TL;DR — Key Takeaways
- A management services agreement (MSA) is the contract between a management services organization (MSO) and a professional medical corporation (PC). It governs the non-clinical services the MSO provides and how it gets paid.
- The MSA must respect California’s Corporate Practice of Medicine doctrine. The MSO cannot control clinical decisions, regardless of what the contract says.
- Compensation must be set at fair market value. Fee structures that look like a percentage of medical revenue often trigger fee-splitting concerns under BPC § 650.
- After SB 351 (effective January 1, 2026), MSAs involving private equity or hedge fund-backed MSOs cannot include certain non-compete and non-disparagement clauses, and those provisions are statutorily void.
- An MSA without an MSO is just a service contract. The terms are most often referred to as MSA when describing the friendly PC structure used to comply with CPOM.
Full Draft
What Is the Difference Between an MSO and a Management Services Agreement?
An MSO is the entity. A management services agreement is the contract.
The MSO is a separate corporate entity, typically an LLC, that provides non-clinical services to a medical practice. It can be owned by anyone — physicians, non-physicians, investors, private equity. The MSA is the document that defines what the MSO does, what it charges, and how it operates within California’s corporate practice constraints.
Together, the MSO and MSA form the friendly PC structure. The professional medical corporation (PC) holds the medical license and employs the clinicians. The MSO handles the rest. The MSA is the legal glue that connects them.
What Clauses Must a Management Services Agreement Include in California?
A California MSA generally addresses several core categories. Skipping any of them creates regulatory or contractual gaps.
Scope of services. A detailed list of the non-clinical services the MSO will provide. Common items: billing and collections, accounting, payroll, HR, marketing, IT and EHR support, supply chain, real estate and equipment leasing, scheduling, regulatory compliance support, and credentialing. The list should be specific. “All necessary management services” is too vague.
Compensation. How the MSO is paid. Fair market value compensation is required. Common structures include flat monthly fees, time-and-materials billing, fixed fees per service category, and hybrid arrangements. Percentage-of-revenue fees draw scrutiny and require careful structuring.
Term and termination. Initial term, renewal, and termination rights for cause and without cause. Restrictive termination provisions can be problematic when they create an effective lock-in.
Reservation of clinical authority. Language reserving exclusive control over clinical decisions to the PC and its physicians. This is the CPOM compliance backbone of the agreement.
Records and ownership. The PC owns the medical records. The MSO does not have ownership rights in patient files, charts, or clinical data.
Indemnification, insurance, and liability allocation. Standard commercial provisions, allocated to reflect each party’s role.
Compliance representations. Representations about CPOM, fee-splitting, anti-kickback, HIPAA, and any applicable state and federal healthcare laws.
How Should MSO Management Fees Be Structured to Avoid Fee-Splitting?
California Business and Professions Code § 650 prohibits splitting professional fees. Compensation arrangements between MSOs and medical practices must be structured to avoid characterizing the MSO’s payment as a share of professional fees.
Safer fee structures include flat monthly fees set at fair market value (FMV) for the services delivered, fee structures tied to operational metrics rather than medical revenue (square footage of space provided, number of full-time-equivalent staff, hours of services rendered), and time-and-materials billing for services with documented hourly rates.
Riskier structures include flat percentages of gross revenue, percentages of net medical income, and any compensation that varies with patient volume or referrals. These don’t automatically violate § 650, but they require detailed FMV justification and careful drafting.
An FMV opinion from a qualified valuation firm is the standard defense. The opinion documents that the management fee corresponds to the actual market value of the non-clinical services, not a share of medical practice profits. [VERIFY: confirm BPC § 650 current text and recent enforcement examples.]
Can an MSO Take a Percentage of Medical Revenue in California?
Possible but risky. California has not categorically banned percentage-of-revenue management fees, but courts and regulators have scrutinized them under BPC § 650, and practitioners typically avoid them where alternatives exist.
Where percentage fees are used, the structure should pass the safe harbor analysis: the percentage must reflect FMV of the services actually provided, the services must be genuine and documented, and the parties must be able to demonstrate that the fee is not a disguise for splitting professional fees.
After SB 351, MSO compensation structures are getting renewed scrutiny when private equity is involved. The statute does not directly prohibit percentage fees, but it gives the Attorney General new enforcement tools and explicit statutory authority to challenge interference with clinical judgment, which percentage fees can imply.
What Makes a Management Services Agreement Non-Compliant?
Several recurring problems push an MSA from compliant to non-compliant.
Clinical control language. Provisions giving the MSO authority over hiring or firing clinicians, setting patient volume, choosing diagnostic tests or treatment options, owning medical records, or directing referrals. Each of these is now explicitly addressed by SB 351 for PE-backed MSOs and by Medical Board guidance for all MSOs.
Above-FMV compensation. A management fee that exceeds fair market value can be recharacterized as a kickback or fee-split.
Termination penalties that lock in the relationship. If the PC cannot realistically exit the relationship, the MSO effectively controls the practice.
Asset ownership shifts. MSAs that transfer patient lists, EHR access, or clinical IP to the MSO disrupt the CPOM-required separation.
Non-compete and non-disparagement clauses against providers. After SB 351, these clauses in PE-backed MSAs are void. Even outside SB 351, California’s Business and Professions Code § 16600 already makes most non-competes against employees unenforceable. [VERIFY: BPC § 16600 and recent amendments.]
How SB 351 Changed MSAs in 2026
SB 351, effective January 1, 2026, codified specific limits on MSAs involving private equity groups and hedge funds. Codified at Health and Safety Code §§ 1190 and 1191. [VERIFY: confirm exact code sections.]
Under SB 351, a PE-backed or hedge fund-backed MSO cannot, through an MSA or otherwise, control or be delegated authority over: the determination of diagnostic tests, treatment plans, referrals, patient volume, hours worked by clinicians, ownership or content of medical records, hiring and firing of clinicians based on clinical competency, and contracting with payers.
MSAs cannot include provisions barring providers from competing after termination or from speaking publicly about quality of care, ethics, or revenue strategies. Sale-of-business non-competes (in genuine practice acquisitions) are still allowed.
Existing MSAs are not grandfathered. PE-backed practices needed to review and update their agreements before the January 1, 2026 effective date and remain subject to ongoing compliance obligations now that the law is in effect.
This article is for general information and is not legal advice. For guidance on your specific situation, contact Bay Legal, PC at 650-668-8000 to schedule a consultation.
