How Healthcare Businesses Operate Legally Without Losing Control
What California’s Corporate Practice of Medicine (CPOM) Doctrine Actually Prohibits
California follows a long-standing legal doctrine known as the Corporate Practice of Medicine (“CPOM”), which strictly limits who may own, control, and financially benefit from the practice of medicine. The doctrine is designed to protect the independence of clinical judgment from commercial influence. While frequently misunderstood or underestimated by healthcare operators, CPOM is actively enforced through licensing actions, contract disputes, investor diligence failures, and whistleblower complaints. Violations are not merely technical — they can result in criminal exposure, license loss, voided contracts, and collapse of improperly structured healthcare businesses.
1.1 Core Legal Principle: Only Physicians May Practice Medicine
Under California Business & Professions Code §2052, it is unlawful for any person or entity to practice medicine, attempt to practice medicine, or hold itself out as practicing medicine without appropriate licensure. The statute broadly defines the practice of medicine and forms the foundation of CPOM enforcement.
California courts and regulators have consistently interpreted this framework to prohibit unlicensed persons or business entities from exercising control over clinical medical decision-making.
This principle was articulated in People ex rel. State Board of Medical Examiners v. Pacific Health Corp. (1938) 12 Cal.2d 156, where the California Supreme Court emphasized that medical decisions must remain under the control of licensed physicians and not commercial enterprises.
Courts and regulators focus not only on formal ownership, but on whether non-physicians exert practical control over medical operations. Even indirect influence, such as financial pressure, compensation structuring, or operational authority, may be treated as unlawful interference with clinical independence.
1.2 Ownership Restrictions: Who May Own a Medical Practice
California law generally prohibits corporations, limited liability companies, or other business entities from owning a medical practice unless specifically authorized by statute. Medical practices must typically be owned by:
- Licensed physicians (MD/DO), or
- A Professional Medical Corporation formed under the Moscone-Knox Professional Corporation Act (Cal. Corp. Code §§13400–13410).
Within a professional medical corporation:
- A majority of shareholders must be licensed physicians (Corp. Code §13401.5);
- Non-physician ownership is limited and strictly regulated; and
- Only licensed physicians may control clinical operations and medical decision-making.
Attempting to structure around these restrictions through nominee arrangements, shadow ownership, or contractual control often triggers CPOM violations.
Forming a professional medical corporation does not eliminate CPOM risk. Regulators and courts evaluate substance over form. If a non-physician effectively controls operations through contracts, financing, or management authority, the structure may still be deemed unlawful regardless of nominal physician ownership.
1.3 Control vs. Ownership: The Real Focus of CPOM
CPOM is not limited to formal ownership. Regulators and courts examine who actually controls the medical practice. Even where a physician technically owns the professional corporation, violations may occur if a non-physician:
- Controls hiring or firing of clinicians;
- Determines medical protocols or treatment decisions;
- Sets physician compensation tied to clinical judgment;
- Controls patient care decisions; or
- Exercises financial leverage that influences clinical independence
The California Attorney General has repeatedly taken the position that “control,” not just ownership, determines whether CPOM is violated.
In enforcement actions, regulators frequently examine whether a non-physician exercises “shadow control” over the practice, meaning control that exists in practice even if not formally documented. This includes economic dependence, contractual leverage, or operational authority that compromises physician independence.
1.4 Fee-Splitting and Financial Control Restrictions
Closely related to CPOM is California’s prohibition on fee-splitting under Business & Professions Code §650, which generally prohibits sharing professional fees with unlicensed persons in exchange for referrals or business generation. Improper MSO arrangements, revenue-based compensation structures, and disguised profit participation may violate this statute.
Fee-splitting violations are among the most commonly investigated structural issues in MSO-based healthcare models. Compensation arrangements that appear commercially reasonable may still violate §650 if tied—directly or indirectly—to professional revenue, patient volume, or referrals.
Violations of §650 may result in:
- Criminal misdemeanor liability;
- Fines and imprisonment;
- Professional discipline; and/or
- Contract invalidation
Fee-splitting is one of the most common triggers for enforcement scrutiny in MSO-based healthcare models.
1.5 The Reality of Enforcement: When Problems Actually Arise
While many operators assume CPOM is rarely enforced, violations most commonly surface during:
- Licensing board investigations;
- Disputes between business partners or founders;
- Whistleblower complaints (often from former employees or physicians)
- Insurance or billing audits;
- Investor or acquisition due diligence; and/or
- Contract disputes where illegal structure voids agreements
Improper structuring often remains undiscovered until a triggering event occurs, at which point the consequences can be significant.
In practice, many CPOM violations remain undetected during early-stage operations and surface only when the organization grows, seeks investment, faces internal disputes, or undergoes regulatory review. At that stage, structural defects are often more difficult and costly to correct.
1.6 Legal and Financial Consequences of CPOM Violations
The consequences of CPOM violations are often cumulative, meaning a single structural defect can trigger regulatory, civil, and criminal exposure simultaneously. Violating California’s CPOM framework can lead to multiple layers of exposure, including regulatory, civil, and criminal consequences.
A. Criminal Exposure
Practicing medicine without a license under B&P Code §2052 may constitute a wobbler offense, which imposes the following criminal penalties:
- Misdemeanor: Up to 1 year in county jail and/or fines;
- Felony: Potential imprisonment and higher fines; and
- Each act may constitute a separate violation
- Fee-splitting violations under B&P Code §650 are misdemeanors punishable by:Up to 1 year in jail;
- Fines up to $50,000 (or more depending on unlawful revenue); and
- Professional discipline
Courts may treat each patient interaction, billing event, or unlawful act as a separate violation, which can significantly increase exposure.
B. Licensing Consequences
The Medical Board of California may:
- Suspend or revoke physician licenses;
- Impose probation or practice restrictions;
Issue citations and fines; and/or - Investigate improper corporate control or MSO arrangements
Loss or restriction of licensure can effectively shut down a medical practice
C. Civil and Business Consequences
CPOM violations frequently create business risk beyond regulatory penalties:
- Contracts may be declared void and unenforceable;
- MSO management agreements may collapse;
- Ownership disputes may invalidate equity arrangements;
- Investors may withdraw or refuse funding;
- Buyers may terminate acquisitions; and
- Civil lawsuits may arise from unlawful structure
Courts have repeatedly refused to enforce contracts formed in violation of CPOM principles, creating substantial financial exposure for improperly structured healthcare businesses. In some cases, unlawful structures have resulted in complete loss of management rights, unwinding of ownership arrangements, and significant financial loss to non-compliant operators.
1.7 Key Takeaway: CPOM Is Structural, Not Theoretical
The CPOM doctrine is not simply a regulatory technicality. It governs how healthcare businesses must be structured and operated. While some improperly structured businesses may operate for years without immediate enforcement, problems often emerge when:
- The business grows;
- A dispute arises;
- Regulators review operations; or
- Investors or buyers conduct diligence
A common misconception among healthcare operators is that CPOM violations are unlikely to be discovered. In reality, most enforcement begins not with regulators, but with disputes, audits, or diligence events that expose structural flaws.
At that stage, correcting structural defects can be costly, or impossible, without disrupting the business.
Concluding Remarks
Because non-physicians cannot directly own or control medical practices under California law, most compliant healthcare organizations utilize a two-entity structure consisting of a Management Services Organization (MSO) and a Professional Medical Corporation (PC). When implemented correctly, this structure allows operational and financial participation while preserving clinical independence. In our next article, we examine how the MSO–Professional Corporation structure functions in practice, and where many healthcare organizations unintentionally create regulatory risk.
Understanding CPOM is not merely a legal exercise; it is foundational to building a healthcare organization capable of scaling safely, attracting investment, and operating without structural regulatory risk.
Kushner Law Offices regularly advises healthcare operators, MSOs, and multi-entity healthcare platforms on CPOM compliance, regulatory structuring, and growth planning. Organizations seeking strategic regulatory counsel or structural review may contact the firm for further guidance.