California’s CPOM Enforcement Accelerates: What MSOs, Sponsors, And Lenders Need to Know

Key Takeaways

• California is aggressively expanding Corporate Practice of Medicine (“CPOM”) enforcement. SB 351, the Aspen Dental settlement, and the pending Art Center Holdings appeal significantly increase regulatory scrutiny of physician practice structures, management service organizations (“MSOs”), and private equity-backed healthcare investments.
• Private equity sponsors, MSOs, lenders, and healthcare investors face increased compliance and transaction risk. California now has direct statutory authority to investigate certain ownership, compensation, governance, and financing arrangements involving physician and dental practices.
• Existing MSO structures should be reviewed now. Organizations should reassess continuity agreements, management fee arrangements, governance rights, financing structures, and transaction timelines before additional enforcement actions or the Art Center Holdings decision impact California’s CPOM landscape.

California is cracking down on the CPOM. The state’s enforcement posture has transitioned from sporadic to systematic. In mid-2025, the California Attorney General (“AG”) reached a settlement with Carbon Health, a technology-driven primary care platform that operates clinics across multiple states through a management services organization structure. That settlement required meaningful structural changes to Carbon Health’s physician practice model and imposed personal liability on one of the company’s co-founders. Since then, enforcement has only accelerated, through new legislation, another major settlement, and aggressive appellate advocacy. For MSOs, sponsors, and lenders, these developments warrant close attention.

How California Is Expanding CPOM Enforcement

Three developments since the Carbon Health settlement have impacted California’s enforcement landscape:

• California SB 351 (effective January 1, 2026). This statute does more than codify existing CPOM principles. It gives the California AG direct enforcement authority over private equity groups and hedge funds operating in physician and dental practices. The prohibitions are specific: no interference with professional judgment, no control over hiring or clinical decisions, and no noncompetes or nondisparagement clauses imposed on providers. MSO structures remain lawful, but the guardrails are now statutory, not just common law.
• Aspen Dental settlement (May 2026). The California AG followed the Carbon Health action with an even broader settlement against Aspen Dental Management, Inc., a national dental support organization serving hundreds of affiliated practices. Aspen agreed to $2 million in civil penalties and $300,000 in restitution, but the injunctive terms are more significant. Aspen is now prohibited from tying management fees or compensation to practice revenue, owning the real property of affiliated practices, setting clinical staff schedules or compensation, restricting where clinicians may practice, and choosing or replacing practice owners. These are significant operational restrictions, and they establish a clear enforcement template for future actions.
• Art Center Holdings appeal (March-April 2026). This California case, involving a fertility practice’s PC-MSO arrangement, could have the broadest impact of the three. The trial court held that a continuity agreement granting the MSO the right to replace the physician owner violated CPOM. On appeal, the positions have diverged sharply. The California AG’s amicus brief advocates a categorical rule: any contractual right for a lay entity to replace a physician owner is per se unlawful. The California Medical Association, filing in opposition, urges a fact-dependent approach, warning that an overbroad rule could destabilize legitimate structures across the industry. A decision is pending, and the outcome will effect California CPOM enforcement going forward.

Taken together, these actions reflect a deliberate, coordinated enforcement strategy, not a series of isolated events.

Who Is Affected?

While these developments are specific to California, the implications extend beyond state lines. California often sets the regulatory tone for the rest of the country, and stakeholders across the healthcare services industry should take note. The following groups face the most direct exposure:

• MSOs and DSOs with private equity or hedge fund backing face the most direct exposure. The Aspen settlement defines the new standard. Revenue-based fees, control over ownership transitions, and restrictive contract terms are all now prohibited.
• Private equity sponsors and hedge funds are now explicitly in scope. California SB 351 names them by category. The California AG has statutory authority to investigate and seek injunctive relief against them directly, not just the MSO.
• Lenders and transaction counterparties should expect tougher diligence. CPOM risk in California deals requires serious attention. Structures with aggressive control rights or captive financing may need to be restructured or repriced.
• National platforms running a single MSO template across multiple states face a choice: adapt for California specifically, or let California’s strict standards drive the national structure. Note also that California AB 1415 requires PE firms, hedge funds, and MSOs to provide 90 days’ advance notice to California’s Office of Health Care Affordability before closing material transactions.
• Physician owners face real uncertainty. If the California Court of Appeal adopts the AG’s categorical approach in Art Center Holdings, even well-structured continuity agreements could be invalidated.

How MSOs and Investors Should Reevaluate Their Structures

The friendly PC model is not dead, but tolerance for structural risk has decreased. Several strategic approaches deserve attention:

• Rethink continuity mechanisms. The California AG’s position, that any MSO right to replace a physician owner is unlawful, may not prevail. But it signals enforcement priorities. Eliminate unilateral MSO replacement rights. Consider mutual governance frameworks that give physicians veto authority over ownership transitions.
• Separate economics from control. The Aspen settlement prohibits tying management fees or compensation to practice revenue, sales, or profits. Percentage-of-revenue models are no longer viable in California. Move toward flat-fee or cost-plus structures, and obtain a third-party independent valuation to support that the fee reflects fair market value for services actually rendered. The prohibition on MSO ownership of practice real property reflects the same concern: regulators are targeting financial dependency as a control mechanism.
• Document the operational reality. California courts assess CPOM based on substance, not just contract language. Build and maintain contemporaneous records of clinical governance, physician decision-making authority, and the MSO’s actual operational role.
• Plan for both appellate outcomes. If the California Court of Appeal endorses the AG’s strict approach, continuity agreements may require immediate renegotiation. If the court adopts a fact-specific framework, the analysis becomes more granular. Model both scenarios now.
• Consider multi-physician ownership. Some platforms explore using multiple physician owners rather than a single friendly PC shareholder. This approach can reduce key-person risk and may strengthen the argument that physicians genuinely control the practice. However, multi-physician structures introduce their own complexities, including governance and decision-making dynamics, potential fee-splitting or anti-kickback concerns under state and federal law, tax implications, and the practical challenge of aligning multiple owners over time. These considerations vary significantly by state and warrant careful analysis before implementation.

What Healthcare Organizations Should Do Now

For anyone with California PC-MSO exposure, these steps should be priorities:

• Scrub continuity documents. Identify any provision giving the MSO unilateral rights to pick or replace the physician shareholder. This is the highest-risk feature under current enforcement. Revise or remove these provisions.
• Audit fee structures. Review whether management fees, compensation, or incentives are tied to practice revenue. The Aspen settlement prohibits all such arrangements. If transitioning to flat-fee or cost-plus models, obtain a third-party independent valuation to confirm that fees reflect fair market value for services actually rendered. Also confirm that practices can select vendors, laboratories, and insurance plans independently.
• Revisit internal financing. Examine credit lines, guarantees, and intercompany loans. If they resemble captive financing rather than arm’s-length lending, restructure toward market-standard terms.
• Account for the AB 1415 notice period. California requires 90 days’ advance notice to the Office of Health Care Affordability for material transactions involving PE, hedge funds, or MSOs. Build this into deal timelines.
• Prepare your CPOM narrative. Boards, investment committees, and diligence teams will ask how the structure responds to recent enforcement. Have a clear answer ready, along with concrete changes already implemented.

California has not outlawed the friendly PC model. But between SB 351, the Aspen settlement, and the AG’s posture in Art Center Holdings, the state has increased the consequences for structural missteps. The right response is a disciplined review of the riskiest control, compensation, and financing features. The Art Center Holdings decision will be the next significant development. Preparation should begin now.