TL;DR — Key Takeaways

• California Business and Professions Code § 650 prohibits offering, paying, or receiving anything of value as compensation for referrals or as a share of professional fees.
• Violations can be charged as misdemeanors or felonies, and they create license discipline exposure for physicians and dentists.
• Fair market value (FMV) is the central defense. Compensation that reflects FMV for actual services rendered, independent of referral volume, generally does not violate § 650.
• Percentage-of-revenue management fees and marketing arrangements that pay per patient or per procedure are the structures most often investigated.
• Federal anti-kickback law (42 U.S.C. § 1320a-7b) applies separately to federal healthcare program patients (Medicare, Medicaid). The two laws overlap but are not identical.

What Counts as Fee-Splitting Under California Business and Professions Code Section 650?

California BPC § 650 prohibits offering, delivering, receiving, or accepting any compensation, rebate, commission, preference, or other consideration as compensation or inducement for referring patients, clients, or customers to any person, regardless of any membership, proprietary interest, or co-ownership relationship. [VERIFY: confirm current § 650 text — the statute has been amended periodically.]

The statute applies broadly across healthcare professions: physicians, dentists, optometrists, chiropractors, psychologists, and others licensed under the Business and Professions Code. It captures both the payor and the payee.

Three categories of conduct are most often at issue: direct payments for referrals (cash kickbacks); compensation arrangements structured as service fees but actually tied to referrals; and management or marketing fees that exceed FMV for the services provided.

Can an MSO Take a Percentage of Gross Revenue Without Violating Fee-Splitting Rules?

It can, but the structure has to hold up. Percentage-of-revenue MSO fees are not categorically prohibited in California, and they are widespread in the market. They are also among the most scrutinized arrangements when regulators investigate.

The compliant version requires that the percentage corresponds to fair market value of the actual non-clinical services the MSO provides; that the services are real, documented, and consistent with the management services agreement; and that the percentage does not function as a profit share or a payment for referrals.

The risky version pays a percentage of gross revenue regardless of services delivered, includes patient marketing or referrals as part of the MSO’s deliverables, or correlates with patient volume in a way that makes the fee look like a payment for clinical activity.

An FMV opinion from a qualified valuation firm strengthens the defense. The opinion documents the methodology and supports the conclusion that the fee corresponds to actual services.

What Compensation Structures Are Prohibited Between an MSO and a Medical Practice?

Several structures are categorically problematic.

Compensation tied to patient referrals. Any payment that varies based on who or how many patients are referred to a particular service or specialist.

Compensation tied to specific procedure volume. Fees that increase when clinicians perform more high-margin procedures (cosmetic injections, IV drips, weight loss prescriptions) implicate § 650 because they incentivize procedure volume rather than reflecting administrative work.

“Per click” or “per patient” marketing fees. Marketing fees that pay an MSO or a third-party referral company a fixed amount per converted lead can be characterized as paying for referrals.

Above-FMV management fees. Fees that exceed the documented value of the services delivered get characterized as disguised payments for the medical practice’s revenue stream.

Equity arrangements that function as kickbacks. Selling equity in the MSO at a discount to physicians who refer patients can be treated as fee-splitting.

How Does Fair Market Value Prevent a Fee-Splitting Violation?

Fair market value is the conceptual line between a service fee and a kickback.

If the MSO genuinely provides $30,000 worth of monthly billing, marketing, IT, and HR services, and the management fee is $30,000, the arrangement is consistent with FMV and is a service contract. If the MSO provides those same services and the fee is $80,000, the extra $50,000 is exposure — it has to be explained as something other than a share of medical revenue.

FMV is established through a defensible valuation methodology: market comparables, cost-build-up analysis, or income-based approaches, applied by an independent valuation firm familiar with healthcare. The valuation is documented in a written opinion that the parties can produce in audit or litigation.

FMV is not a single number. It’s a range, and the parties have flexibility within that range. What the parties cannot do is set fees outside that range without justification and assume regulators won’t notice.

What Are the Penalties for Fee-Splitting in California?

Penalties under § 650 include both criminal and professional consequences.

Criminal. Violations can be charged as a misdemeanor (up to one year in county jail) or as a felony, depending on the circumstances. Felony charges can include up to three years of imprisonment and significant fines. [VERIFY: confirm current § 650 penalty range.]

License discipline. The Medical Board can suspend or revoke a physician’s license for fee-splitting. Similar consequences apply for dentists, chiropractors, and other licensees under their respective boards.

Civil and administrative. Federal healthcare programs may pursue parallel enforcement under Medicare/Medicaid anti-kickback laws (42 U.S.C. § 1320a-7b), which apply to federal program patients and bring False Claims Act exposure as a separate matter.

Contract unenforceability. Contracts that violate § 650 can be void as against public policy, leaving the parties without a legal remedy to enforce payment obligations.

Federal Anti-Kickback vs. California Fee-Splitting

California § 650 and the federal anti-kickback statute (AKS) are related but distinct.

• 650 applies to all California healthcare businesses regardless of payer. AKS applies only to services reimbursed by federal healthcare programs, primarily Medicare and Medicaid.

AKS has formal regulatory “safe harbors” — specific structures (like personal services contracts, space rentals, and FMV management agreements) that, if met, immunize an arrangement from AKS liability. § 650 does not have a parallel codified safe harbor framework, though FMV analysis serves a similar function in practice.

A cash-pay California aesthetic practice with no federal program patients is subject to § 650 only. A primary care practice that bills Medicare is subject to both. Dual analysis is the norm for any healthcare business with federal-program revenue.

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.