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Friendly PC Model Under Fire: California AG Continues Corporate Practice of Medicine Crackdown in Carbon Health Settlement

By   Christine Parkins Johnson
07.07.26
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Signaling a focus on enforcing California's prohibition on the corporate practice of medicine (CPOM), California Attorney General Rob Bonta announced a significant settlement with Carbon Health Technologies Inc., 12 affiliated professional medical corporations, and Carbon Health co-founder and former CEO Eren Bali. The settlement resolves allegations involving violation of CPOM, as well as consumer protection, advertising, and billing practices. While the settlement does not establish binding precedent and was entered without an admission of wrongdoing, it provides important insight into the types of arrangements between management services organizations (MSOs) and professional medical corporations (PCs) that regulators may view as violations of California law. The settlement also reinforces that California regulators are evaluating not only formal ownership structures, but also how MSO-PC arrangements function in practice.

Key Takeaways

The settlement is notable because it requires Carbon Health, which operates over 60 clinics across eight states, to restructure aspects of its friendly PC model. The settlement enjoins Carbon Health from the following:

  • The management services agreement (MSA) will not give the MSO complete control over the PC's advertising, payor negotiations, selection of medical equipment, or decisions regarding the hiring, firing, or compensation of licensed medical professionals.
  • The MSO will not hold any ownership interest in professional corporations, including through an assignable option agreement granting the MSO the right to acquire ownership interests.
  • The MSO will not maintain financing arrangements that require PCs to obtain exclusive funding from the MSO on above-market or economically coercive terms.

The Attorney General alleged that the MSO-PC arrangement gave the MSO influence beyond administrative support functions permitted under California laws. According to the complaint, the AG focused not only on formal governance rights, but also on the MSO's alleged day-to-day influence over operational and financial decisions traditionally reserved to physicians, including financial control, contracting authority, compensation structures, and staffing oversight.

The complaint also focused on succession and continuity provisions, including assignable stock transfer rights and mechanisms allowing the MSO to cause ownership of the professional corporations to transfer to physicians of the MSO's choosing. The AG alleged that these provisions effectively made the professional corporations captive PCs whose existence and ownership were dependent on the MSO's discretion. 

In addition, the settlement suggests regulators may increasingly examine whether financing arrangements create economic leverage that undermines physician independence.

Under the proposed settlement, in addition to structural and operational reforms, Carbon Health agreed to pay $4.4 million in civil penalties, while former CEO Eren Bali agreed to pay an additional $100,000 penalty personally. The AG also required Carbon to fix certain billing practices and misleading statements about in-network status. Notably, the AG pursued the enforcement action despite Carbon entering bankruptcy proceedings.

Background on CPOM and the Current Enforcement Landscape

California's CPOM prohibition generally bars unlicensed individuals and entities from owning or controlling medical practices or employing physicians. The Medical Board of California distinguishes between clinical decisions that must remain with licensed physicians and administrative functions that may be delegated to unlicensed individuals or non-clinical entities such as MSOs. California's CPOM restrictions are among the strictest in the country, although approaches vary significantly by state. To comply with these rules while easing the administrative and financial burden of running a medical practice, many California physician organizations use the "Friendly-PC" model, under which a physician-owned PC contracts with an MSO for administrative support such as accounting, marketing, and HR services. Per Medical Board guidance, the PC must retain control over clinical operations, staffing decisions, financial matters, and medical judgment.

The Carbon Health settlement is part of a broader series of California CPOM developments in 2026. Earlier this year, the Attorney General filed an amicus brief in Art Center Holdings, Inc. v. WCE CA Art, LLC supporting a strict interpretation of California's CPOM restrictions, including arguing that the contractual provisions giving the MSO the power to replace the physician shareholder of the PC violate California's CPOM prohibition. In May 2026, the AG announced a settlement with Aspen Dental involving alleged violations of California's prohibition on the corporate practice of dentistry, which functions similarly to CPOM.

These developments follow the January 1, 2026, effective date of Senate Bill 351, which expanded California's restrictions on private equity and hedge fund involvement in physician and dental practices and codified several aspects of California's CPOM framework. Collectively, these developments indicate heightened scrutiny of the degree of influence MSOs and investors may exercise over physician organizations, particularly in technology-enabled and private equity-backed healthcare platforms. The Attorney General's office also appears willing to require operational and governance changes in addition to financial penalties.

Looking Ahead

The Carbon Health settlement offers meaningful insight into how California regulators may evaluate future MSO-PC arrangements under CPOM principles. Notably, the settlement does not prohibit compliant MSO-PC structures generally. Rather, it reflects California's increasingly aggressive scrutiny of arrangements viewed as giving unlicensed entities excessive operational, financial, or governance control over medical practices. Organizations operating MSO-PC structures in California may wish to reassess governance provisions, financing arrangements, succession mechanisms, and operational oversight practices in light of the Attorney General's recent enforcement posture. Organizations should consider reviewing:

  • succession, option, and equity transfer provisions;
  • rights to designate, approve, or replace physician shareholders;
  • financing, security, and lending arrangements;
  • management fee structures, and other features that may suggest economic dependence;
  • approval rights, consent rights, and reserved powers;
  • branding and marketing controls;
  • payor contracting controls;
  • physician independence in clinical and operational decision-making; and
  • board minutes, investor materials, internal communications, and operational practices that could suggest de facto MSO control.

Christine Parkins Johnson is counsel in the Los Angeles office of DWT. For questions or more insights, please reach out to Christine or another member of our healthcare team and sign up for our alerts.

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