Physicians looking to bring on business partners, streamline operations, or scale a practice often turn to a Management Service Organization (MSO). Done right, an MSO arrangement can free a physician to focus on patient care while a dedicated business partner handles the operational side of running a practice. Done wrong, it can expose both the physician and the MSO to serious regulatory risk under California’s Corporate Practice of Medicine doctrine and its anti-kickback statutes.
This article explains what an MSO is, how it fits within California’s legal framework, what it can and cannot do, how it should be compensated, and what a well-drafted Management Services Agreement (MSA) should look like, including a significant new reporting requirement that took effect this year.
What Is an MSO?
A Management Service Organization is a third-party business entity that partners with a medical practice to handle non-clinical functions in exchange for a fee. The MSO takes on the administrative and operational side of the business — things like:
- Staffing support for non-clinical roles
- Billing and revenue-cycle coordination
- Marketing management
- Technology infrastructure
- Vendor management
- Facility leasing
- Operational workflow design
The medical practice itself, organized as a Professional Medical Corporation (PMC) — continues to deliver medical services and retains full control over clinical judgment. The MSO provides the infrastructure that lets the practice run efficiently, without ever stepping into the practice of medicine itself.
Why This Structure Exists: California’s Corporate Practice of Medicine Doctrine
California Business and Professions Code section 2400 prohibits corporations, lay entities, and unlicensed individuals from practicing medicine. This is the foundation of California’s Corporate Practice of Medicine doctrine, commonly known as CPOM. CPOM draws the line between the business functions an MSO may lawfully perform and the clinical functions that must remain in the hands of licensed professionals.
Because of CPOM, any entity that offers medical services must be organized as a professional corporation, and that corporation must be at least 51% owned by a licensed physician. Under California Corporations Code section 13401.5, the remaining 49% may be held by certain other licensed professionals such as nurse practitioners, psychologists, and optometrists, provided the number of licensed non-physician shareholders never exceeds the number of physician shareholders. A non-licensed person or entity cannot hold this minority interest. A medical spa, for example, cannot be structured as 51% physician-owned and 49% owned by a licensed esthetician or cosmetologist.
One important structural distinction: a medical practice cannot be organized as an LLC. An MSO, by contrast, can be, because it doesn’t provide professional medical services, as long as it stays within the boundaries described below.
What an MSO Cannot Do
The central rule is straightforward: an MSO cannot practice medicine, and it cannot control clinical decision-making. Its administrative role can never override a physician’s professional judgment, and it should never be positioned as directing the medical services of the PMC.
California courts have made clear that whether an arrangement between a physician and an MSO amounts to the unlicensed practice of medicine turns on whether the MSO exercises or has retained the right to exercise control or discretion over the physician’s practice. (People v. Superior Court (Cardillo) (2013) 218 Cal.App.4th 492, 498.) Courts have also emphasized that a strict, well-documented delineation between the medical elements of the practice and the non-medical elements delegated to the MSO supports a finding that the structure is compliant. (Epic Medical Management, LLC v. Paquette (2015) 244 Cal.App.4th 504, 509, 518.)
Specifically, an MSO in California cannot be involved in:
- Selection, oversight, and termination of clinical personnel
- Selection of medical equipment and supplies
- Setting the parameters under which the PMC contracts with third-party payors
- Decisions regarding coding and billing procedures
The Medical Board of California has acknowledged that a physician may consult with the MSO on these matters but, the decisions themselves cannot be made by the MSO alone. As the Board has put it, MSOs that arrange for, advertise, or provide medical services rather than simply providing administrative staff and services, are prohibited. In short, an MSO should never influence treatment decisions, supervision models, or clinical protocols. Operational oversight supports clinical judgment; it cannot substitute for or override it.
Getting MSO Compensation Right
MSO compensation is one of the most heavily regulated aspects of this relationship, under both federal and California law. The touchstone is fair market value: compensation must reflect the actual management services being provided, never the volume or value of patient referrals.
California’s anti-kickback framework is broader than federal law. Federal rules focus on referrals and self-referrals connected to Medicare, Medicaid, and Medi-Cal reimbursement. California Business and Professions Code section 650(a) goes further, prohibiting the offer, delivery, receipt, or acceptance of consideration to induce patient referrals regardless of whether the patient is enrolled in a federal program, covered by private insurance, or paying cash.
Section 650(b) provides a safe harbor: payment for services other than patient referrals — including a percentage of gross revenue or similar arrangement — is not unlawful if the compensation is commensurate with the fair market value of the services provided, or the fair rental value of any leased premises or equipment.
In practice, the safest approach is a flat fee, reevaluated periodically, every six months is common. Percentage-of-gross-revenue structures are not automatically unlawful; in Epic Medical Management, LLC v. Paquette, California courts upheld an MSO fee calculated as 50% of office medical services, 25% of surgical services, and 75% of pharmaceutical expenses, based on total revenues collected. But this approach carries risk. Since that decision, similar percentage-based arrangements have drawn increasing regulatory scrutiny, and are often characterized as impermissible fee-splitting. We generally advise against percentage-of-gross-revenue compensation, since it is more easily construed as tied to patient volume and referrals.
One structure to avoid altogether: compensation based on net revenue. Because net-revenue arrangements deduct expenses and effectively split profits with an unlicensed entity, they trigger a CPOM violation outright.
What Is an MSA — and Why It Matters
The Management Services Agreement, or MSA, is the contract governing the relationship between the PMC and the MSO. It defines the scope of the MSO’s services, how it will be paid, and where the line falls between administrative support and clinical authority.
A well-drafted MSA typically covers:
- Scope of Business Services: the specific non-clinical services the MSO will provide, and confirmation that clinical authority remains solely with the medical practice
- Manager’s Compensation: the fee structure and methodology, consistent with fair market value
- Term and Termination: the length of the agreement and the conditions for termination by either party
- Confidentiality, Recordkeeping, and Independent Contractor Status: protecting each party’s confidential information, recordkeeping obligations, and confirmation that the MSO is an independent contractor rather than an employee or clinical decision-maker
- Dispute Resolution, HIPAA, and Miscellaneous Provisions: mediation and arbitration clauses, a Business Associate Agreement governing the MSO’s handling of protected health information, and standard terms like governing law and assignment
The MSA is where compliance risk concentrates. The written agreement needs to match operational reality a contract that grants the MSO authority over clinical matters, or compensation that doesn’t reflect the actual management services provided, can create CPOM, fee-splitting, or other regulatory exposure, regardless of how the parties intended it to function.
Best Practices for a Compliant MSA
A well-drafted MSA protects both parties by keeping compensation at fair market value, keeping clinical and non-clinical functions strictly separate, and applying California law throughout. Key practices include:
- A flat fee based on fair market value, reassessed every six months
- A contract term of under three years
- A California choice-of-law provision — important because California’s CPOM and anti-kickback laws are stricter than many other states’, and MSAs governed by other states’ laws often include clauses that are unenforceable, or even unlawful, in California
- Statutory language expressly prohibiting compensation tied to referrals or patient volume, along with HIPAA compliance obligations
- A Business Associate Agreement addendum, or equivalent section, obligating the MSO to safeguard protected health information
- A strict, explicit delineation of clinical versus non-clinical functions
- Mediation and arbitration provisions
Common MSA Pitfalls to Avoid
- Long contract terms anything over three years, such as a ten-year term
- Post-termination non-compete provisions generally unenforceable against a physician in California, with limited exceptions
- Compensation tied to net revenue or profits for example, defining revenue as gross billings minus operating expenses, with the MSO taking 50% of that net figure
- Compensation tied to patient volume, injections, or medication dosage
- Excessive liquidated damages provisions that don’t reflect a reasonable estimate of actual damages and instead function as a penalty on the PMC for terminating — for example, requiring the PMC to pay three years’ worth of fees to exit the agreement
- Right of first refusal clauses or anti-assignment provisions
- Choice-of-law clauses selecting a state other than California
What Changed for MSOs in 2026
Effective January 1, 2026, California enacted AB 1415, introducing a new reporting requirement for certain MSOs. The law creates a category called “noticing entities,” which includes hedge funds, private equity funds, MSOs, and new business entities formed to enter into agreements or transactions with a healthcare entity.
Under AB 1415, noticing entities must notify California’s Office of Health Care Affordability (OHCA) at least 90 days before closing certain material transactions involving healthcare entities payers, providers, and integrated delivery systems. OHCA regulations define a “material transaction” as one involving:
- A high-revenue healthcare entity — meaning California revenue of $25 million or more, and
- A material change — meaning the transfer of 25% or more of voting rights in that entity, or a transaction with a fair market value of $25 million or more.
Any MSO contemplating a merger, acquisition, sale, or other change in ownership or control should confirm whether AB 1415’s notice requirement applies well before closing. Missing this notice window can delay or derail an otherwise well-planned transaction.
The Bottom Line
MSOs remain a valuable and legally sound way for physicians to bring in business expertise and operational support without compromising clinical independence. The structure only works when the MSA is drafted carefully: compensation must reflect fair market value, clinical and non-clinical functions must stay clearly separated, and the agreement must be built around California’s not another state’s regulatory framework. As AB 1415 shows, the compliance landscape for MSOs continues to evolve, and agreements that were compliant a few years ago may need a fresh look today.
Thakur Law Firm, APC has drafted a multitude of MSAs that are compliant with California law and has litigated contractual disputes between physicians and MSOs. Contact us for a consultation on drafting or reviewing your MSA at [email protected] or 714-740-7172.