Key Takeaways

• An MSO (management services organization) is a non-clinical business entity that provides administrative, operational, and management services to a physician-owned professional corporation under a written Management Services Agreement (MSA).
• The MSO/PC structure exists because California’s Corporate Practice of Medicine (CPOM) doctrine bars non-physicians from owning or controlling medical practices. The MSO holds the business operations; the PC holds the clinical practice. They contract.
• B&P Code § 650(b) allows MSO compensation based on a flat fee, cost-plus, or even a percentage of gross revenue — provided the compensation 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).
• SB 351 (effective January 1, 2026) prohibits private equity groups and hedge funds from interfering with clinical judgment in physician and dental practices and voids certain non-compete and non-disparagement clauses in MSO agreements.
• AB 1415 (effective January 1, 2026) adds MSOs to the “noticing entities” that must give the Office of Health Care Affordability (OHCA) at least 90 days’ advance written notice of covered material change transactions.

What Is an MSO in Healthcare?

A management services organization — an “MSO” — is a separate business entity, usually structured as an LLC or corporation, that delivers the non-clinical services a healthcare practice needs to operate. The MSO doesn’t see patients. It doesn’t bill in its own name for clinical services. It provides the practice’s operational backbone: billing, marketing, real estate, equipment, technology, scheduling, HR, compliance infrastructure, and management oversight of everything that isn’t clinical.

The MSO sits alongside a separate clinical entity — almost always a professional corporation (PC) owned by one or more licensed physicians. The PC delivers care; the MSO runs the business. They’re connected by a written Management Services Agreement (MSA) that defines the services, the fees, and (critically) the lines that the MSO is not allowed to cross.

This split-entity structure exists because California’s Corporate Practice of Medicine (CPOM) doctrine doesn’t let non-physicians own medical practices, employ physicians, or control clinical decisions. Without an MSO, lay capital cannot legally participate in the economics of a California medical practice. With a well-structured MSO, lay investors and operators can participate in the business side — provided the MSO stays on its side of the line.

The same structure is used outside medicine for analogous reasons: dental MSOs serving dental corporations, veterinary MSOs serving veterinary corporations, and so on. The principles are the same; the underlying corporate-practice rules vary by profession.

[suggested internal link: practice area page on Healthcare MSO and Management Structures]

Quick CTA: If you’re a physician evaluating an MSO partnership, an investor scaling a multi-location healthcare business, or a non-physician operator trying to figure out the only way to legally participate in California healthcare economics, the MSO/PC architecture is where every conversation starts. Bay Legal, PC designs and reviews MSO structures, MSAs, and friendly-PC arrangements across California. Call (650) 668-8000 or schedule a consultation at baylegal.com/contact.

Why MSOs Exist: The CPOM Problem

California’s CPOM doctrine rests on three statutory pillars and decades of case law:

• B&P Code § 2052 prohibits unlicensed practice of medicine.
• B&P Code § 2400 declares that corporations have no professional rights to practice medicine.
• Corp. Code § 13401.5(a) requires that at least 51% of a California medical corporation be owned by licensed physicians and surgeons.

The California Supreme Court reinforced these rules in People ex rel. State Board of Medical Examiners v. Pacific Health Corp., 12 Cal. 2d 156 (1938), and again in Conrad v. Medical Board of California, 48 Cal. App. 4th 1038 (1996). The doctrine prohibits lay corporations from:

• Employing physicians for the purpose of practicing medicine.
• Controlling clinical decisions (test selection, referrals, prescribing, treatment plans, panel size, clinical hours).
• Owning patient medical records.
• Setting parameters that constrain a physician’s clinical judgment.

The problem: a modern healthcare business needs capital. It needs technology investment. It needs sophisticated operations. It needs multi-location scale. None of that fits inside a small physician-owned PC. The MSO is the legally-sanctioned workaround.

[suggested internal link: practice area page on Corporate Practice of Medicine]

How the MSO/PC Structure Works

A compliant California MSO arrangement has three core components:

1. The Professional Corporation (PC)

• Owned at least 51% by California-licensed physicians and surgeons.
• Holds the clinical license, payor enrollment, patient relationships, and medical records.
• Employs (or contracts with) all clinicians.
• Retains exclusive authority over clinical decisions.
• Often described as a “friendly PC” when the physician owner has been recruited specifically to hold the clinical entity for an MSO-backed business — the term reflects that the physician owner and the MSO are aligned operationally and economically, not that the structure is somehow sham.

2. The MSO

• Can be owned by lay investors, non-physician operators, or physician owners — any combination.
• Provides the non-clinical operating infrastructure: real estate, equipment, IT, billing, marketing, scheduling, HR, finance, compliance, and management services.
• Does not employ clinicians for the purpose of practicing medicine.
• Cannot exercise clinical control regardless of contract language.

3. The Management Services Agreement (MSA)

The MSA is the operative contract between the MSO and the PC. A well-drafted MSA does five things:

• Defines the services the MSO will provide — typically a long, specific list, not a catch-all clause.
• Sets the compensation — flat fee, cost-plus, percentage of gross revenue, or a hybrid. See the next section for what the law requires.
• Preserves clinical authority to the PC — clinical decisions, hiring and firing of clinicians, treatment protocols, panel size, hours, referrals, and patient care all remain with the PC.
• Defines the term, renewal, and termination
• Addresses ancillary issues — non-clinical employee assignment, lease structure, equipment ownership, IP, insurance, and indemnification.

A “succession” arrangement is sometimes included so the MSO can substitute a new physician owner of the PC if the original owner leaves. This is permitted but increasingly scrutinized — particularly after SB 351 — and needs careful drafting.

What the MSO Can Be Paid: B&P § 650(b) and the Epic Medical Management Case

This is the question that drives most MSO compliance disputes. The answer turns on B&P Code § 650, which has two parts that matter:

• 650(a) prohibits kickbacks — any consideration paid as compensation or inducement for referring patients.
• 650(b) carves out a safe harbor:

“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.”

In plain English: a percentage-of-revenue management fee is lawful if the percentage reflects the actual fair market value (FMV) of the services the MSO is delivering. A percentage-of-revenue arrangement that has no relationship to FMV — or that’s a disguised payment for referrals — is unlawful fee-splitting.

The California Court of Appeal addressed this directly in Epic Medical Management, LLC v. Paquette, 244 Cal. App. 4th 504 (2015). The case involved a physician who had contracted with an MSO for non-clinical management services under a Management Services Agreement that paid the MSO based on percentages of office, surgical, and pharmaceutical revenue. The physician argued the percentage-based structure was illegal under § 650.

The court rejected the argument, observing that § 650(b) “permits precisely the arrangement contemplated… payment to a management company for management services based on a percentage of revenue — as long as the consideration is commensurate with the value of the services furnished (and facilities and equipment leased). Given this flexibility in section 650, there is no absolute prohibition on consideration being paid a management company — even one which occasionally refers patients.”

Practical takeaways for MSO compensation structures:

• Flat monthly fee — simplest structure; needs to track actual services and overhead delivered.
• Cost-plus — MSO bills its actual costs plus a defined margin; widely used and well-supported under FMV analysis.
• Percentage of gross revenue — permitted under § 650(b) and Epic, but requires documented FMV support showing the percentage reflects the actual value of the management services and facilities, not the volume of referrals.
• Tiered or hybrid structures — also permitted, with the same FMV documentation requirement.

The piece that ties any of these structures together is the FMV analysis. The MSO and PC should maintain (and refresh annually) a written analysis that documents the services provided, the costs incurred, market comparables, and the methodology used to set the fee. Without that documentation, the arrangement is more vulnerable to fee-splitting scrutiny from the Medical Board, the AG (especially post-SB 351), and federal anti-kickback enforcement where federal program reimbursement is involved.

Mid-content CTA: The FMV analysis is where most MSO arrangements get challenged — the percentage that “feels right” in year one stops feeling right as the practice scales. Bay Legal, PC structures MSO compensation arrangements and prepares supporting FMV documentation for healthcare businesses across California. Call (650) 668-8000 or schedule a consultation at baylegal.com/contact.

What the MSO Cannot Do (CPOM Lines)

The MSO can run almost everything. It cannot run anything clinical. Specifically, the MSO cannot:

• Hire or fire physicians or other clinicians for the purpose of practicing medicine. The PC employs and terminates clinicians; the MSO can recruit candidates and run the operational paperwork, but the decision rests with the PC.
• Set clinical schedules that override clinical judgment about patient care.
• Determine treatment plans, prescribe medications, order diagnostics, or make referrals.
• Set patient panel sizes or visit lengths in ways that constrain clinical judgment.
• Own patient medical records. Records belong to the PC.
• Bill in its own name for clinical services. The PC bills; the MSO is paid by the PC under the MSA.
• Make medical-staff or clinical-credentialing decisions.

An MSO that drifts into any of these areas — even with good intentions — risks CPOM violations regardless of what the MSA says. California courts and the Medical Board look at the practical reality of who controls clinical decisions, not just the contract.

SB 351 (2025): New CPOM Rules for Private Equity and Hedge Funds

SB 351 (Cortese, Ch. 409, Stats. 2025) was signed October 6, 2025, and took effect January 1, 2026. It codifies long-standing CPOM principles specifically in the context of physician and dental practices, with a particular focus on private equity (PE) and hedge fund involvement.

The key provisions:

1. SB 351 defines “hedge fund” and “private equity group,” with carve-outs for hospitals, hospital systems, and public agencies.
2. Clinical-control prohibitions. PE groups and hedge funds cannot interfere with a physician’s or dentist’s clinical judgment — including diagnostic test selection, referral and consultation decisions, ultimate patient responsibility, panel size, or clinical hours. They cannot own patient records, make clinical-personnel employment decisions, or set parameters that restrict clinical judgment.
3. Voided non-compete and non-disparagement clauses. SB 351 voids non-compete and non-disparagement provisions in MSO and 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 confidentiality clauses protecting material non-public information remain valid (unless they suppress legally required disclosures).
4. The California Attorney General can seek injunctive relief and equitable remedies, plus attorney’s fees.
5. Reservation clause. SB 351 does not replace existing CPOM — it adds to it.

For MSO structures, the practical impact is on contract drafting. MSAs between PE/hedge fund-backed MSOs and physician practices now need to be reviewed for non-compete and non-disparagement language that won’t survive enforcement, and for governance terms that might cross into clinical control. Existing MSAs that pre-date SB 351 are not grandfathered — the new restrictions apply.

SB 351 by its terms targets physician and dental practices. It doesn’t directly reach nursing-practice MSOs or MSOs serving other professions. But the underlying CPOM rules still apply to anything that constitutes the practice of medicine, and AG enforcement may extend by analogy. The AG’s office may issue implementing or interpretive guidance over time; counsel can confirm current published guidance for any specific arrangement.

AB 1415 (2025): OHCA Notice Now Reaches MSOs

AB 1415 (Bonta, Ch. 641, Stats. 2025) was signed October 11, 2025, and took effect January 1, 2026. It amends the California Health Care Quality and Affordability Act (H&S Code §§ 127500.2, 127501, 127507) and adds § 127501.5.

• New “noticing entities.” MSOs, private equity groups, hedge funds, newly created entities formed for healthcare transactions, and certain other entities that own or operate providers are added to the list of entities required to file pre-transaction notices with the Office of Health Care Affordability (OHCA) within HCAI.
• 90-day advance notice. Covered noticing entities must give at least 90 days’ written notice before a covered material change transaction.
• MSO data reporting. Under new § 127501.5, MSOs must submit data and other information to OHCA on a basis to be defined in implementing regulations.
• Duplicative reporting eliminated where multiple notice obligations would otherwise apply.

For MSO transactions, the practical impact is on deal timing. Acquisitions of MSO-supported practices, sales of MSOs, and certain internal restructurings now need to be planned around the 90-day OHCA notice window. OHCA’s implementing regulations continue to develop; confirm current status at hcai.ca.gov before relying on specific procedural steps.

[suggested internal link: practice area page on OHCA Transaction Notice Compliance]

When the MSO Model Makes Sense — and When It Doesn’t

The MSO/PC structure is the right answer for healthcare businesses that need any of the following:

• Outside capital in a practice that delivers services constituting the practice of medicine.
• Multi-location scale across cities, regions, or specialties.
• Operational infrastructure — technology, billing systems, marketing engines, real estate, equipment — that a single physician-owned PC can’t efficiently build alone.
• Multi-state expansion of a telehealth or platform-based business, where each state’s clinical entity sits under one MSO.
• Non-physician operators (NP entrepreneurs, healthcare technology founders, experienced practice managers, investors) who want to participate in the business economics of a clinical practice they cannot themselves own.

The MSO/PC structure is not the right answer for:

• A solo physician practice with no investor capital and no plans to scale. A simple medical PC is the cleaner structure.
• A practice that wants to bypass CPOM. The MSO is a compliance structure, not a workaround.
• A non-physician owner who wants clinical control. SB 351 just made this more dangerous, not less.

Common Pitfalls and Red Flags

1. MSA that gives the MSO clinical control — even with careful “non-clinical only” language at the front, drafted-in-veto rights over clinical hires, panel size, or treatment protocols are CPOM violations.
2. No FMV documentation for the management fee — particularly common with percentage-of-revenue structures.
3. Same person controlling both entities — when the “friendly physician” is purely nominal and the MSO calls all the shots, the structure looks like a sham. Epic gave more flexibility on fees, but did not bless lay control of the practice.
4. Cross-entity employees rendering both clinical and management services without clear allocation — particularly problematic for clinical support staff.
5. MSA that voids itself by including post-SB 351-prohibited non-compete or non-disparagement clauses with PE/hedge fund counterparties.
6. Missed OHCA notice under AB 1415 on a covered transaction.
7. Paper medical director — a physician owner who never actually exercises clinical oversight. This pattern has been a common focus of Medical Board enforcement in recent years.
8. Bundled flat fees that ignore actual cost variance — a fee that doesn’t track services delivered loses its FMV defensibility over time.
9. Records ownership in the MSO — patient records belong to the PC.
10. MSO billing in its own name for clinical services — the PC must be the billing entity.

Talk to a California Healthcare MSO Attorney

The MSO/PC architecture is one of the central structural tools in California healthcare business law, but it’s also the kind of structure that’s easy to draft into trouble. Between the FMV documentation requirement, the SB 351 contract limitations, the AB 1415 notice obligations, and the bedrock CPOM rules, there’s a lot to keep aligned.

If you’re a physician evaluating an MSO partnership, an investor structuring a healthcare acquisition, or an operator scaling a multi-location practice, attorneys at Bay Legal, PC design and review MSO structures, draft MSAs, prepare FMV documentation, and handle SB 351 and AB 1415 compliance across California. Call (650) 668-8000 or schedule a consultation at baylegal.com/contact to walk through your specific structure.

[suggested internal link: contact / schedule a consultation page] — anchor in closing CTA

Frequently Asked Questions

What is an MSO in healthcare?

An MSO — management services organization — is a non-clinical business entity (typically an LLC or corporation) that provides administrative, operational, and management services to a clinical professional corporation under a written Management Services Agreement. The MSO doesn’t see patients or bill for clinical services. It supports the practice’s business operations while the PC handles all clinical care.

Why does California require the MSO/PC structure for healthcare investment?

California’s Corporate Practice of Medicine doctrine (B&P Code § 2400) prohibits non-physicians from owning medical practices, employing physicians, or controlling clinical decisions. The MSO/PC structure separates the clinical entity (a physician-owned PC) from the business entity (the lay-ownable MSO), letting outside capital participate in the business side while clinical authority remains with licensed physicians.

Can an 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 fair-market-value analysis is essential to defend the arrangement.

What is a Management Services Agreement?

A Management Services Agreement (MSA) is the written contract between an MSO and a professional corporation. It defines the services the MSO provides, the compensation, the term, and (critically) the boundaries — preserving clinical authority to the PC while delegating non-clinical functions to the MSO. A well-drafted MSA is the operational backbone of every compliant MSO/PC arrangement.

How did SB 351 and AB 1415 change MSO arrangements in 2026?

SB 351 (effective January 1, 2026) restricts private equity and hedge fund involvement in clinical decision-making at physician and dental practices and voids certain non-compete and non-disparagement clauses in MSO agreements. AB 1415 (also effective January 1, 2026) adds MSOs to the list of entities required to give the Office of Health Care Affordability (OHCA) at least 90 days’ advance notice of covered material change transactions. Both apply to existing as well as new MSO arrangements.

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.