California Attorney General Rob Bonta announced a historic settlement with digital and urgent care provider Carbon Health Technologies Inc., its affiliated medical groups, and its co-founder and former CEO, Eren Bali. The enforcement action resolves allegations that the company violated California’s strict ban on the corporate practice of medicine (CPOM) by exerting excessive corporate control over the clinical entities it was operating.
Crucially, the settlement does not outlaw the widely used “friendly PC” or “MSO” models in California. Instead, it serves as an explicit warning to healthcare investors and management services organizations (MSOs) that overstepping the boundary between administrative support and clinical control can trigger severe regulatory and personal liabilities.
The Mechanics of the Alleged CPOM Violation
Under California law, medical practices must be owned and directed exclusively by licensed healthcare professionals to ensure that patient care—not corporate profit—remains the primary driver. And even this doesn’t apply to all healthcare providers; only certain license types are permitted to own these businesses.
Following an investigation by the California Department of Justice, regulators alleged that Carbon Health’s non-clinical corporate entity crossed the line from a supportive management group into an entity that effectively controlled and dictated the operations of the medical practice. Key features targeted by the Attorney General as evidence of unlawful corporate control included:
- Restrictive Continuity Agreements: Contractual frameworks that granted the MSO total control over physician ownership, including the unilateral right to trigger or select a replacement physician-owner and the ability to prevent the owner from selling or transferring ownership interests (for example, through a stock transfer restriction agreement)
- Overreaching Operational Control: Management agreements that gave the non-clinical corporate entity inappropriate influence over professional branding, strategic partnerships, and commercial healthcare operations.
- Interference with Practice Independence: Corporate structures that limited the friendly PC’s ultimate governance and operational independence, undermining the legal separation required between business management and professional practice.
Key Takeaways for Private Equity, Venture Capital, and Digital Health Providers
1. Personal Executive Liability is a Reality
In a notable departure from standard entity-level enforcement, the California AG individually assessed a $100,000 civil penalty against Carbon Health’s co-founder. This signals that, at least in California, regulators are willing to look past the corporate shield and hold executive officers, directors, and founders personally liable for structural compliance failures.
2. Mandatory Structural Restructuring
Subject to formal approvals, the settlement requires Carbon Health to fundamentally restructure its corporate model. The new framework must establish clear, ironclad boundaries ensuring that physicians retain independent, uncoerced control over clinical operations, medical decisions, and the internal governance of their practices.
3. Part of a Growing Regulatory Trend
This settlement is not an isolated event. It aligns with a broader push by the California DOJ to target corporate interference in professional healthcare models. State regulators are actively scrutinizing the actual operational realities of MSO arrangements, ensuring that “paper compliance” matches daily operations.
Compliance Next Steps
Healthcare companies, digital health platforms, and private equity investors operating in California should immediately conduct thorough reviews of their administrative service agreements (ASAs) and MSO-PC structures. Special care should be given to evaluating ownership-transfer options, establishing clear boundaries for branding, and ensuring that clinical autonomy remains entirely uncompromised.
Optimize Your Compliance Framework
If your organization utilizes a friendly-PC structure and you would like to review your corporate governance documents or management agreements for alignment with California’s evolving compliance landscape, please contact us.