California Attorney General Rob Bonta recently announced a proposed settlement with Carbon Health Technologies, Inc., which operates primary care clinics throughout the state. The settlement follows allegations that the company’s physician practice management structure ran afoul of California’s corporate practice of medicine (CPOM) doctrine, as well as certain state consumer protection and billing laws. Carbon Health denied the allegations and did not admit liability as part of the proposed settlement.
If approved by the court, the settlement will require Carbon Health to restructure its California operations, revise certain billing, contracting, and advertising practices, and pay approximately $4.4 million in civil penalties. The company’s former CEO agreed separately to pay an additional $100,000.
At the center of the Attorney General’s allegations was Carbon Health’s use of a “friendly professional corporation” model, through which its management services organization (MSO) allegedly obtained contractual rights extending beyond the traditional role of a management company. The AG alleged that the agreements allowed the MSO to replace physician owners while restricting physicians’ ability to terminate the MSO relationship without risking ownership of their medical practices. The complaint further alleged that, under this arrangement, the MSO and its unlicensed officers directed matters such as staffing, advertising, and insurance negotiations, resulting in non-physician influence over the operation of the medical practices and interference with physicians’ independent professional judgment.
While the settlement does not establish new legal precedent, it offers insight into the types of governance and operational arrangements that may draw regulatory scrutiny, especially in states like California, New York and Illinois that have strict CPOM restrictions. As recently discussed here, private equity investments in healthcare providers and related corporatization of healthcare services are drawing increasing federal and state regulatory attention, and academic institutions and physician trade associations are expressing concerns regarding unlicensed parties putting “profits over patients” by cutting corners on costs, reduced staffing and increased fees.
It appears highly likely that we will see additional enforcement cases like Carbon Health. Thus, it is essential that healthcare organizations that use MSO structures consider reviewing their management agreements, governance documents, and day-to-day operational practices to confirm that physicians retain authority over clinical decision-making and that management companies do not exercise an impermissible degree of control over the practice of medicine.
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