California’s Corporate Practice of Medicine Doctrine After Carbon Health: Is the “Friendly PC” Model Still Viable?

On June 26, 2026, California Attorney General Rob Bonta announced a $4.5 million settlement with (i) Carbon Health Technologies, Inc. (Carbon Health), a management services organization (MSO), (ii) Carbon Health’s affiliated professional corporations (PCs) in California, and (iii) an individual who served as one of Carbon Health’s co-founders and its former CEO. The settlement resolved a complaint filed by the California Attorney General alleging, among other things, that Carbon Health violated California’s Unfair Competition Law¹ by using an MSO-PC structure that resulted in the corporate practice of medicine (CPOM).²

The case, filed in Los Angeles Superior Court, is the most significant CPOM enforcement action to date against a venture-backed, multi-state urgent and primary care platform. It also arrives against the backdrop of rising scrutiny of private equity’s involvement in health care via MSO-PC arrangements.

Allegations Regarding Carbon Health’s MSO-PC Structure

As alleged in the Attorney General’s complaint, Carbon Health formed a friendly PC model in 2016, pursuant to which (i) Carbon Health’s physician co-founder incorporated and became sole shareholder of Carbon Health Primary Care of California, P.C. (CHPCC), and (ii) Carbon Health and CHPCC entered into a management services agreement (MSA) whereby Carbon Health would serve as CHPCC’s exclusive provider of administrative and management services.

The complaint further alleged that the MSA included several contractual levers that gave Carbon Health “undue and unlawful control” over CHPCC, and that Carbon Health used this “same unlawful playbook” with its other affiliated PCs in California. Those MSA provisions included:

• requiring Carbon Health’s consent for the PC’s routine corporate and financial matters (e.g., entering into any asset purchases, debt, or contracts with a value over $1,000, amending the PC’s articles of incorporation or bylaws, or issuing shares or paying dividends);

• granting Carbon Health a security interest in the physician-shareholder’s shares of the PC; and

• requiring the PC’s physician-shareholder to transfer his shares to a physician of Carbon Health’s choosing in the event of a breach or default of the MSA by the PC, or upon termination of the MSA for any reason.

In contrast, the MSA permitted Carbon Health to assign its obligations to a wholly-owned affiliate or successor without the PC’s consent.

The Attorney General alleged that the MSA effectively made CHPCC and Carbon Health’s other affiliated PCs “captive” PCs, “the existence and ownership of which were wholly dependent upon [Carbon Health’s] discretion.”

The Attorney General’s complaint further alleged that in 2019, Carbon Health updated its MSAs with California-based PCs in a manner that was even more problematic. Specifically, the complaint claimed that the updated MSAs gave Carbon Health “complete authority over advertising; payor negotiations; selection of medical equipment; and the hiring, firing, and compensation of licensed medical professionals associated with the ‘Carbon Health’ brand name.” In addition, the updated MSA installed a new physician shareholder in CHPCC and Carbon Health’s other affiliated PCs, who granted Carbon Health an “assignable option” in the PCs. If Carbon Health exercised that option, ownership of the PC would “immediately transfer” to a physician of Carbon Health’s “sole choosing.” The updated MSA permitted Carbon Health to exercise the option if (i) the management services agreement between Carbon Health and the PC was terminated, expired, or not renewed; (ii) Carbon Health, in its “sole discretion,” determined that the shareholder’s continued ownership of the PC would “impair” Carbon Health’s ability to provide management services under the MSA; (iii) the shareholder obligated the PC to incur debt to any entity other than Carbon Health; or (iv) the shareholder attempted to sell the PC, in whole or in part, to any physician not designated by Carbon Health.

In addition to arguing that Carbon Health’s MSAs were problematic, the Attorney General also alleged that Carbon Health’s “conduct” “reflect[ed] and confirm[ed]” its “undue and unlawful” control over its affiliated PCs. As an example, the complaint noted that Carbon Health’s Board “discussed matters that can only be decided by a physician licensed in the State of California,” including reductions in clinical staffing, increasing billing complexity, payor contracting, physician workload, and physician compensation.

The Attorney General alleged that, by engaging in the corporate practice of medicine, Carbon Health committed acts or practices that were “unlawful, unfair, or fraudulent,” resulting in “unfair competition” under California law, meriting civil penalties and an injunction.

Settlement Agreement

As part of its settlement agreement with the California Attorney General, Carbon Health is enjoined from engaging in the corporate practice of medicine, “including but not limited to, the following”:

• having an MSA that grants the MSO “complete authority over advertising, payor negotiations, selection of medical equipment, and the hiring, firing, and compensation of licensed medical professionals”;

• granting an MSO “any ownership interest” in a PC, including through an “assignable option agreement” that grants the MSO “the right to acquire such ownership interests for its own account”; and

• creating a “revolving credit agreement” that requires affiliated PCs to “seek financing exclusively from the [MSO] at an above market rate”; provided, however, that an MSO may “take a first priority lien” in certain of the affiliated PC’s assets “with conventional lender restrictions.”

In his press release, Attorney General Bonta made clear that this means that Carbon Health will need to “revise its corporate structure” to ensure that the physician-owned PCs have “independent control over medical decisions and how the practices operate.”

Increased Scrutiny of MSO-PC Structures

The Carbon Health case arrives amidst other recent developments demonstrating increasing scrutiny of private equity/MSO-PC arrangements across the country and at the state and federal level. For example, federal and state regulators continue to focus on private equity’s role within the context of increasing oversight of healthcare dealmaking generally. Certain states, such as Oregon, have significantly restricted how MSOs may support and interact with professional medical corporations. California’s SB351, effective since January 1, 2026, has codified existing CPOM constraints along with adding new restrictions for private equity groups and hedge funds.

Additionally, the California Attorney General’s March 2026 amicus brief in Art Center Holdings defending the CPOM ban³ sets out the Attorney General’s strict interpretation of California’s CPOM prohibition, and argues that contractual arrangements giving a lay entity the right to replace a medical practice’s physician-owner violate CPOM by giving the MSO direct control over physician employment and indirect control over the broader operations of the PC. The brief further argues that certain MSO-PC structures can erode the legal separation CPOM requires between the delivery of professional medical services and lay control, with potential consequences for cost and quality of care.

Finally, the recent Aspen Dental settlement further illustrates this trend.⁴ The settlement resolves allegations related to the corporate practice of dentistry in which Aspen Dental allegedly exceeded its business management and administrative services role by, among other things, interfering with and unlawfully directing the practice, ownership, and management of dentistry in California through the use of unilateral decision-making about office buildouts and equipment purchases (without a clearly-identified independent dentist owner for each office), as well as the use of sales promotions and incentives for clinical staff.

Together, these developments raise the following question for California health care entities using a “friendly PC” or MSO-PC structure: to what extent is the model still viable?

Is the Friendly PC Model Done in California?

While the Carbon Health case illustrates how an MSO arguably can cross the line from permissible business support to the unlicensed practice of medicine, it does not do away with the friendly PC model. In fact, in his press release, Attorney General Bonta emphasized that the settlement shows that “healthcare businesses can be restructured to protect patients, preserve physicians’ independent medical judgment, and comply with California’s laws.”

Based on the issues flagged by the California Attorney General in his complaint and the settlement agreement, an MSO-PC model would not appear to run afoul of California’s CPOM prohibition if, among other things:

• the PC retains decision-making authority over clinical decisions, staffing levels, payor negotiations, advertising, selection of medical equipment, and the hiring, termination, and compensation of clinicians;

• the MSO’s role is limited to management support functions in the realm of administrative and business services, and any MSO approval rights of PC decisions are limited to genuine business management functions and are narrow in scope; and

• the MSO is not granted any security interests, pledges, or assignable options over PC shares, and there is no mechanism (direct or contingent) by which the MSO can unilaterally replace the physician owner.

Of course, the devil will be in the details, so California-based MSOs looking to mitigate potential CPOM risk should consider carefully reviewing their MSO-PC model. Among other things, an MSO may wish to (i) assess whether their current MSAs include any replacement rights, security interests, assignable options, or consent thresholds that functionally transfer control, and (ii) document physician authority over all clinical operations, both through the preparation of policies and procedures requiring such authority and the documentation of the parties’ implementation of those policies and procedures. MSOs that fail to consider whether their business model requires any restructuring may find themselves in the uncomfortable position of having their business model restructured by the California Attorney General’s Office.

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1. Cal. Bus. & Prof. Code § 17200 et seq. ↩︎
2. Cal. Bus. & Prof. Code § 2400 et seq; § 2052 et seq. ↩︎
3. Brief of the California Attorney General as Amicus Curiae in Support of Neither Party, Art Center Holdings, Inc. v. WCE CA Art, LLC, No. B338625 (Cal. Ct. App. Mar. 30, 2026). ↩︎
4. Stipulation for Entry of Final Judgment and Permanent Injunction, People v. Aspen Dental Mgmt., Inc., No. 26STCV14023 (Cal. Super. Ct. filed May 4, 2026). ↩︎