Key Takeaways

• California’s anti-kickback rule lives at B&P Code § 650(a) — broader than the federal Anti-Kickback Statute, because it applies to all payors, not just federal program patients. It captures any consideration paid or received as compensation or inducement for referring patients.
• Penalties are real: up to $50,000 per violation, county jail up to one year, and state prison under Penal Code § 1170(h). Violation is a “wobbler” — misdemeanor or felony. Plus licensing-board discipline.
• 650(b) carves out fair-market-value compensation for services other than referrals — including percentage-of-revenue MSO fees. Epic Medical Management, LLC v. Paquette, 244 Cal. App. 4th 504 (2015), confirmed the breadth of that safe harbor.
• B&P § 650.01 (PORA) is California’s physician self-referral statute — California’s analog to the federal Stark Law. It prohibits a licensee from referring patients for specific designated services to an entity in which the licensee or an immediate family member has a financial interest, subject to enumerated exceptions in § 650.02.
• For practices that bill federal programs, the federal Anti-Kickback Statute (42 U.S.C. § 1320a-7b) and Stark Law (42 U.S.C. § 1395nn) apply in parallel, with their own penalties and exclusion remedies. Both are unforgiving and both interact with California law.

What “Fee-Splitting” and “Kickbacks” Actually Mean in California

California uses three overlapping statutes to police improper financial relationships in healthcare:

• B&P Code § 650 — the anti-kickback / fee-splitting rule for healthcare licensees.
• B&P Code § 650.01 — the Physician Ownership and Referral Act (PORA) — California’s self-referral statute.
• B&P Code § 650.02 — the exceptions to PORA.

In casual conversation, “fee-splitting” and “kickbacks” get used interchangeably. Legally they’re the same prohibition: any consideration paid or received in exchange for referring patients is a kickback, and the practice of dividing a professional fee with another party in exchange for referrals is the historical phrase “fee-splitting.” Both fall under § 650(a). “Self-referral” is a different prohibition — referring patients to an entity in which the referring provider has a financial interest — and it lives at § 650.01.

The same conduct can violate state and federal law simultaneously. For a clinic that bills any federal program (Medicare, Medicaid/Medi-Cal, TRICARE, federal employee health benefits), the federal Anti-Kickback Statute (AKS) and Stark Law apply alongside California’s rules.

If you’re a clinic owner, an MSO operator, or a physician evaluating any arrangement where money flows between practices, vendors, or referral sources, fee-splitting risk is one of the easiest ways to lose a license — or face criminal charges. Bay Legal, PC reviews and structures referral, marketing, lease, and MSO arrangements to avoid B&P § 650 and federal AKS exposure across California. Call (650) 668-8000 or schedule a consultation at baylegal.com/contact.

B&P Code § 650(a): California’s Anti-Kickback Rule

The text of § 650(a) is the operative prohibition:

“[T]he offer, delivery, receipt, or acceptance by any person licensed under this division or the Chiropractic Initiative Act of any rebate, refund, commission, preference, patronage dividend, discount, or other consideration, whether in the form of money or otherwise, as compensation or inducement for referring patients, clients, or customers to any person, irrespective of any membership, proprietary interest, or coownership in or with any person to whom these patients, clients, or customers are referred is unlawful.”

Two features distinguish § 650(a) from the federal AKS:

• All payors. 650(a) reaches every patient referral, regardless of whether the patient is on Medicare, Medi-Cal, a commercial plan, or paying cash. The federal AKS only reaches federally-reimbursed services.
• Essentially strict liability in many enforcement contexts. Federal AKS requires “knowing and willful” intent. California’s § 650, by contrast, focuses on the structure of the arrangement. If the payment is tied to volume or value of referrals, the structural reality often drives liability — the licensee’s subjective good faith generally is not the protection it is under federal law. Counsel can confirm how the current case law and enforcement guidance apply to a specific arrangement.

Penalties under § 650(i)

Violation of § 650 is a “wobbler” — chargeable as either a misdemeanor or a felony. The statutory penalty in § 650(i):

• First conviction: county jail up to one year, or state prison under Penal Code § 1170(h), or fine up to $50,000, or both imprisonment and fine.
• Second or subsequent conviction: state prison imprisonment under § 1170(h), or that imprisonment plus a $50,000 fine.

Beyond criminal exposure, a § 650 violation can trigger licensing-board discipline by the Medical Board, BRN, Dental Board, Chiropractic Board, or any other healing-arts board with jurisdiction over the licensee. A wide-ranging investigation may also pick up CPOM violations, unlicensed practice charges under § 2052, and aiding-and-abetting charges under § 2264 — frequently appearing alongside fee-splitting prosecutions in Medical Board enforcement actions.

B&P Code § 650(b): The Fair-Market-Value Safe Harbor

The headline rule against fee-splitting has a critical safe harbor in § 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.”

This is the provision that makes MSO management fees lawful in California — and not just flat-fee or cost-plus arrangements. Percentage-of-revenue management fees are explicitly permitted by the text of § 650(b), as confirmed by the California Court of Appeal in Epic Medical Management, LLC v. Paquette, 244 Cal. App. 4th 504 (2015). The court read § 650(b) as authorizing exactly the kind of arrangement at issue there — payment to a management company for management services based on a percentage of revenue — provided the consideration is commensurate with the value of the services furnished (and the fair rental value of any premises or equipment leased).

The operational requirement is fair-market-value (FMV) documentation. We cover this in detail in our MSA explainer — the analysis lists the services provided, costs incurred, market comparables, and methodology supporting the fee. Without that documentation, even a defensible arrangement looks vulnerable on audit.

Other § 650 Carve-Outs

Section 650 also contains exceptions in subsections (c) through (h):

• 650(c) — federally qualified health center (FQHC) arrangements that improve services to underserved populations and comply with federal law.
• 650(d) — proprietary referrals to laboratory, pharmacy, clinic, or health care facility where the licensee’s return on investment is based on capital invested, not the number or value of referrals; the referral is unlawful if there was no valid medical need.
• 650(g) — third-party advertising platforms that don’t recommend or endorse a specific licensee, with a fee commensurate with the service.
• 650(h) — effective January 1, 2022 — internet-based advertising, appointment booking, and information services that don’t recommend or endorse a specific licensee. This carve-out was a significant change for healthcare marketing platforms; it removed earlier California AG opinions treating paid provider listings as unlawful referral payments.

B&P Code § 650.01: California’s Self-Referral Statute (PORA)

Section 650.01, the Physician Ownership and Referral Act of 1993 (PORA), prohibits a different transaction than § 650(a):

“Notwithstanding Section 650, or any other provision of law, it is unlawful for a licensee to refer a person for laboratory, diagnostic nuclear medicine, radiation oncology, physical therapy, physical rehabilitation, psychometric testing, home infusion therapy, or diagnostic imaging goods or services if the licensee or their immediate family has a financial interest with the person or in the entity that receives the referral.”

PORA is California’s analog to the federal Stark Law, but with three significant differences:

• It covers only specific designated services — lab, nuclear medicine, radiation oncology, PT, rehab, psychometric testing, home infusion, and diagnostic imaging. Stark covers a different (though overlapping) list of “designated health services.”
• It reaches all payors, not just federally-reimbursed services.
• It applies to all licensees under the Business and Professions Code, not just physicians.

A “financial interest” under PORA is broadly defined and includes ownership interests, debt, loans, leases, compensation, remuneration, discounts, rebates, dividends, distributions, subsidies, and any other direct or indirect payment. Indirect financial relationships — including arrangements where the licensee owns a leasing entity — are explicitly captured.

The In-Office Ancillary Services Exception (§ 650.02(f))

The most important PORA exception is the in-office ancillary services exception:

“The prohibition of Section 650.01 shall not apply to any service for a specific patient that is performed within, or goods that are supplied by, a licensee’s office, or the office of a group practice.”

This exception lets a licensee perform PORA-listed services in the licensee’s own office without violating the self-referral rule. Most physician offices providing in-house lab draws, in-house imaging, or in-house PT under direct supervision can rely on this exception, provided the services are actually delivered in the office or group practice setting.

The exception has structural requirements for group practices defined in § 650.02 — the services must be billed in the name of the group, substantially all services of the group’s licensees must be provided through the group, and overhead and income must be distributed under previously agreed methods.

Other § 650.02 Exceptions

Section 650.02 contains additional exceptions for:

• Rural / underserved areas where no alternative provider exists within 25 miles or 40 minutes — with written disclosure to the patient (§ 650.02(a)).
• Nonprofit health-facility-controlled medical groups under H&S Code § 1206(l) (§ 650.02(d)).
• University-employed licensees referring within the university system (§ 650.02(e)).
• Cardiac rehabilitation services under physician supervision (§ 650.02(g)).
• Pathologist, radiologist, and radiation oncologist consultations (§ 650.02(j)).
• Workers’ compensation referrals under Labor Code § 139.3 / § 139.31 (§ 650.02(k)).

PORA enforcement runs alongside § 650(a) enforcement and can be charged together when the conduct involves both a referral relationship and a referring physician’s ownership interest.

The line between a defensible referral arrangement and a § 650 violation is structural — it lives in the contract, the FMV analysis, and the way the parties actually operate. Bay Legal, PC structures referral, lease, MSO, and self-referral arrangements to keep clinic owners on the right side of B&P §§ 650 and 650.01 across California. Call (650) 668-8000 or schedule a consultation at baylegal.com/contact.

The Federal Layer: Anti-Kickback Statute and Stark Law

For practices that bill federal programs, the federal regime applies in parallel with California law.

Federal Anti-Kickback Statute (AKS) — 42 U.S.C. § 1320a-7b(b)

The federal AKS prohibits knowingly and willfully offering, paying, soliciting, or receiving any remuneration to induce referrals for items or services reimbursable under a federal health care program. Key features:

• Federal programs only — Medicare, Medicaid, TRICARE, etc. Commercial and cash-pay patients are outside AKS scope.
• Intent requirement — “knowing and willful” — but federal courts apply the “one purpose” test: if any purpose of the payment is to induce referrals, even if there are legitimate purposes, the arrangement can violate AKS.
• Criminal penalties — substantial per-violation fines and significant imprisonment. The statutory amounts have been adjusted by Congress over the years; check the current text of 42 U.S.C. § 1320a-7b for the figures in effect at the time of an enforcement action.
• Civil penalties — fines per violation and treble the amount of the kickback under the Civil Monetary Penalties Law. The dollar amounts have been adjusted for inflation over time and continue to be updated by HHS-OIG.
• Program exclusion — federal program exclusion is a separate, devastating consequence.
• Safe harbors — 42 C.F.R. § 1001.952 lists narrow safe harbors for specific arrangement types (personal services contracts, space and equipment rentals, investment interests, employee relationships, etc.). Each safe harbor has specific structural requirements; substantial compliance with each element is required.

Federal AKS and CMP penalty amounts have been adjusted for inflation under 2018 amendments and subsequent HHS-OIG / CMS adjustments; consult published HHS-OIG guidance at oig.hhs.gov for the current amounts before relying on any specific figure.

Stark Law — 42 U.S.C. § 1395nn

The federal Stark Law prohibits a physician from referring Medicare patients for “designated health services” (DHS) to an entity with which the physician (or an immediate family member) has a financial relationship, unless an exception applies. Key features:

• Strict liability — no intent requirement. Either the arrangement fits an exception or it doesn’t.
• Designated health services include clinical lab services, PT, OT, speech-language pathology, radiology and imaging, radiation therapy, DME, parenteral and enteral nutrients, prosthetics, home health, outpatient prescription drugs, and hospital services.
• Penalties — denial of payment, refund of payments collected, civil money penalties, and potential False Claims Act exposure (treble damages plus per-claim penalties).
• Exceptions — Stark has detailed exceptions in 42 C.F.R. §§ 411.355–411.357 covering in-office ancillary services, bona fide employment, personal services arrangements, space and equipment rentals, and others. Each exception has technical requirements that must be satisfied to the letter.

Where Stark and AKS both apply, the analysis runs in parallel. An arrangement that fits a Stark exception still has to satisfy AKS (or fit an AKS safe harbor) for the same referrals to be lawful.

Where Fee-Splitting Risk Hides in Real Practice

The B&P § 650 enforcement record in 2024–2026 shows recurring patterns:

• MSO management fees without FMV documentation. The percentage-of-revenue structure is lawful under § 650(b), but the FMV analysis is essential.
• Marketing arrangements with referral-based compensation. Paying a marketing company per patient acquired (rather than per service delivered) raises § 650 risk. The § 650(g) and (h) carve-outs help, but only if the marketing service doesn’t recommend or endorse specific providers.
• Lease arrangements at above- or below-market rates. A landlord-tenant relationship can become a kickback when rent doesn’t reflect fair rental value.
• Medical director stipends. Flat monthly stipends to medical directors who don’t actually perform commensurate services look like fee-splitting where the practice generates significant revenue.
• Referral coordinator commissions. Paying an internal coordinator per patient referred to a specific specialist or facility is a textbook § 650 violation.
• Cross-referrals between physicians and physical therapy, imaging, or lab entities they own. Direct PORA exposure if the in-office ancillary exception doesn’t apply.
• “Joint ventures” with no operating substance. A shell joint venture that exists to distribute referral fees is exactly what § 650(a) and § 650.01 target.
• Free or below-cost services to referral sources. Free medical staff time, free office space, free billing services — any of these can be “consideration” under § 650(a).
• Per-click pharmacy or DME payments. Per-prescription or per-DME-order payments to providers are AKS violations on the federal side and § 650 violations on the state side.
• Group purchasing arrangements with rebates that flow to referring providers in ways that don’t track legitimate purchasing services.

Compliance Architecture: What a Defensible Clinic Looks Like

A practice that wants to manage fee-splitting risk in 2026 typically maintains:

1. A written FMV analysis for every material financial arrangement with another healthcare entity, refreshed annually.
2. A compliance policy that requires legal review of any arrangement where money flows between the practice and a referral source, vendor, or affiliated entity.
3. A medical director agreement with time tracking, services definition, and hourly or cost-plus compensation.
4. MSO arrangements structured under the friendly-PC + MSO model with defensible MSA terms, FMV-supported fees, and post-SB 351 / AB 1415 compliance.
5. In-office ancillary documentation for any PORA-listed services performed in the office — confirming the services satisfy § 650.02(f) requirements.
6. Federal AKS safe-harbor compliance for federal-payor arrangements — personal services, employee, lease, or investment safe harbors as appropriate.
7. Annual training for clinical and administrative staff on referral and marketing compliance.
8. Audit-ready files — FMV analyses, market comparables, board minutes, compliance reviews, and amendment histories.

The compliance cost is real. The alternative — a Medical Board investigation, AG enforcement, or federal AKS exposure — is more expensive.

Common Pitfalls and Red Flags

1. Per-patient or per-referral compensation to anyone — coordinator, marketer, vendor, referral source.
2. MSO management fee without FMV analysis — particularly percentage-of-revenue structures.
3. Flat medical director stipend not tied to actual hours and services.
4. Lease at above-market rent from a referring provider, or below-market from a referral source.
5. Free services to a referral source — staff time, office space, billing services.
6. Cross-referrals between affiliated entities without an applicable PORA exception.
7. Marketing arrangements that recommend or endorse specific providers in exchange for payment.
8. Federal-payor arrangements that don’t fit any AKS safe harbor.
9. Group purchasing rebates that flow to providers based on referrals.
10. Joint ventures with no operating substance — shells distributing referral fees.

Talk to a California Healthcare Compliance Attorney

Fee-splitting and self-referral exposure is structural — it lives in contracts, compensation formulas, and the operational reality of how money moves between healthcare entities. The defensible arrangements aren’t accidentally defensible; they’re built that way from the start, with documented FMV support, clear services definitions, and explicit awareness of where state and federal lines run.

If you’re structuring a referral arrangement, a marketing program, a lease, a medical director engagement, an MSO partnership, or a joint venture in California healthcare, attorneys at Bay Legal, PC review, structure, and document arrangements to manage B&P § 650, § 650.01, federal AKS, and Stark exposure across the state. Call (650) 668-8000 or schedule a consultation at baylegal.com/contact.

Frequently Asked Questions

What is fee-splitting in California healthcare?

Fee-splitting is the unlawful division of a professional fee or any other consideration in exchange for referring patients. It’s prohibited by B&P Code § 650(a), which captures any rebate, refund, commission, preference, patronage dividend, discount, or other consideration — monetary or otherwise — paid as compensation or inducement for referrals. The prohibition applies to all California healing-arts licensees regardless of the payor source.

Can a healthcare MSO be paid a percentage of revenue in California?

Yes. B&P Code § 650(b) permits percentage-of-gross-revenue compensation for management services if the fee is commensurate with the fair market value of the services furnished. The California Court of Appeal confirmed this in Epic Medical Management, LLC v. Paquette, 244 Cal. App. 4th 504 (2015). Documented FMV analysis is essential to defend the arrangement.

What is PORA in California healthcare?

PORA — the Physician Ownership and Referral Act of 1993, codified at B&P Code § 650.01 — is California’s physician self-referral statute. It prohibits a licensee from referring patients for specific designated services (lab, diagnostic nuclear medicine, radiation oncology, PT, physical rehabilitation, psychometric testing, home infusion therapy, and diagnostic imaging) to an entity in which the licensee or an immediate family member has a financial interest, unless an exception in § 650.02 applies — most commonly the in-office ancillary services exception.

What are the penalties for fee-splitting in California?

Under B&P Code § 650(i), violation is a wobbler — chargeable as a misdemeanor or felony. Penalties include up to one year in county jail or state prison under Penal Code § 1170(h), and a fine of up to $50,000. A second or subsequent conviction carries state prison imprisonment plus a $50,000 fine. Licensing-board discipline (Medical Board, BRN, Dental Board, etc.) typically runs in parallel.

Does the federal Anti-Kickback Statute apply alongside California’s anti-kickback law?

Yes, for practices that bill federal programs. The federal Anti-Kickback Statute (42 U.S.C. § 1320a-7b) prohibits knowingly and willfully offering, paying, soliciting, or receiving remuneration to induce referrals for federally-reimbursed items or services. It has criminal and civil penalties, federal program exclusion, and a list of narrow regulatory safe harbors. California’s § 650 reaches all payors, federal and non-federal; the federal AKS reaches only federal-program services. Both can be charged simultaneously when applicable.

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.