California’s attorney general recently drew a line in the sand for management services organizations regarding how much control over a physician practice is too much in the nation’s most recent test of corporate medicine laws.
California Attorney General Rob Bonta’s office announced June 26 that Carbon Health, 12 affiliated professional medical corporations and the company’s co-founder and former CEO Eren Bali agreed to pay a combined $4.5 million — $4.4 million from Carbon Health and $100,000 from Mr. Bali personally — to resolve allegations that the San Francisco-based company violated the state’s corporate practice of medicine law. The office pursued the case even as Carbon Health worked through Chapter 11 bankruptcy proceedings it filed in February.
California’s corporate practice of medicine law generally bars unlicensed individuals and companies from owning or controlling medical practices. To work within that restriction, many physician organizations use a “friendly PC” model: a physician-owned professional corporation contracts with a management services organization for administrative support such as billing, marketing and HR, while the PC retains control over clinical operations, staffing and financial decisions, according to analysis of the case published by law firm Davis Wright Tremaine July 7.
The state alleged Carbon Health’s management services agreements gave it authority well beyond that administrative role, including control over advertising, payor negotiations, medical equipment selection, and the hiring, firing and compensation of licensed clinicians, according to the complaint. Investigators also pointed to succession provisions that let Carbon Health, through an assignable option agreement, transfer a PC’s ownership to a physician of its own choosing — effectively making the practices dependent on the company for their continued existence.
“Medical decisions must be made by licensed healthcare professionals,” Mr. Bonta said in a statement, “not by companies focused on profits.”
Under the judgment, Carbon Health is permanently barred from holding ownership interests in the PCs it manages, from giving its management arm complete control over the functions cited in the complaint, and from requiring the practices to obtain financing exclusively from the company on above-market terms. The company must also correct billing and advertising practices the state said misled patients, including misrepresenting which insurance plans its clinics accepted and improperly auto-charging patient credit cards.
The Carbon Health case is the second corporate practice of medicine settlement Mr. Bonta’s office has announced this year, part of a broader statewide enforcement push. In May, the office reached a $2 million settlement with Aspen Dental over similar allegations involving the corporate practice of dentistry. In March, the office filed an amicus brief in Art Center Holdings v. WCE CA Art, arguing that contract provisions letting a management company replace a practice’s physician owner violate California law. The activity follows Senate Bill 351, which took effect Jan. 1, and expanded the state’s restrictions on private equity and hedge fund involvement in physician and dental practices.
Taken together, the actions signal that California regulators are scrutinizing not just the formal ownership structure of MSO-PC arrangements, but how those arrangements function day to day, including board discussions, financing terms and staffing decisions. For hospitals, health systems, physician groups and investors operating friendly PC structures in California, the Carbon Health settlement reads almost like a checklist of provisions to revisit: succession and equity transfer rights, financing terms, and approval rights tied to clinical and staffing decisions.
The settlement is subject to court approval and was reached without an admission of wrongdoing by Carbon Health or Mr. Bali.
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