How California’s Carbon Health ruling impacts MSOs, tech companies

California Attorney General Rob Bonta recently announced that Bay Area-based primary, urgent, and virtual care chain Carbon Health had been violating the state’s laws prohibiting the corporate practice of medicine.  

This settlement follows similar action against Aspen Dental that aligns with California’s restrictions on who can own medical and dental practices. It may also leave professional corporations (PCs) and managed service organizations (MSOs) pressing pause on business ventures in the Golden State. 

Limited roles for MSOs, investors owning medical practices

California enacted two pieces of legislation in October 2025 that placed some of the strictest restrictions in the country on what’s called the corporate practice of medicine. 

• Senate Bill No. 351 limits the role of private equity groups and hedge funds that own medical practices “from interfering with licensed professionals’ clinical judgment or controlling key practice functions” such as hiring and billing, as well as clinical decision-making, according to Best Best & Krieger. 

• Assembly Bill No. 1415 requires private equity groups, hedge funds, and MSOs to provide notice to the state’s Office of Health Care Affordability at least 90 days before investing in a medical practice – essentially so the state can ensure the move is in the best interest of patients and the practice.  

The laws don’t expressly prohibit MSO/PC structures, the law firm said. “They do, however, reflect increased California scrutiny of whether licensed professionals retain meaningful control or whether contractual and financial structures create effective MSO control.” 

Medical practices “captive” to corporate owners

Such scrutiny was at the heart of the Carbon Health settlement. The Attorney General’s complaint noted the corporate entity was not licensed to provide medical care but nonetheless owned and controlled the medical practice, thereby “interfere[ing] with and unlawfully direct[ing] the practice of medicine.”  

Under California law, the MSO can provide administrative support functions but cannot have “day-to-day influence over operational and financial decisions traditionally reserved to physicians,” as Davis Wright Tremaine explained.  

To comply with regulations, Carbon Health must restructure in three ways. 

• The MSO must give up control of the PC’s advertising, payer negotiations, purchasing, and hiring and compensation of clinical staff.  

• The MSO cannot hold ownership interest in the PC. 

• The PC cannot be required under financing agreements to borrow from the MSO at above-market rates. 

As Nixon Peabody put it, “these provisions rendered the practices captive, subordinating the PCs’ independent existence to the MSO’s discretion.”  

Additionally, the settlement imposed a $4.4 million penalty on Carbon Health and a $100,000 penalty on Carbon Health co-founder and former CEO Eren Bali. 

Take a closer look at governance, financing models

The Carbon Health settlement came on the heels of a settlement with Aspen Dental, which allegedly did not contract with existing dental offices upon entering California in 2019 and engaged in “false and misleading advertising.” The Aspen Dental settlement involved $2 million in penalties and $300,000 in restitution to some patients. 

Taken together, the announcements from the Attorney General provide a cautionary tale for digital health companies. Organizations “may wish to reassess governance provisions, financing arrangements, succession mechanisms, and operational oversight practices” that may otherwise suggest an MSO has financial control over clinical operations, Davis Wright Tremaine noted. 

Nixon Peabody expanded on a couple key points. Succession planning needs to consider how the organization would remain in compliance with California law if a physician-owner opted to step down, the firm said, while compensation plans should avoid “reward[ing] clinical staff for product or service sales.” 

Brian Eastwood is a Boston-based writer with more than 10 years of experience covering healthcare IT and healthcare delivery. He also writes about enterprise IT, consumer technology, and corporate leadership.