California Attorney General Escalates Attack on PC-MSO Model: What Venture-Backed, Private Equity, and Digital Health Companies Need to Know

Foley & Lardner LLP (Foley) represented Carbon Health in negotiating a settlement agreement with the California Attorney General (AG) to resolve alleged corporate practice of medicine (CPOM) violations against Carbon Health, a technology-based primary and urgent care company that recently emerged from Chapter 11 bankruptcy.

Although litigation in the courts may have yielded a different result, the California AG settlement with Carbon Health is part of a broader trend of increased regulatory scrutiny of PC-MSO structures and further signals that the California AG has focused its crosshairs on health care arrangements that may implicate California’s corporate practice restrictions, including arrangements used by private equity-backed, venture-backed, and digital health companies operating in California.

Foley’s representation of Carbon Health in the settlement with the California AG provided important insight into the operational arrangements and management functions that California enforcement agencies may view as presenting heightened CPOM risk in PC-MSO arrangements.

Settlement Terms

The complaint filed by the California AG includes allegations that Carbon Health violated California’s CPOM prohibition. Notably, the complaint does not allege any inappropriate medical care. Carbon Health denies wrongdoing of any kind but agreed to resolve the allegations by entering into the settlement agreement.

The settlement includes a total of $4.4M in civil penalties, most of which is identified in the stipulation for final judgment as a prepetition general unsecured claim under the Carbon Health bankruptcy. The settlement is conditioned on approval by both the federal bankruptcy court and state court. In an unusual departure from typical corporate practice-related enforcement, the California AG individually named and assessed a $100K civil penalty against the Co-Founder and Chairman of Carbon Health. California regulators’ willingness to look beyond the corporate entities and target individuals demonstrates that corporate executives, officers, directors, and founders may be exposed to personal liability in connection with PC-MSO structures.

Key Takeaways

The following highlights the top takeaways for private-equity backed, venture-backed, and digital health companies looking to minimize enforcement risk when navigating the evolving regulatory landscape:

• Review MSO Influence on PC Ownership: PC-MSO arrangements often include an agreement commonly referred to as an “assignable option agreement,” “stock transfer restriction agreement,” or “succession agreement.” Companies should reassess existing provisions in these agreements that could be viewed as granting control over physician ownership or clinical functions, including an MSO’s contractual right to trigger or select the identity of a physician replacement.

• Review MSO’s Role Under Management Services Agreement: Companies should evaluate whether management services agreements (MSA) between the management services organization (MSO) and professional corporation (PC) could be viewed as inappropriately giving the MSO control over advertising, payor negotiations, billing and coding, medical records, selection of medical equipment, or the hiring, firing, and compensation of health care professionals.

• Evaluate Opportunity for a Business Breakup: Companies should consider whether PC-MSO contracts create the perception that the PC is captive to the MSO. There is less enforcement risk when contracts allow PC owners to easily terminate the MSA without losing ownership of their practice.

• Review Lending Arrangements: CPOM risks associated with any deficit funding, line of credit, or other lending arrangement between an MSO and PC can be managed by ensuring such arrangements reflect market terms and do not require a PC to exclusively seek financing from the MSO.

• Evaluate Branding Agreements: Companies should be cautious of relying on the branding of the MSO in California. CPOM risk can be mitigated by ensuring patients are aware of the identity of the PC operating the clinical practice, such as through conspicuous disclosures at the point of care.

• Monitor the Trend of Increased Enforcement. The Carbon Health settlement follows other recent California AG activity involving corporate practice restrictions and MSO-PC structures, including the California AG’s amicus brief filed on March 30, 2026, in Art Center Holdings, Inc., et al. v. WCE CA Art, et al., a case involving a physician medical practice owner and private equity-backed management services organization (MSO), and the California AG’s announcement of a settlement agreement on May 7, 2026, with Aspen Dental involving alleged violations of California’s prohibition on the corporate practice of dentistry. We anticipate additional enforcement actions by the California AG will be forthcoming.

The recent enforcement in California presents compliance challenges for PC-MSO structures. Health care companies operating in multiple states, including through telemedicine and digital health platforms, should evaluate whether restructuring is needed to ensure compliant operations in California. We will continue to monitor California enforcement activity and any legislative changes that affect PC-MSO structures and related MSAs.

The Foley team representing Carbon Health in the California AG action includes partners Thomas (T.J.) Ferrante, Jason Mehta, and Adam Hepworth, and associates Samantha Gerencir and Ashley Grabowski.

Foley is here to help you address the short- and long-term impacts in the wake of this enforcement action. We have the resources to help you navigate these and other important legal considerations related to PC-MSO structures and CPOM compliance. Please reach out to the authors, your Foley relationship partner, or our Health Care Practice Group with any questions.

Special thanks to Pouyan Ahmadi, a summer associate in Foley’s Tampa office, for his contributions to this article.