A California state appellate court is set to hear arguments in a lawsuit brought by a fertility practice physician who said a private equity-backed management services organization fired him after he refused to dismiss an employee physician.
According to the American Medical Association, this case could reshape how PE-backed firms structure their control over acquired medical practices across the state.
The case stems from a 2019 transaction in which physicians at a California fertility practice sold a 51% stake to Women’s Care Enterprises, a private equity-backed MSO, in exchange for cash and deferred consideration. Under the arrangement, the MSO was to provide nonclinical administrative services while the medical practice remained under physician ownership.
The dispute began when the private equity firm demanded the physician-owner fire two employee physicians. One resigned. The physician-owner refused to dismiss the other. The firm then terminated his consulting contract, triggering a provision in their agreement that allowed the firm to replace him with a physician of its own choosing.
In March 2024, a Los Angeles Superior Court ruled the arrangement violated California’s ban on the corporate practice of medicine, finding that the contract gave the private equity firm “undue control over the doctor” and that the removal clause alone placed physicians in an “untenable position” under state law, according to the AMA. The case is now before the California 2nd District Court of Appeal.
California Attorney General Rob Bonta filed an amicus brief in April supporting the trial court’s finding, though supporting neither party outright, as both sides are seeking to weaken the corporate practice of medicine prohibition.
“State law is clear: Medical decisions must be made by licensed physicians, not unduly influenced by corporate interests,” Mr. Bonta said in the brief. “As private equity investment in healthcare grows, we must reaffirm our commitment to California’s prohibition on the corporate practice of medicine and ensure patients remain our top priority.”
Mr. Bonta argued that when an unlicensed corporation holds the power to replace a physician-owner, it effectively owns the practice regardless of how the contracts are structured.
The California Medical Association, backed by the AMA Litigation Center, also filed an amicus brief, but urged a more measured approach. The CMA warned against categorical prohibitions on removal clauses, noting they are common across physician-MSO arrangements statewide, and called instead for a fact-based standard that evaluates whether undue clinical influence has actually been transferred in a given deal.
“Erecting rigid barriers in the enforcement of the corporate practice of medicine statute could have the unintended consequence of stifling innovation and the evolution of healthcare, resulting in significant disruption to many current physician alignments,” the CMA brief said.
The appellate ruling will carry weight well beyond this case, according to the AMA. Private equity investment in physician practices has grown roughly sixfold since 2012, from 75 firms to 484 by 2021, according to an analysis cited in the AMA’s amicus materials. In specialties such as dermatology, gastroenterology and ophthalmology, PE involvement now exceeds 30% of practices.
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