Key Takeaways

• The friendly-PC + MSO model uses two separate entities: a physician-owned California professional corporation (formed under Cal. Corp. Code § 13401.5) that holds the clinical practice, and a separately-owned management services organization (usually an LLC) owned by the non-licensee buyer.
• The Management Services Agreement between the two entities is the central operating document. Its terms — services scope, fee structure, control provisions, term and termination, change of control — determine whether the arrangement survives regulatory scrutiny.
• The California AG’s 2026 enforcement pattern (Aspen Dental, Art Center Holdings, Carbon Health) has identified specific MSA structures the AG considers impermissible: assignable options giving the MSO the right to acquire the PC’s ownership; exclusive above-market financing arrangements; complete MSO authority over clinician hiring, firing, and compensation; MSO control over advertising, payor negotiation, and equipment selection.
• Percentage-of-revenue management fees remain lawful under B&P § 650(b) and Epic Medical Management, LLC v. Paquette, 244 Cal. App. 4th 504 (2015), but only with fair-market-value documentation and without corresponding MSO control over clinical decisions.
• SB 351 (effective January 1, 2026) voids specific non-compete and non-disparagement clauses in employment arrangements between physicians and PE- or hedge fund-affiliated MSOs or PCs. Sale-of-business non-competes under B&P § 16601 remain enforceable within specific limits.
• AB 1415 (effective January 1, 2026) may impose 90-day OHCA notice obligations on MSO transactions depending on the acquisition vehicle and capital source. OHCA final regulations were expected in August 2026 as of drafting.

The friendly-PC + MSO model is the default compliant structure for non-licensee participation in California healthcare, and it works well when it is built properly. When it is built poorly, it produces the arrangements the California Attorney General has spent 2026 dismantling. The June 2026 Carbon Health settlement identified specific MSA provisions the AG considers per se impermissible. The May 2026 AG amicus brief in Art Center Holdings attacked continuity-agreement structures that gave the MSO the right to replace the PC’s physician-owner. And SB 351 (effective January 1, 2026) voided specific non-compete and non-disparagement clauses in PE- and hedge fund-affiliated MSAs by statute.

A non-licensee buyer building a friendly-PC + MSO structure at acquisition needs to know both what the compliant version looks like and what the AG is prepared to enforce against. This post walks through the architecture, the MSA provisions that matter, and the operational discipline the structure requires to survive scrutiny over time.

The Two-Entity Architecture

Every compliant friendly-PC + MSO structure starts with the entity separation.

The Professional Corporation (PC). A California medical corporation formed under Cal. Corp. Code § 13401.5, at least 51% owned by California-licensed physicians. Allied professionals in specific enumerated categories (registered nurses, physician assistants, and others listed in § 13401.5(a)) may hold up to 49% as minority shareholders. No unlicensed person may hold any shares. The PC is the clinical entity: it holds the license, employs the clinical staff (physicians, NPs, PAs, RNs performing delegated functions), owns the patient records, holds the payor enrollments, and controls all clinical decisions. All patient billing flows through the PC first.

The Management Services Organization (MSO). A separate entity — typically a California LLC — owned by the non-licensee buyer or investor group. The MSO provides non-clinical services to the PC under the MSA: facilities, equipment, IT and billing infrastructure, marketing, non-clinical staffing (front-desk, administration), HR and payroll administration (for MSO employees only — the PC employs its own clinical staff), purchasing, and business development. The MSO does not employ clinical staff, does not make clinical decisions, does not control patient records, and does not bill patients directly for medical services.

The Management Services Agreement (MSA). The contract between the PC and the MSO that defines the relationship. The MSA specifies what non-clinical services the MSO provides, what fee the PC pays the MSO for those services, what clinical decisions and records remain under the PC’s exclusive control, and how the relationship is governed (term, termination, change of control, dispute resolution).

The three components have to work together, and each component has to actually operate the way the documents describe. A friendly-PC + MSO structure that looks correct on paper but fails in operation — where the MSO makes clinical decisions, where the MSO exercises effective control over the physician’s practice, where the fee structure sweeps most of the practice’s revenue without corresponding services, is the structure the California AG identifies as an indirect corporate practice of medicine.

The MSA: Provisions That Matter

The MSA is where the AG’s 2026 enforcement pattern lands most directly. Every provision the AG has publicly criticized traces to a specific MSA clause. Every provision the AG considers compliant is one that maintains the operational separation the doctrine requires.

Services scope. The MSA lists the non-clinical services the MSO provides. The scope should be specific enough to describe what the MSO actually does and consistent with what the MSO actually delivers. Boilerplate “any and all administrative services” language is neither useful nor safe — it invites arguments that the MSO’s scope encompasses clinical functions the MSO cannot lawfully perform. Practical scope categories include facilities and leasehold, non-clinical equipment provision and maintenance, IT and billing infrastructure, marketing and business development, non-clinical staffing and HR administration, purchasing and supply chain, and administrative services (accounting, tax preparation coordination, insurance procurement for the MSO’s assets).

Fee structure. The management fee is where the Epic / B&P § 650(b) analysis lives. Three common structures:

• Flat fee — a fixed monthly or quarterly amount. Simplest to defend on FMV grounds; the FMV analysis is a comparison of the fee to the fair-market cost of comparable services in comparable settings.
• Cost-plus — the MSO’s actual costs plus a defined markup. FMV support comes from the reasonableness of both the underlying costs and the markup. Requires careful accounting.
• Percentage of revenue — a defined percentage of the PC’s collections. Lawful under B&P § 650(b) as confirmed by Epic Medical Management, LLC v. Paquette, 244 Cal. App. 4th 504 (2015), but requires FMV documentation showing the percentage-of-revenue payment approximates the fair-market cost of the services actually provided. FMV needs to be refreshed annually.

The California AG’s 2026 enforcement has focused on percentage-of-revenue fees that (a) exceed what FMV would support, (b) function economically as revenue extraction rather than payment for services, or (c) are paired with MSO control over clinical decisions. Percentage-of-revenue fees remain lawful when properly supported and structured; they attract scrutiny when they are not.

Clinical control provisions. The MSA must specify that the PC retains exclusive control over clinical decisions, patient records, clinician hiring and firing decisions (informed by clinical performance, not MSO business preferences), and clinical protocols. The MSO cannot dictate diagnostic tests, referrals, patient panel size, hours worked by physicians, or treatment decisions. SB 351 codifies these prohibitions specifically for PE- and hedge fund-affiliated MSOs; the same restrictions apply through the underlying CPOM doctrine to non-PE MSOs.

Term and termination. The MSA has a defined term (typically five to ten years) and termination provisions that respect the PC’s clinical autonomy. Termination-for-cause provisions should not give the MSO tools to remove or replace physicians for clinical decisions the MSO disagrees with — this is one of the concerns the AG raised in the Art Center amicus brief and the Carbon Health settlement.

Change of control. When the MSO’s ownership changes (which happens on the buyer’s exit), the MSA typically continues in place, but change-of-control provisions specify how (and whether) the PC’s physician-owner consents. A compliant structure gives the physician-owner meaningful voice; a non-compliant structure gives the MSO the right to substitute the physician-owner for a different physician of the MSO’s choice — the specific arrangement the AG’s Art Center amicus attacked.

Dispute resolution. Standard commercial provisions. California law governs; venue in California courts or California arbitration. SB 351’s voiding of specific non-compete and non-disparagement clauses applies here as well — MSAs cannot enforce non-competes against physicians beyond what B&P § 16601 permits for sale-of-business situations.

The Carbon Health Benchmarks

The June 2026 Carbon Health settlement identified specific MSA arrangements the AG considers impermissible. A non-licensee buyer structuring a friendly-PC + MSO on acquisition should benchmark against these:

• No assignable option agreements giving the MSO the right to acquire the PC’s ownership interests. The AG treated these as evidence of indirect corporate ownership.
• No exclusive above-market financing arrangements where the MSO provides financing to the PC on terms the MSO controls. The AG treated these as instruments of control rather than ordinary financing.
• No MSO authority over clinician hiring, firing, and compensation for clinical staff. Personnel decisions for clinical staff belong with the PC.
• No MSO control over advertising, payor negotiations, and equipment selection where those functions bear on clinical decisions. The MSO can provide marketing services; the PC should retain approval authority over clinical representations. The MSO can facilitate payor relationships; the PC should retain the payor participation decisions. The MSO can procure equipment; the PC should have approval authority over clinical equipment selection.

The Carbon Health arrangements were extreme in aggregate — a single MSA that combined all of these features. A well-structured MSA can include marketing services and equipment procurement and payor-relationship facilitation without crossing the AG’s lines, provided the clinical authority remains with the PC and the arrangement does not aggregate into effective MSO control over the practice.

Operational Discipline: The Post-Closing Layer

A compliant friendly-PC + MSO structure at closing is not the same as a compliant structure two years later. Operational discipline is what keeps the structure defensible over time.

Separate books and bank accounts. The PC has its own bank accounts and its own accounting. Patient payments flow to the PC first; the PC then pays the MSO by invoice against the MSA. The MSO’s revenue from the PC is treated as service revenue for the MSO’s tax and accounting purposes. The two entities never commingle funds. Merchant processing accounts belong to the PC for patient billing; the MSO’s separate merchant processing (if any) handles only MSO-owned revenue lines.

Clinical decisions and records under PC control. The PC’s employees make clinical decisions; the PC’s charts document them; the PC’s medical director oversees clinical protocols and standardized procedures. The MSO’s role is non-clinical.

Annual FMV refresh. The management fee’s FMV support is documented at closing and refreshed annually. FMV analysis reflects changes in services provided, market comparables, and the practice’s operational profile. Percentage-of-revenue arrangements particularly benefit from documented annual review, because revenue growth without corresponding growth in services can shift the FMV analysis.

Personnel discipline. MSO employees never make clinical decisions or hold clinical staff supervision authority. Clinical staff report through the PC’s clinical leadership; MSO staff report through the MSO’s operational leadership. Where the same individual serves both entities (uncommon but possible for narrow functions), the individual’s roles are documented separately.

Medical director oversight. The PC’s medical director actually functions in the role — conducts or supervises good-faith exams, reviews and approves standardized procedures under 16 CCR § 1474, is immediately available during procedures, manages clinical incidents. Compensation for the medical director role is separate from compensation for shareholder participation and reflects services actually provided.

Change management. When the practice grows, adds services, or changes personnel, the MSA and the operational documents get updated to reflect the changes. Static documentation for a growing practice creates gaps between what the documents describe and what the practice actually does — a source of exposure the AG’s Art Center amicus and Carbon Health settlement both drew attention to.

SB 351 and the Non-Compete / Non-Disparagement Overlay

For non-licensee buyers using PE or hedge fund capital, SB 351 (effective January 1, 2026) voided specific non-compete and non-disparagement clauses in physician employment and MSA arrangements. Physicians cannot be bound by post-employment non-competes that restrict clinical practice, and cannot be bound by non-disparagement clauses that prevent them from commenting on quality of care, ethics, or financial practices.

Two carve-outs remain:

• B&P § 16601 sale-of-business non-competes. A physician who sells substantial goodwill in a transaction can be bound by a non-compete tied to the sale. Structured properly, this is enforceable within the specific geographic and temporal limits § 16601 allows. Structured as a disguised employee non-compete, it is not.
• Confidentiality of material nonpublic information. Confidentiality clauses protecting nonpublic business information of the PE group or hedge fund remain enforceable, provided the clause does not prevent required legal disclosures or prohibit public commentary on quality of care.

For non-PE, non-hedge fund buyers, SB 351’s specific prohibitions do not apply, but B&P § 16600 already voids most employee non-competes in California independent of the healthcare context. Non-licensee buyers building post-closing employment structures for physicians should assume non-competes are unenforceable and plan retention around compensation, culture, and equity participation instead.

AB 1415 and the OHCA Notice Overlay

For MSO transactions triggering AB 1415 notice, the 90-day advance-notice window has to be built into the deal timeline from the LOI. OHCA’s proposed emergency regulations (May 15, 2026) apply the notice framework to (among others) PE and hedge fund transactions crossing a 5% ownership threshold, MSO-to-MSO transactions, transactions through newly-created acquisition vehicles, and real-estate sale-leaseback transactions involving provider facilities. Final regulations were expected in August 2026 as of drafting; confirm current status at hcai.ca.gov before finalizing deal timing.

The practical rule for non-PE, non-hedge fund single-clinic buyers: AB 1415 notice typically does not apply. For any other structure, assume it may and build the timeline accordingly.

When to Bring Counsel Into the Structuring

Before the LOI is signed. Structuring conversations at LOI drive every downstream commercial term — the physician-partner’s role and compensation, the fee structure, the term and termination provisions, the change-of-control mechanics, and the AB 1415 notice timing. Pre-LOI is when structural adjustments are easy; post-LOI they become disruptions.

Bay Legal, PC represents non-licensee buyers of California treatment businesses through structural counsel, MSA drafting, and post-closing compliance. Call (650) 668-8000 or schedule a consultation at baylegal.com/contact.

Frequently Asked Questions

What is a friendly-PC + MSO structure?

A two-entity structure in which a physician-owned California professional corporation delivers clinical care and holds patient records, and a separately-owned management services organization (typically an LLC) provides non-clinical administrative and operational support under a Management Services Agreement. The physician holds and controls the PC; the buyer or investor holds the MSO; the MSA governs the fee, the operational separation, and the change-of-control mechanics. The structure is standard in California because CPOM prohibits lay ownership of the clinical entity.

Can the MSO’s management fee be a percentage of the PC’s revenue?

Yes. Percentage-of-revenue management fees are lawful under B&P § 650(b) and Epic Medical Management, LLC v. Paquette, 244 Cal. App. 4th 504 (2015), provided the fee is supported by fair-market-value documentation and is not paired with MSO control over clinical decisions. The California AG has scrutinized percentage-of-revenue arrangements where the fee exceeds FMV or functions economically as revenue extraction rather than payment for services. FMV should be documented at inception and refreshed annually.

What MSA provisions has the California AG considered impermissible?

The June 2026 Carbon Health settlement identified several: assignable option agreements giving the MSO the right to acquire the PC’s ownership interests; exclusive above-market financing arrangements the MSO controls; MSO authority over clinician hiring, firing, and compensation; and MSO control over advertising, payor negotiations, and equipment selection. A well-structured MSA can include marketing services and equipment procurement without crossing these lines, provided clinical authority remains with the PC.

Does SB 351 apply to my acquisition if I am not private equity or a hedge fund?

SB 351’s specific contract prohibitions (voiding non-compete and non-disparagement clauses) apply by statutory language to PE- and hedge fund-affiliated MSOs and PCs. The underlying Corporate Practice of Medicine doctrine that SB 351 codifies applies to every non-licensee owner regardless of capital source. For non-PE buyers, SB 351’s specific prohibitions do not apply, but B&P § 16600 already voids most employee non-competes in California independent of the healthcare context.

Does AB 1415 apply to my transaction?

It depends on the acquisition vehicle and capital source. Single-clinic acquisitions by an individual buyer or a family office without private equity or hedge fund capital typically will not trigger AB 1415 notice under OHCA’s proposed 5% threshold. Multi-location roll-ups, transactions involving PE or hedge fund capital, and transactions through newly-created acquisition vehicles are more likely to trigger notice. OHCA’s final regulations were expected in August 2026 as of drafting; confirm current status at hcai.ca.gov before finalizing deal timing.

Talk to a California Healthcare Acquisition Attorney

Bay Legal, PC represents non-licensee buyers of California treatment businesses through structural counsel, friendly-PC + MSO formation, MSA drafting, and post-closing compliance. If you are structuring an acquisition or want to review your post-closing structure against 2026 enforcement benchmarks, call (650) 668-8000 or schedule a consultation at baylegal.com/contact.