California’s corporate practice of medicine prohibition has seen significant activity in the first half of 2026. The state’s long-standing prohibition against the corporate practice of medicine has been reinforced through recent legislation and enforcement actions. SB-351, enacted in January 2026, statutorily adopted the corporate practice prohibition in the context of private equity group and hedge fund investment in California physician and dental practices.
In March 2026, California Attorney General Rob Bonta filed an amicus curiae brief in the pending appellate case Art Center Holdings, Inc. et al. v. WCE CA Art, LLC, et al., asserting that a private equity-backed management services organization (MSO) maintained improper control of a physician practice.
Recent settlements have also been announced. The California AG announced a settlement with Aspen Dental Management, Inc. (Aspen Dental) alleging corporate practice of dentistry and false advertising violations, resulting in $2 million in penalties, $300,000 in restitution, and injunctive terms. Most recently, on June 26, 2026, the California AG announced a settlement with Carbon Health Technologies, Inc. (Carbon Health), its affiliated professional medical corporations (PCs), and co-founder and former CEO, imposing $4.5 million in combined penalties and injunctive relief regarding alleged corporate practice of medicine, deceptive advertising, and improper patient billing practice claims.
California has maintained a strict prohibition against lay or unlicensed entities engaging in the practice of medicine and other clinical professions since the early 20th century, codified into law in 1980. The goal of this prohibition is to protect patients from the commercial exploitation of medicine and similar disciplines.
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The “friendly PC” or MSO-PC model has been deemed permissible and utilized to address the corporate practice prohibition while allowing for much-needed investment and back-office support. However, the model is at issue in the Art Center Holdings case and the Aspen Dental and Carbon Health settlements, which contain friendly PC provisions that are atypical and arguably allow the MSO to exercise undue control over the PC.
For example, Aspen Dental improperly restricted the manner in which PC clinicians could communicate with patients, directed the laboratories that the PC could utilize, and determined compensation for PC clinicians. Similarly, Carbon Health had complete authority over the maintenance and use of patient medical records, the selection of medical equipment, and the hiring and firing of PC clinicians.
The California AG has focused on a friendly PC provision that is common in these arrangements – the ability of the MSO to direct the transfer of ownership in the PC. Succession/share transfer agreements often include triggering events relating to the physician-owner transferring PC stock without the MSO’s approval or termination of the underlying administrative services agreement or other arrangements between the MSO and PC in certain instances.
The Art Center Holdings amicus brief and the Carbon Health settlement demonstrate the California AG’s unfavorable view of these common arrangements. While the Art Center Holdings case is still pending, and the Aspen Dental and Carbon Health settlements represent compromises of disputed claims without any admission of liability, these matters are illustrative of the California AG’s evolving position regarding succession/share transfer agreements.
The potential impact of a categorical prohibition against succession/share transfer agreements would be a significant shock to the California marketplace given their widespread use. The California Medical Association (CMA) warns that such an outcome could have unintended consequences to the industry by adversely impacting the ability of MSOs to provide needed capital to PCs and depriving PCs of management expertise upon which clinicians rely so they may focus on clinical care.
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Stakeholders utilizing the friendly PC model in California should actively review their ownership, governance, and contractual arrangements to determine whether they are facially consistent with the California AG’s evolving view. The practical implications of the MSO-PC relationship should be evaluated as well, particularly with respect to succession/share transfer agreements and the degree of control MSOs retain over the selection of new physician owners.
California AG is willing to mandate corporate reorganizations for alleged corporate practice of medicine violations, assert liability against corporate executives, and leverage newly granted authority under SB-351 against private equity groups and hedge funds. As enforcement actions in California are often adopted in other jurisdictions, state attorneys general in other corporate practice states may view these settlements as a roadmap for similar investigations, which could have far-reaching implications for the healthcare industry, including health care policies.
For now, the California AG’s actions serve as a reminder of the importance of compliance with the corporate practice of medicine prohibition, and the need for stakeholders to carefully review their arrangements to ensure they are not running afoul of the law.
The State of California website provides more information.
