing medicine or interfering with physicians’ professional judgment. While MSO/PC arrangements remain common in healthcare—where a professional corporation provides clinical services and a separate management services organization (MSO) handles non-clinical operations—these structures must be carefully designed to avoid improper control over clinical decision-making. Recent developments do not render all MSO/PC models unlawful, but they signal increased regulatory scrutiny of contractual governance and operational arrangements that may give non-licensed entities control over the professional practice. (Medical Board CPOM Guidance)

Key Recent Developments

SB 351: New Statutory Restrictions on Private Equity and Hedge Fund Involvement

In October 2025, California enacted SB 351, which restricts private equity groups and hedge funds involved with physician or dental practices from interfering with licensed professionals’ clinical judgment or controlling key practice functions, such as medical records, clinical hiring and firing, payer contracting, billing and equipment selection. Contract provisions that permit such control are void and unenforceable, and the Attorney General may seek injunctive and other equitable relief to enforce the law. The statute reinforces California’s broader corporate practice restrictions by ensuring clinical decision-making remains with licensed providers. (SB 351 Enforcement Provisions)

AB 1415: Expanded OHCA Oversight of MSO and Investor Transactions

Enacted in October 2025, AB 1415 expanded the Office of Health Care Affordability’s transaction oversight framework to include certain transactions involving management services organizations (MSOs), private equity groups, hedge funds and other entities connected to healthcare providers. Covered transactions generally require notice to OHCA at least 90 days before entering into the agreement or transaction. Importantly, the law does not alter California’s corporate practice of medicine doctrine. (AB 1415 Transaction Notice Provisions)

Art Center Holdings: Competing Views on Continuity and Replacement Rights

The pending Art Center Holdings appeal has become a key case in the debate over friendly-PC continuity agreements. The California Attorney General argues that replacement rights or restrictions preventing a physician-owner from replacing an MSO may give the MSO impermissible control over the practice. By contrast, the California Medical Association argues that such arrangements should be evaluated case by case based on whether they interfere with clinical decision-making, rather than treated as automatically unlawful. (Attorney General’s Art Center Amicus Brief; AG Art Center Amicus Announcement; CMA Art Center Amicus Brief; CMA Art Center Amicus Announcement)

Aspen Dental Settlement: Dentistry, Advertising, Incentives, and Practice Control

In May 2026, the California Attorney General announced a settlement with Aspen Dental resolving allegations involving the corporate practice of dentistry and false advertising, including penalties, restitution and injunctive terms addressing practice ownership, incentives and advertising. Aspen Dental did not admit liability. Although the case involved dentistry, it highlights broader MSO/PC issues, including practice owner independence, limits on MSO control and consumer-facing communications. (Aspen Dental Settlement Announcement; Aspen Dental Stipulation and Proposed Judgment)

Carbon Health Settlement: Medicine, Friendly-PC Control, Billing and Advertising

The Carbon Health settlement brings these issues directly into the medical context. The California Attorney General alleged that Carbon Health’s friendly-PC structure gave its MSO impermissible control over clinic operations, including the power to replace the physician-owner of the clinics. The proposed judgment addresses MSO authority over key operational functions, financing arrangements, billing and advertising practices, and includes $4.4 million in civil penalty claims against the Carbon Health entities in their bankruptcy cases and a $100,000 penalty against its co-founder and former CEO. (Carbon Health Settlement Announcement; Carbon Health Complaint; Carbon Health Proposed Judgment)

What These Developments Mean

These developments should be read carefully. The Carbon Health and Aspen Dental matters were resolved through settlements without admissions of wrongdoing, and the Attorney General’s position in Art Center Holdings is a litigation position, not a final appellate ruling. CMA’s amicus brief also underscores that stakeholders may disagree about whether courts should adopt a categorical rule for continuity agreements and replacement rights.

Taken together, these developments suggest California is increasingly focused on whether MSO/PC arrangements preserve meaningful licensed-professional control or instead give MSOs practical control through contractual, operational or financial arrangements.

Practical Considerations

Healthcare organizations using MSO/PC structures in California should review their arrangements to ensure they preserve meaningful licensed-professional control. That review should focus on key governing documents and operational practices, including ownership, replacement and termination rights, management authority, financing, billing, staffing, payer contracting, advertising and patient communications. Organizations should also assess whether day-to-day operations align with contractual terms, as regulators may scrutinize arrangements where practical control rests with an MSO or investor-affiliated entity rather than licensed professionals.

Looking Ahead

These developments do not mean that MSO/PC structures are prohibited in California. They do, however, reflect increased California scrutiny of whether licensed professionals retain meaningful control or whether contractual and financial structures create effective MSO control. Until further guidance develops, arrangements should be evaluated closely for replacement rights, operational authority, financial leverage, advertising and billing practices.

For questions regarding California’s corporate practice of medicine doctrine, MSO/PC structures, or healthcare transaction compliance, please contact Alison S. Bassett.

Disclaimer: BBK Legal Alerts are not intended as legal advice. Additional facts, facts specific to your situation, or future developments may affect subjects contained herein. Seek the advice of an attorney before acting or relying upon any information herein.