Key Takeaways

• A Management Services Agreement (MSA) is the written contract between a management services organization (MSO) and a healthcare professional corporation (PC). It defines what the MSO does, what it gets paid, and — critically — what it is not allowed to control.
• A compliant California MSA respects two structural limits: California’s Corporate Practice of Medicine (CPOM) doctrine (the MSO cannot exercise clinical control) and B&P Code § 650 (the management fee must be commensurate with the fair market value of the services furnished, not a payment for referrals).
• Fee structures can be flat, cost-plus, percentage of gross revenue, or a hybrid — all of them lawful if supported by documented FMV analysis. Epic Medical Management, LLC v. Paquette, 244 Cal. App. 4th 504 (2015), is the controlling California case.
• Review your MSA every year. The 2026 California changes — SB 351 (PE/hedge fund restrictions and voided non-compete clauses) and AB 1415 (OHCA pre-transaction notice expanded to MSOs) — affect both new and existing arrangements.
• A poorly drafted MSA is a top-three audit target in California healthcare. The Medical Board, the AG, and federal anti-kickback enforcers all look at the same thing: does the structure preserve clinical control to the physician, and is the fee defensible as fair market value?

What an MSA Is and Why It Exists

A Management Services Agreement is the written contract between a management services organization and a professional corporation. The MSO provides the practice’s non-clinical infrastructure — billing, real estate, equipment, technology, marketing, scheduling, HR, finance, compliance. The PC delivers clinical services. The MSA defines the relationship, the services, the fees, and the boundaries between them.

The MSA exists because California’s Corporate Practice of Medicine doctrine doesn’t let non-physicians own a medical practice. Without an MSA, a lay investor or non-physician operator cannot legally participate in the economics of a California medical practice. With a well-drafted MSA, the same investor or operator can run a substantial business — provided the MSO stays on its side of the line.

We’ve covered the broader MSO/PC architecture and CPOM rules elsewhere. This post focuses specifically on the MSA itself: what’s in it, how to read it, where it goes wrong, and what changed in 2026.

If you’re being asked to sign an MSA, or you’ve drafted one yourself, or you’re trying to figure out whether your existing MSA still works post-SB 351 and AB 1415, this is the contract that holds the entire structure together. Bay Legal, PC drafts and reviews MSAs for healthcare entrepreneurs, physicians, and investors across California. Call (650) 668-8000 or schedule a consultation at baylegal.com/contact.

What Has to Be in a California Healthcare MSA

A compliant MSA covers ten things. The drafting craft is in how each one is handled.

1. The Parties

The MSO is one entity (typically an LLC or a corporation, lay-ownable). The PC is the other (a California medical corporation, dental corporation, nursing corporation, or other Moscone-Knox professional corporation owned by the appropriate licensees). They have to be separate. Common pitfalls: same physical address with no real separation, overlapping employees, shared bank accounts.

2. The Services the MSO Provides

The MSO’s scope of services is one of the most important clinical-control checkpoints. A well-drafted services schedule is granular — not a catch-all “all non-clinical management services” clause, but a specific list:

• Real estate (the MSO holds the lease; the PC sublets or pays facility-use fees).
• Equipment leasing and maintenance.
• Information technology (EHR licensing, hardware, support).
• Billing and revenue cycle management (the PC bills in its own name; the MSO administers the workflow).
• Marketing, branding, and patient acquisition.
• Scheduling and intake.
• Non-clinical staffing (front desk, admin, finance, HR personnel).
• Procurement of supplies (non-prescription items).
• Compliance program infrastructure.
• Management and operational oversight of all non-clinical functions.

What’s missing from the list is anything clinical. The MSO doesn’t provide clinical staffing, clinical protocols, clinical decision support, or anything else that touches treatment of patients.

3. What the PC Retains (the CPOM Reserve)

This is the flip side of the services schedule. The MSA needs an explicit reservation of clinical authority to the PC:

• Patient diagnostic, treatment, prescriptive, and referral decisions.
• Clinical hiring, firing, and credentialing of clinicians.
• Treatment protocols, standardized procedures, and clinical guidelines.
• Patient panel size, visit length, and clinical hours.
• Ownership of patient medical records.
• Medical staff and clinical-committee decisions.

The clinical reserve language has to be more than boilerplate. If the PC’s clinical authority is contradicted elsewhere in the MSA — by service descriptions that include clinical work, by termination provisions that effectively let the MSO veto clinical decisions, or by side letters — the reserve doesn’t save the structure.

4. The Management Fee Structure

The MSO’s compensation under the MSA is the second-highest-risk element. California permits a range of fee structures under B&P Code § 650(b):

“The payment or receipt of consideration for services other than the referral of patients that is based on a percentage of gross revenue or similar type of contractual arrangement shall not be unlawful if the consideration is commensurate with the value of the services furnished or with the fair rental value of any premises or equipment leased or provided by the recipient to the payer.”

The four standard structures are:

• Flat monthly fee — fixed dollar amount per month, sometimes adjusted annually. Simplest; works best when the MSO’s services and the PC’s volume are stable.
• Cost-plus — MSO bills its actual costs plus a defined margin. Defensible under FMV analysis because the fee tracks actual work.
• Percentage of gross revenue — MSO is paid a percentage of the PC’s collections. Permitted under § 650(b) and Epic Medical Management, but requires documented FMV support showing the percentage reflects the value of the services, not the volume or value of patient referrals.
• Hybrid — fixed base plus variable component, or tiered structures that adjust as the practice scales.

The California Court of Appeal in Epic Medical Management, LLC v. Paquette, 244 Cal. App. 4th 504 (2015), confirmed that a percentage-of-revenue structure is lawful when commensurate with the value of the services furnished. The court rejected the view that § 650 categorically prohibits management-company arrangements simply because the management company sometimes makes referrals, focusing instead on whether the arrangement’s compensation is tied to the value of the services rendered.

The piece that ties any of these structures together is the FMV analysis: a written document that records the services provided, the costs incurred, market comparables, and the methodology used to set the fee. Without that documentation, every structure looks more vulnerable to fee-splitting scrutiny.

5. The Term and Renewal

Most MSAs run for an initial term of five to ten years with renewal provisions. The term matters because:

• A short term plus easy termination by the MSO can look like the MSO has effective control over the PC.
• An extremely long term (20+ years) with no exit makes the structure look like a sham sale of the practice.
• Renewal mechanics need to be drafted around the new SB 351 restrictions on PE/hedge fund non-compete clauses.

6. Termination Rights

This is where many MSAs get into trouble. A typical structure:

• Termination for cause by either party for material breach, with notice and cure.
• Termination without cause by either party with substantial notice (often 180 days to a year).
• Termination on insolvency, license loss, or regulatory action.

The drafting issue: if the MSO has broad termination rights and the PC owner is contractually obligated to “step aside” on termination — handing the PC to a new physician of the MSO’s choosing — the structure can drift toward MSO control of the practice. Post-SB 351, certain non-compete clauses in PE/hedge-fund-backed MSO arrangements with physician or dental practices are voided. The succession mechanics need careful drafting.

7. Real Estate and Equipment

Most MSO arrangements have the MSO hold the lease on the office space and own (or lease) major equipment. The PC then pays the MSO either as part of the management fee or under a separate sublease. Both approaches work; the documentation has to be specific. A lease at substantially above-market rates can itself become a fee-splitting problem.

8. Confidentiality and Non-Disparagement

Pre-2026, broad mutual confidentiality and non-disparagement clauses were standard. SB 351 changed this for MSAs between PE/hedge fund-backed MSOs and physician or dental practices: non-disparagement clauses are voided, with a narrow carve-out for material non-public information confidentiality (and unless they suppress legally required disclosures). MSAs being signed or renewed in 2026 should be reviewed for compliance.

9. Non-Competition

Non-compete clauses in California are already heavily restricted under Cal. Bus. & Prof. Code § 16600. SB 351 specifically voids non-compete clauses in MSO/asset-purchase agreements between PE/hedge funds and physician or dental practices, with two carve-outs: bona fide sale-of-business non-competes otherwise permitted under California law remain valid, and certain confidentiality provisions remain valid. MSO arrangements that relied on broad non-compete language to bind physician owners to the structure need to be redrafted.

10. Insurance, Indemnification, and Dispute Resolution

Standard clauses, but worth careful attention:

• Insurance — the PC needs professional liability coverage; the MSO needs general liability and (sometimes) errors and omissions. The MSA should specify minimum coverage amounts and require certificates.
• Indemnification — typically the PC indemnifies the MSO for clinical claims; the MSO indemnifies the PC for operational claims. Carve-outs for IP, regulatory violations, and gross negligence are common.
• Dispute resolution — arbitration clauses are common (and survived in Epic). Choice of law and venue should be California.

The drafting decisions in any one of these ten elements can be the difference between a defensible MSA and one the Medical Board or the AG can pick apart on review. Bay Legal, PC drafts, reviews, and refreshes MSAs for healthcare businesses across California. Call (650) 668-8000 or schedule a consultation at baylegal.com/contact.

Fee Structures in Depth: What FMV Documentation Looks Like

A flat fee or a cost-plus structure with detailed time tracking is the easier defense. The harder defense — and the most common MSA structure for scaled healthcare businesses — is a percentage-of-revenue fee.

Defending a percentage-of-revenue fee under FMV requires documentation. The standard practice in 2026 is a written FMV analysis prepared at the start of the engagement and refreshed annually (or whenever the scope of services or the practice volume materially changes). The analysis typically includes:

• A detailed inventory of MSO services — what the MSO actually delivers each month.
• Cost analysis — direct costs (personnel, technology, real estate) and allocated overhead attributable to the PC’s account.
• Market comparables — what comparable MSO arrangements pay for similar services in similar markets. Industry surveys and benchmarking data are typically used.
• Methodology — how the analyst moved from inputs to the recommended fee.
• Conclusion — the FMV range supporting the negotiated fee.

Third-party valuation firms regularly perform this analysis for larger MSO arrangements. For smaller practices, an in-house analysis prepared by counsel and the MSO’s financial team can suffice — but it has to be in writing and refreshed.

The analysis is your defense if the arrangement is challenged. Without it, the MSO has a hard time showing that the fee was commensurate with the value of the services and not driven by referrals or volume.

What SB 351 Changed for MSAs in 2026

SB 351 (Cortese, Ch. 409, Stats. 2025) took effect January 1, 2026. The provisions most relevant to MSA drafting:

1. Clinical-control prohibitions for PE/hedge funds. PE groups and hedge funds with stakes in physician or dental practices cannot interfere with clinical judgment, own patient records, or make clinical-personnel decisions. MSAs that explicitly or implicitly give the MSO clinical input now risk AG enforcement.
2. Voided non-compete clauses in MSO/asset-purchase agreements between PE/hedge funds and physician/dental practices, with two carve-outs:
   • Bona fide sale-of-business non-competes otherwise permitted under California law remain valid.
   • Confidentiality clauses protecting material non-public information remain valid (unless they suppress legally required disclosures).
3. Voided non-disparagement clauses — same carve-outs.
4. AG enforcement — the California Attorney General can seek injunctive relief, equitable remedies, and attorney’s fees.

For MSAs being drafted or renewed in 2026, the practical impact is on the non-compete, non-disparagement, succession, and clinical-control language. Existing MSAs aren’t grandfathered — the new restrictions apply.

What AB 1415 Changed for MSO Transactions in 2026

AB 1415 (Bonta, Ch. 641, Stats. 2025) also took effect January 1, 2026, and amends the California Health Care Quality and Affordability Act:

• MSOs are added to the list of “noticing entities” that must give the Office of Health Care Affordability (OHCA) at least 90 days’ advance written notice before a covered material change transaction.
• New H&S Code § 127501.5 requires MSOs to submit data and other information to OHCA on a basis to be defined in implementing regulations.

For MSA drafting, the practical impact is on timing and exit planning. Acquisitions of MSO-supported practices, sales of MSOs, and certain internal restructurings now have to be planned around the OHCA notice window. The MSA itself should contemplate the notice obligation in its assignment, change-of-control, and termination provisions. OHCA’s implementing regulations continue to develop; confirm current status at hcai.ca.gov before relying on specific procedural steps.

How to Read an MSA Someone Hands You

If you’re a physician being recruited to a friendly-PC role, or an operator being asked to step into an existing MSO arrangement, here’s the checklist:

1. Who owns the PC? Confirm 51%+ physician ownership of the medical corporation.
2. What services does the MSO claim to provide? Look for any clinical scope creep.
3. What’s the management fee structure, and is there FMV documentation? Ask to see the FMV analysis.
4. How long is the term, and what triggers termination? Look for forced-substitution clauses.
5. Are there non-compete or non-disparagement provisions? Post-SB 351, these may be unenforceable depending on counterparty.
6. Who controls clinical decisions, panel size, and hours? Should be the PC.
7. Who owns patient records? Should be the PC.
8. What’s the indemnification structure? Watch for indemnifications that effectively make the PC liable for MSO operational failures.
9. What’s the OHCA notice mechanic if the MSO is sold? Post-AB 1415, this matters.
10. Does the structure pass the “feels like the MSO controls the practice” smell test? If yes, the structure may not survive Medical Board or AG scrutiny.

If any of these answers are unclear, the MSA needs revision before signing.

Common Pitfalls and Red Flags

1. Catch-all services language (“all non-clinical management services”) instead of a granular schedule.
2. No FMV analysis for the management fee.
3. Termination provisions that effectively force the physician to step aside to a successor of the MSO’s choosing without cause.
4. Non-compete clauses in PE/hedge fund-backed arrangements (post-SB 351 these may be void).
5. Bundled flat fees that don’t track scope creep over years.
6. Same management team running both entities without clear allocation of time.
7. Records ownership in the MSO instead of the PC.
8. MSO billing in its own name for clinical services.
9. Indemnification that flows the wrong way on clinical claims.
10. No annual review of the FMV analysis, services schedule, or non-compete enforceability.

Talk to a California Healthcare MSA Attorney

The MSA is one of the central documents in any MSO/PC healthcare arrangement. It’s also a document where many compliance problems hide — the catch-all services language, the unsupported percentage fee, the voided non-compete clause that gives the MSO false comfort about physician retention, the indemnification language drafted before SB 351 and AB 1415 were on the books.

If you’re drafting, signing, refreshing, or being asked to step into an MSA in California, attorneys at Bay Legal, PC review and draft MSAs, prepare FMV documentation, and handle the SB 351 / AB 1415 compliance work for healthcare businesses across the state. Call (650) 668-8000 or schedule a consultation at baylegal.com/contact.

Frequently Asked Questions

What is a Management Services Agreement (MSA) in California healthcare?

An MSA is the written contract between a management services organization (MSO) and a healthcare professional corporation (PC). It defines the non-clinical services the MSO will provide, the management fee, the term and termination rights, and — critically — preserves clinical authority to the PC. The MSA is the operational backbone of every compliant MSO/PC arrangement in California healthcare.

Can an MSA pay the MSO a percentage of revenue in California?

Yes. B&P Code § 650(b) permits percentage-of-gross-revenue compensation if the fee is commensurate with the fair market value of the services furnished. Epic Medical Management, LLC v. Paquette, 244 Cal. App. 4th 504 (2015), confirmed this. The MSO and PC should maintain (and annually refresh) a written FMV analysis documenting the services provided, costs incurred, market comparables, and methodology supporting the fee.

What did SB 351 change for MSAs in 2026?

SB 351 (effective January 1, 2026) voids non-compete and non-disparagement clauses in MSO and asset-purchase agreements between private equity groups or hedge funds and physician or dental practices, with narrow carve-outs for sale-of-business non-competes and material non-public information confidentiality. SB 351 also restricts PE/hedge fund interference with clinical decisions, ownership of patient records, and clinical-personnel decisions. Existing MSAs are not grandfathered.

Does an MSO sale require notice to OHCA under AB 1415?

Often, yes. AB 1415 (effective January 1, 2026) adds MSOs to the list of “noticing entities” that must give the Office of Health Care Affordability at least 90 days’ advance written notice before a covered material change transaction. The MSA’s assignment and change-of-control provisions should contemplate this notice obligation.

Who owns the patient medical records under a healthcare MSA?

The professional corporation (PC) — the clinical entity — owns the patient medical records. An MSA that purports to assign records ownership to the MSO violates California’s Corporate Practice of Medicine doctrine, which reserves clinical authority (including records ownership) to the physician-led PC. The MSO typically provides the IT systems on which records are stored, but the records themselves remain with the PC.

This article provides general information about California law and is not legal, tax, or financial advice. Reading this article, contacting Bay Legal, PC, or sending information through baylegal.com does not create an attorney-client relationship. The information here focuses on California law and may not reflect the law of other jurisdictions. Statutes, regulations, agency guidance, and case law change; this article reflects the authors’ understanding as of the date of publication and may not reflect later developments. For advice about your specific situation, consult a licensed California attorney.