Step-by-Step Overview of MSOs for Medical Practices in California

Management Services Organizations (MSOs) are widely used in California to separate clinical care from business operations. The usual structure pairs a physician-owned professional corporation (PC) that delivers medical services with an MSO that provides nonclinical management under a Management Services Agreement (MSA). California permits this model, but it is constrained by the corporate practice of medicine (CPOM) doctrine and fee-splitting restrictions. In addition, if the practice serves Medicare or Medicaid patients, federal fraud-and-abuse laws such as the Stark Law and the Anti-Kickback Statute (AKS) must be considered. Recent California legislation—Senate Bill 351 and Assembly Bill 1415, both effective January 1, 2026—adds new oversight and reinforces limits on private equity or investor control in MSO arrangements.

1. What Services an MSO Can Manage

In California, an MSO may manage all nonclinical aspects of a medical practice. The key boundary is that the MSO cannot practice medicine or control how medicine is practiced. Typical permissible MSO functions include leasing and maintaining office space, providing front-desk and billing staff, payroll and human resources administration, IT systems, scheduling and call-center support, marketing and branding, purchasing supplies, and general financial and operational administration. These services are considered business support rather than clinical care.

A plain-English example is helpful. An MSO can run the practice’s website, buy medical supplies, hire receptionists, and provide billing software. It can also process insurance claims and send statements as an administrative function. What it cannot do is decide how long a patient visit should last, which tests should be ordered, how patients are triaged, or which physician should treat a particular patient. Those are clinical judgments that must remain with the licensed physicians in the PC.

2. CPOM and Fee-Splitting Restrictions

California’s CPOM doctrine blocks non-physicians and business entities from owning a medical practice or exerting control over clinical decision-making. The PC must be owned and controlled by physicians, and the PC—not the MSO—must control the delivery of care, the supervision of clinicians, and medical policies. MSAs should expressly state that the MSO has no authority over diagnosis, treatment, clinical protocols, or professional medical staffing decisions. Regulators evaluate not only paperwork but also how the parties operate in reality.

California also prohibits improper fee-splitting with unlicensed persons. A frequent risk area is the MSO management fee. When MSO compensation is tied to a percentage of professional fees or collections, it can look like the MSO is sharing in medical revenue, which may violate California fee-splitting rules even if a similar method might qualify under a federal Stark exception. Safer approaches in California include fixed monthly fees, cost-plus fees based on documented overhead, or tiered fees based on neutral operational drivers such as the number of clinicians supported rather than revenue or patient volume. Fees should be supported by fair-market-value (FMV) analysis.

Plain-English comparison: paying the MSO “10% of all patient collections” creates fee-splitting risk because the MSO’s return rises automatically with clinical revenue. Paying the MSO “$75,000 per month for staffing, facilities, and IT, adjusted to FMV each year” is more defensible, assuming the number matches FMV and the services are actually provided.

3. Federal Concerns: Stark Law and Anti-Kickback Statute

Even if an MSO arrangement complies with California CPOM, federal requirements can still apply where federal program patients or referrals are involved. Two main federal statutes matter most.

The Stark Law generally prohibits physicians from referring Medicare patients for designated health services (DHS)—for example, imaging, lab testing, durable medical equipment, or physical therapy—if the physician has a financial relationship with the DHS entity, unless a specific exception applies. In PC-MSO settings, Stark risk appears when the MSO or its affiliates own DHS entities that receive referrals from the physicians. Stark compliance typically depends on a written agreement, commercially reasonable services, and compensation that is FMV and not tied to referral volume or value.

The Anti-Kickback Statute prohibits giving or receiving anything of value to induce or reward referrals of services reimbursed by federal health programs. MSO payments or side arrangements can trigger AKS concerns if they function as referral incentives. Like Stark, AKS frameworks focus heavily on FMV, written contracts, and ensuring compensation is not linked to the flow of patients.

Plain-English examples: A Stark issue can arise if physicians in the PC own a stake in a lab owned by the MSO platform and refer Medicare patients there without exception. An AKS issue can arise if the MSO gives physicians below-market rent in exchange for sending patients to an affiliated imaging center. Both scenarios become higher risk if the financial benefit changes with referral volume.

4. Compliance Worksheet for California PC-MSO Arrangements

A practical way to review compliance is to walk through the structure using a consistent checklist. First, confirm that the professional corporation is fully physician-owned and that physicians control the PC’s board and key decisions. Next, verify that the MSA draws a clear line between business services and clinical authority and that the MSO does not hire, fire, or discipline clinicians for clinical reasons. Then evaluate the MSO fee methodology and confirm that it is fixed or cost-based and supported by an FMV analysis, rather than a percentage of practice collections.

After that, map any affiliated entities that provide DHS or other ancillary services. Identify whether physicians refer federal program patients to those affiliates and, if so, whether a Stark exception and AKS safe harbor are realistically satisfied. Finally, confirm the arrangement is actually followed in day-to-day operations, that records are maintained, and that the PC retains practical oversight rights, including meaningful termination provisions if the MSO overreaches. Recent California reforms emphasize this “substance over form” approach.

5. Governance Tips to Keep the Model Defensible

Governance is essential because CPOM enforcement often turns on control in practice. The physician owners should hold regular board meetings, document clinical policy decisions, and maintain written job descriptions showing that clinical leadership roles report to the PC, not the MSO. The MSA should include a clinical independence clause, confirm PC ownership of patient records and clinical equipment where required, and clarify that any MSO recommendations on staffing or operations are advisory only.

MSO compensation should be retested against FMV at defined intervals, especially when the practice expands, new service lines are added, or payer mix changes. If the MSO provides marketing, the advertising should identify the physician practice as the care provider and avoid implying that the MSO delivers medical services. For private-equity or investor-backed MSOs, governance documents should be checked against SB 351’s limits on investor influence and AB 1415’s OHCA reporting triggers.

Do and Don’t Guidance

Do

1. Use a detailed written MSA that lists only non-clinical services and contains explicit clinical carve-outs.
2. Set MSO fees using FMV support, and prefer fixed or cost-plus structures over revenue percentages.
3. Maintain active physician governance with documented meetings and clear clinical authority lines.
4. Identify all DHS and referral pathways early to confirm Stark and AKS compliance frameworks.
5. Train both PC and MSO staff on CPOM boundaries and the prohibition on referral-based incentives.

Don’t

1. Use percentage-of-collections management fees without specialized California counsel review.
2. Allow MSO owners or investors to approve clinical hires, protocols, or treatment decisions.
3. Create discounts, bonuses, or side benefits that rise with referral volume or patient flow.
4. Assume CPOM compliance settles Stark or AKS exposure when federal program patients are present.
5. Rely on “paper separation” if, in daily operations, the MSO effectively controls patient care.

How Leiva Law Firm Can Assist

Leiva Law Firm advises California medical practices and MSOs on structuring compliant PC-MSO arrangements that can scale without violating CPOM or fee-splitting restrictions. The firm drafts and negotiates MSAs with strong clinical independence provisions, reviews MSO compensation models for FMV support, and evaluates governance frameworks to confirm that physicians retain genuine authority over care delivery. When federal program patients or ancillary services are involved, the firm also conducts high-level Stark and AKS risk reviews and helps align agreements with applicable exceptions and safe harbors. These services assist practices in building defensible operating models while reducing regulatory exposure.

To schedule a consultation with our business lawyer, contact Leiva Law Firm at (818) 519-4465.