Summary. Most states prohibit a corporation from employing physicians or otherwise controlling the practice of medicine, which means a non-physician investor cannot simply buy a medical practice. The workaround the industry settled on is a two-entity structure: a physician-owned professional corporation that holds the clinical business and the licenses, and a management services organization that provides everything else under a long-term contract paying a management fee. Whether that structure is respected depends on how the documents allocate control and how the fee is calculated, and both are constrained by fee-splitting rules, the federal fraud and abuse statutes, and an increasingly active set of state transaction review laws. This article explains the doctrine, the structure and its pressure points, the regulatory overlay, and the diligence and closing mechanics that healthcare deals require.

A private equity firm wants to buy a dermatology group. In most industries that sentence describes a straightforward transaction. In medicine it describes a problem, because in most states the firm cannot own the thing it wants to buy.

The corporate practice of medicine doctrine holds that a business corporation may not practice medicine or employ physicians to do so. Its rationale is that a physician's clinical judgment should not be subject to the direction of people whose obligation runs to shareholders rather than to patients, and that the profession's licensure system would mean little if unlicensed entities could control licensed practice.

The doctrine has not stopped investment in physician practices. It has shaped it into a particular structure, and understanding that structure — and the ways it fails — is the substance of healthcare transactional practice.

The doctrine

Where it comes from

Corporate practice restrictions arise from several sources, and the mix differs by state:

  • Medical practice acts limiting the practice of medicine to licensed individuals and defining the unlicensed practice of medicine broadly.
  • Professional corporation statutes restricting ownership of a professional entity to licensed members of the profession.
  • Attorney general opinions and medical board rules, which in several states are the operative authority.
  • Judicial decisions, some of which are quite old and remain controlling.
  • Fee-splitting prohibitions, which are analytically distinct but operate together with the doctrine.

How much it varies

Enormously, and this is the central practical point.

Some states enforce the doctrine strictly, with active medical board attention and a real risk of unwinding. California, Texas, New York, New Jersey, Colorado, Illinois, and Ohio are commonly cited as the more restrictive.

Some states have no meaningful corporate practice prohibition and permit direct employment of physicians by general corporations.

Many states occupy a middle position with significant exceptions: hospitals may employ physicians, nonprofit entities may, professional corporations owned by licensees may, and managed care organizations may.

And the doctrine differs by profession within a single state. Medicine, dentistry, optometry, veterinary medicine, chiropractic, nursing, physical therapy, behavioral health, and pharmacy each have their own rules, and a state that prohibits corporate practice of medicine may permit dental service organizations to operate freely — or the reverse.

There is no substitute for researching the specific profession in the specific state.

Fee splitting

A separate prohibition, found in medical practice acts, professional conduct rules, and — in the federal context — in the Anti-Kickback Statute's reach.

The traditional rule bars a licensee from sharing professional fees with an unlicensed person. Applied literally, a management fee calculated as a percentage of practice revenue is a split of professional fees.

States take different positions. Some prohibit percentage-of-revenue management fees outright. Some permit them where the fee reflects fair market value for services actually rendered. Some are silent and unenforced.

The conservative structure uses a flat fee or a cost-plus fee, adjusted periodically to fair market value, with documentation supporting the calculation. Percentage fees appear frequently in practice and carry more risk, particularly in restrictive states and where federal program business is involved.

The MSO structure

The two entities

The professional entity — a professional corporation, professional association, or professional limited liability company, depending on the state. It is owned by one or more licensed physicians. It holds the clinical licenses, the provider numbers, the payor contracts in most models, and it employs the clinicians. It bills for professional services and it bears clinical responsibility.

The management services organization — an ordinary business entity, owned by the investor. It provides everything that is not the practice of medicine: real estate, equipment, non-clinical personnel, billing and collections, information technology, marketing, human resources, purchasing, compliance support, and administrative management. It is paid a management fee.

The MSO is where the investment sits and where the enterprise value accrues.

The documents that make it work

The Management Services Agreement. Long-term — twenty to forty years is typical — with limited termination rights. It defines the services, the fee, and, critically, what the MSO does not control: clinical decision-making, the physician-patient relationship, medical records ownership in some states, and clinical staffing decisions.

The Stock Transfer Restriction Agreement, sometimes called a succession agreement. This is the instrument that makes the structure investable. The nominal physician owner of the professional entity — the "friendly PC" or "captive PC" physician — agrees that they will transfer their shares, for a nominal amount, to a successor designated by the MSO, on the occurrence of specified events: death, disability, loss of license, or simply on the MSO's demand.

The effect is that the MSO controls who owns the professional entity without owning it. Whether that is a legitimate arrangement or a sham depends on the state and on how far the documents go.

Employment agreements between the professional entity and its physicians.

A lease or sublease and an equipment agreement, frequently rolled into the MSA.

Assignment and security arrangements, where the lender requires them.

The pressure points

The structure fails where the documents or the practice give the MSO control over clinical matters. The recurring flashpoints:

  • Clinical staffing. May the MSO decide which physicians are hired or terminated? A right of consultation is defensible; a right of approval is dangerous.
  • Scheduling and patient volume. Productivity targets that effectively dictate how many patients a physician sees in an hour, or how much time is spent per visit.
  • Clinical protocols. Standardized care pathways imposed by the MSO rather than adopted by the clinicians.
  • Coding and billing direction. Instructions that affect what is documented and billed are clinical.
  • Referral direction. Requiring referrals within the network, which implicates both corporate practice and the federal fraud and abuse statutes.
  • Medical records. Several states require that the professional entity own and control them.
  • Fee structure. A percentage fee in a state that prohibits it; a fee that leaves the professional entity with no margin at all, evidencing that the arrangement is not arm's-length.
  • The friendly PC physician. A physician with no economic interest, no involvement in the practice, and no ability to resist the MSO looks like a nominee, which is what the doctrine exists to prevent.

Enforcement, and where it actually comes from

Direct medical board enforcement is not the most common risk. The doctrine surfaces most often through:

  • Payor recoupment. A payor asserts that services were billed by an entity not entitled to bill and demands repayment. This is the largest practical exposure.
  • Physician disputes. A departing physician sues, or defends a noncompete, by attacking the structure. Corporate practice violations render contracts unenforceable as against public policy in several states, which makes this an attractive defense.
  • Qui tam actions, alleging that claims submitted under an unlawful arrangement were false claims.
  • Diligence. The next buyer's counsel finds the problem, and it becomes a price adjustment or a broken deal.

The federal fraud and abuse overlay

Corporate practice is state law. The federal statutes apply independently and reach the same arrangements from a different direction.

The Anti-Kickback Statute

42 U.S.C. § 1320a-7b(b) prohibits knowingly and willfully offering, paying, soliciting, or receiving remuneration to induce or reward referrals of items or services payable by a federal health care program. It is a criminal statute, intent-based, and — since the Affordable Care Act amendment at § 1320a-7b(h) — a person need not have actual knowledge of the statute or specific intent to violate it. A claim resulting from a violation is a false claim under the False Claims Act by operation of the same provision.

The one purpose test, from United States v. Greber, 760 F.2d 68 (3d Cir. 1985), holds that remuneration violates the statute if any one purpose is to induce referrals, even if other legitimate purposes exist.

Safe harbors at 42 C.F.R. § 1001.952 provide protection where all elements are met. The relevant ones here:

  • Personal services and management contracts, § 1001.952(d), historically requiring a written agreement of at least one year, specified services, and aggregate compensation set in advance at fair market value not determined in a manner taking into account the volume or value of referrals. The safe harbor was amended to add an outcomes-based payment arrangement provision and to relax the aggregate-compensation requirement, but the fair market value and referral-independence conditions remain central.
  • Employment, § 1001.952(i), which protects bona fide employment relationships broadly.
  • Space and equipment rental, § 1001.952(b) and (c).
  • Value-based arrangement safe harbors added in 2020, at § 1001.952(ee) through (gg).

Failing a safe harbor is not itself a violation; it means the arrangement is analyzed on intent.

The Stark Law

42 U.S.C. § 1395nn prohibits a physician from referring a Medicare patient for designated health services to an entity with which the physician or an immediate family member has a financial relationship, unless an exception applies, and prohibits billing for the referred service. Unlike the Anti-Kickback Statute, Stark is strict liability — no intent required.

Designated health services include clinical laboratory services, imaging, physical and occupational therapy, radiation therapy, DME, home health, outpatient prescription drugs, and inpatient and outpatient hospital services.

Exceptions that matter in practice group structures:

  • In-office ancillary services, § 1395nn(b)(2), which requires satisfying the group practice definition in § 1395nn(h)(4) and 42 C.F.R. § 411.352 — including the requirement that substantially all services be furnished through the group, that overhead and income be distributed by predetermined methods, and the restrictions on distributing profits from designated health services.
  • Bona fide employment, § 1395nn(e)(2).
  • Personal service arrangements, § 1395nn(e)(3).
  • Rental of office space and equipment, § 1395nn(e)(1).
  • Fair market value compensation, 42 C.F.R. § 411.357(l).

The 2020 regulatory reforms clarified the definitions of fair market value, commercial reasonableness, and the volume or value standard, and added value-based exceptions at § 411.357(aa).

Fair market value is the hinge. Nearly every arrangement in this area depends on compensation being fair market value and commercially reasonable, and the way to establish it is a contemporaneous independent valuation — obtained before the arrangement is executed, not reconstructed during an investigation.

Other federal constraints

The Civil Monetary Penalties Law, 42 U.S.C. § 1320a-7a, including the beneficiary inducement prohibition.

The False Claims Act, 31 U.S.C. §§ 3729–3733, which is the enforcement engine. Universal Health Services, Inc. v. United States ex rel. Escobar, 579 U.S. 176 (2016), established implied certification liability where the claim makes specific representations rendered misleading by undisclosed noncompliance with a material requirement, and emphasized that materiality is demanding.

HIPAA, and the business associate relationship between the professional entity and the MSO.

Provider enrollment and change of ownership. A transaction may constitute a CHOW for Medicare purposes under 42 C.F.R. § 489.18, requiring notice, assignment or rejection of the provider agreement, and revalidation. Assignment carries successor liability for the predecessor's overpayments and sanctions, which is a genuine reason to consider rejecting the agreement and enrolling anew — at the cost of a gap in billing.

Transaction mechanics

Structure

The typical acquisition splits the practice:

  • The non-clinical assets — equipment, leases, receivables in some structures, workforce, goodwill attributable to the business — are sold to the MSO.
  • The clinical assets and the professional entity remain with or transfer to a friendly PC owned by a physician acceptable to the buyer, subject to the stock transfer restriction agreement.
  • The selling physicians sign employment agreements with the professional entity, typically with a multi-year term, restrictive covenants, and rollover equity in the MSO holding company.

The rollover is often the most important economic term to the selling physicians and the most under-explained. It should be documented with the same care as the purchase price.

Diligence

Beyond ordinary corporate diligence:

  • Licensure — every facility license, CLIA certificate, pharmacy permit, DEA registration, radiological materials license, and clinic license, with expiration dates and transferability confirmed. Several of these do not transfer and require new application, which drives the closing timeline.
  • Provider enrollment — Medicare, Medicaid, and commercial payor enrollments and participation agreements, with assignment and notice provisions reviewed.
  • Billing and coding audit. A statistically valid sample, reviewed by a certified coder. This is where undisclosed exposure lives, and an extrapolated overpayment can exceed the purchase price.
  • The sixty-day rule. Under 42 U.S.C. § 1320a-7k(d), an identified overpayment must be reported and returned within sixty days of identification, and retention beyond that is a False Claims Act violation. A buyer's diligence that identifies an overpayment starts a clock — and who reports it, and when, must be addressed in the agreement rather than discovered afterward.
  • Existing arrangements with referral sources: medical directorships, leases, call coverage, joint ventures. Each needs a Stark exception and an Anti-Kickback analysis, with fair market value support.
  • Malpractice coverage, and critically whether it is claims-made, requiring a tail policy — who buys it and at what cost is a standard negotiated term.
  • Exclusion screening of all providers and employees against the OIG List of Excluded Individuals and Entities and the SAM exclusions list, which must be run at hire and monthly thereafter.
  • Compliance program and any history of self-disclosures, corporate integrity agreements, payor audits, or government inquiries.

Approvals and notices

Hart-Scott-Rodino where thresholds are met, 15 U.S.C. § 18a.

State healthcare transaction review. A rapidly expanding category. A growing number of states now require advance notice — commonly sixty to ninety days — of material healthcare transactions, with authority in the attorney general or a health oversight agency to review, extend, and in some states to disapprove. California's Office of Health Care Affordability, Massachusetts, Oregon, New York, Illinois, Minnesota, and others have adopted regimes that differ in thresholds, covered parties, and remedies. Several specifically target private equity acquisitions of physician practices. This is now a threshold structuring question and must be checked early, because a sixty-day pre-closing notice period is not a detail.

Certificate of need in the states that require it for certain facilities and services.

Change of ownership filings with Medicare, Medicaid, and commercial payors, with lead times that frequently exceed the desired closing date.

Antitrust. Physician practice roll-ups have drawn increasing attention, and the agencies have brought actions addressing serial acquisitions in a local market. Local market share analysis belongs in diligence.

Building the structure defensibly

The difference between a structure that survives scrutiny and one that does not is rarely a single provision. It is whether the arrangement is what the documents say it is.

Research the specific state and the specific profession, in writing. A memorandum analyzing the corporate practice doctrine, the fee-splitting rule, the professional entity ownership requirement, and any managed care or telehealth exception, for every state where the practice operates. Multistate operations frequently require different structures in different states, which is expensive and is the correct answer.

Choose the friendly PC physician with care. Someone actually involved in the practice, licensed in the state, with a real role and, ideally, some economic interest. A nominee who lives in another state and has never seen the clinic is the fact that makes the structure look like a sham.

Draft the MSA to leave clinical control where it belongs, and mean it. Include express reservations of clinical authority to the professional entity, and do not include approval rights over clinical staffing or protocols.

Support the management fee. An independent fair market value opinion at the outset and on a periodic reset schedule. If the fee is a percentage, understand the state's position on percentage fees before agreeing to it.

Operate consistently with the documents. This is where structures fail. Board minutes of the professional entity showing real deliberation. Clinical policies adopted by clinicians. Separate bank accounts, separate books, and intercompany transactions actually settled. Employment decisions made by the professional entity. A structure papered correctly and operated as a single business is the fact pattern that produces adverse findings.

Address telehealth separately. A telehealth business necessarily practices where the patient is located, which means licensure in each state and, in restrictive states, a professional entity in each. Multistate PC structures with a single MSO are common and require careful attention to each state's ownership and modality-specific rules.

Revisit periodically. State law in this area is moving quickly, particularly on transaction review and on legislative attention to private equity ownership of practices. A structure that was compliant when built may not remain so.

Primary authority

  • State medical practice acts, professional corporation statutes, medical board regulations, and fee-splitting prohibitions — the operative law, which differs by state and by profession and has no federal analogue.
  • 42 U.S.C. § 1320a-7b(b) — the Anti-Kickback Statute, including § 1320a-7b(h) (no specific intent required) and § 1320a-7b(g) (a resulting claim is a false claim); 42 C.F.R. § 1001.952 — safe harbors, including (b) and (c) (space and equipment rental), (d) (personal services and management contracts), (i) (employment), and (ee)–(gg) (value-based arrangements).
  • 42 U.S.C. § 1395nn — the Stark Law, including § 1395nn(b)(2) (in-office ancillary services), § 1395nn(e) (compensation exceptions), and § 1395nn(h)(4) (group practice); 42 C.F.R. §§ 411.351–411.357, including § 411.352 (group practice), § 411.357(l) (fair market value compensation), and § 411.357(aa) (value-based exceptions).
  • 31 U.S.C. §§ 3729–3733 — the False Claims Act; 42 U.S.C. § 1320a-7k(d) — the sixty-day overpayment rule; 42 U.S.C. § 1320a-7a — civil monetary penalties; 42 U.S.C. § 1320a-7 — exclusion authority.
  • 42 C.F.R. § 489.18 — change of ownership and assignment of the Medicare provider agreement; 42 C.F.R. Part 424, Subpart P — provider enrollment.
  • 15 U.S.C. § 18a — Hart-Scott-Rodino; 15 U.S.C. § 18 — Clayton Act § 7.
  • 45 C.F.R. Parts 160 and 164 — HIPAA, including the business associate relationship between the professional entity and the MSO.
  • State healthcare transaction notice and review statutes — California's Office of Health Care Affordability provisions, and the analogous regimes in Massachusetts, Oregon, New York, Illinois, Minnesota, and a growing list of states, several expressly reaching private equity acquisitions.
  • United States v. Greber, 760 F.2d 68 (3d Cir. 1985) — the one purpose test.
  • Universal Health Services, Inc. v. United States ex rel. Escobar, 579 U.S. 176 (2016) — implied certification and demanding materiality.
  • OIG Advisory Opinions and Special Fraud Alerts — the most useful practical guidance on specific arrangements.

A worked deal: the four-state dermatology platform

A sponsor acquires a dermatology group operating twenty-two clinics across four states. The structure question is answered differently in each.

State A enforces corporate practice strictly and prohibits percentage-based management fees. The structure is a professional corporation owned by a designated physician subject to a stock transfer restriction agreement, with a flat management fee reset annually to fair market value on an independent valuation. The friendly PC physician is the group's regional medical director — a real role, in the state, with a modest equity interest in the MSO.

State B permits corporate employment of physicians outright. The MSO employs the physicians directly. No professional entity, no succession agreement, no fee analysis. Substantially simpler and cheaper to operate — and a reminder that the complexity elsewhere is a legal artifact, not a business necessity.

State C has a corporate practice doctrine with a broad managed care exception and no reported enforcement in twenty years. Counsel recommends the conservative structure anyway, because the exposure is not the medical board — it is the payor recoupment claim and the next buyer's diligence, both of which apply the statute as written.

State D has recently enacted a healthcare transaction notice statute requiring ninety days' advance notice to the attorney general for acquisitions above a revenue threshold, with authority to extend review. The threshold is met. This provision alone moves the closing date by four months and it was identified in week two only because someone asked.

Diligence findings. The billing audit samples 200 encounters and finds a pattern of Mohs surgery units billed without adequate documentation of stages, extrapolating to a potential overpayment in the low seven figures. This triggers the sixty-day rule the moment it is identified. The parties negotiate: the seller retains the obligation, funds an escrow, engages counsel to prepare an OIG or CMS self-disclosure, and indemnifies without cap for the specific exposure. Representation and warranty insurance excludes it, as expected.

Three medical directorship agreements with a referring hospital have no fair market value support and pay above the range. They are terminated and re-papered at closing with a valuation.

Two physicians appear on no exclusion list but have open board complaints, which are disclosed.

Closing mechanics. Facility licenses in two states do not transfer and require new applications with sixty-day processing. Medicare CHOW filings are prepared; the parties elect to reject the provider agreement in the two states with the billing exposure, accepting a billing gap rather than successor liability. Tail coverage is purchased by the sellers at a negotiated split.

The lesson. Every material timing constraint in the deal came from a regulatory requirement rather than from the negotiation, and every one of them was discoverable in the first month.

The physicians' side

Most writing in this area addresses the investor. The selling physicians have their own set of questions, and they are frequently advised by counsel who does one of these transactions a decade.

Understand what you are selling. The purchase price is generally a multiple of adjusted EBITDA — practice earnings after normalizing physician compensation down to a market rate. That normalization is the transaction. A physician earning $900,000 who accepts post-closing compensation of $550,000 has funded much of the purchase price out of their own future income, and the difference between the two numbers, multiplied by the multiple, is what is being monetized. This is not improper; it is the deal. It should be understood before the letter of intent, not explained at the closing dinner.

Model the rollover honestly. Rollover equity in the MSO holding company is typically a meaningful share of total consideration. Ask: what percentage of the fully diluted equity, on what capitalization, subject to what preferences? Sponsor preferred equity with an accruing return sits ahead of common rollover, and in a flat or modest exit the rollover can be worth substantially less than its stated value or nothing at all. Ask for a waterfall at three exit values.

Read the compensation model for the term after the initial period. Many agreements set compensation for two or three years and then convert to a formula the MSO controls. That formula is the physician's actual long-term economics.

Understand the restrictive covenant. Duration, geographic scope, and whether it is tied to employment or to the sale. Sale-related covenants are enforced far more readily than employment covenants. Note that several states have recently restricted or prohibited physician noncompetes specifically, and the law here is moving.

Ask about clinical autonomy in operational terms, not in the abstract. How many patients per session? Who sets the schedule template? Who decides staffing ratios? What happens if you refuse a productivity target? The MSA's clinical-autonomy language is real, and so is the practical pressure of a budget.

Get separate counsel from the practice's counsel. The practice's lawyer represents the entity, and the interests of a founding physician nearing retirement, a mid-career partner, and a recently hired associate are genuinely different.

Ask what happens at the second exit. The sponsor's model is a sale in three to seven years to a larger platform. Everything about the arrangement — the covenants, the rollover, the compensation formula — should be evaluated against that event, because it is the one that determines the outcome.

Beyond medicine: the same structure elsewhere

The MSO model was developed for physician practices and has been exported to every licensed profession that attracts outside capital. The doctrine differs enough in each that the medical template cannot simply be copied.

Dentistry. Dental support organizations are the most mature version of the model, and several states regulate them specifically — with statutes addressing permissible DSO services, prohibited controls over clinical judgment, and in some states registration requirements. A few states have enacted dental-specific legislation after enforcement actions involving clinical decisions driven by production targets.

Veterinary medicine. Most states restrict corporate ownership of veterinary practices, and the consolidation of the sector has proceeded through management structures closely tracking the medical model. Practice acts and board rules vary widely, and several states are notably permissive.

Optometry and ophthalmology. Optometry is regulated separately and in several states restrictively, including rules governing the relationship between optical retailers and optometrists — a longstanding area of enforcement.

Behavioral health. Frequently subject to corporate practice restrictions and to additional licensure for facilities and programs. The telehealth overlay is unusually significant here, and prescribing controlled substances remotely carries its own regime under the Ryan Haight Act, 21 U.S.C. § 829(e), whose telemedicine flexibilities have been extended repeatedly and remain subject to rulemaking.

Physical therapy, chiropractic, acupuncture, and nursing. Each with a separate practice act and a separate answer.

Pharmacy. Ownership restrictions in several states, plus federal DSCSA requirements and PBM regulation that has expanded rapidly at the state level.

Law. Worth mentioning because it is the strictest of all. ABA Model Rule 5.4 prohibits nonlawyer ownership of law firms and fee sharing with nonlawyers, and — with the narrow exceptions of Arizona's alternative business structures and Utah's sandbox — outside investment in law practices remains prohibited nationwide. The MSO model is used for law firm back-office services, but the constraints are tighter and the tolerance for aggressive structures much lower.

The general instruction is the same in every case: identify the practice act, the professional entity statute, the board rules, and the fee-splitting prohibition for the specific profession in the specific state, and build from there rather than from a form.

Where this is heading

Three developments are worth tracking, because each could change the structure rather than merely regulate it.

State transaction review is expanding fast. The regimes adopted in the last several years differ in threshold and remedy, but the direction is uniform: advance notice, agency review, and in some states authority to condition or block. Several statutes name private equity acquirers specifically, and several reach transactions that would not be reportable under Hart-Scott-Rodino. A platform operating in ten states should expect to be filing notices somewhere continuously.

Legislative attention to the friendly PC itself. Bills have been introduced in multiple states to codify what corporate practice prohibits — restricting an MSO's control over clinical staffing, scheduling, coding, and referrals, limiting stock transfer restriction agreements, and in the most aggressive versions requiring that the professional entity's owner have a genuine practice in the state. Where such a statute passes, existing structures may require restructuring rather than mere adjustment.

Physician noncompete restrictions. A number of states have limited or prohibited noncompetes for physicians specifically, on access-to-care grounds, and the trend is toward more restriction. Because retention of the selling physicians is central to the investment thesis, a change here alters deal value directly.

The stable observation across all of it is that the doctrine's original concern — that clinical judgment should not answer to capital — has not gone away, and the regulatory response has moved from prohibiting ownership to scrutinizing control. Structures built to satisfy the form of the doctrine while defeating its substance are the ones most exposed to what comes next.

Related articles

This article is provided for general informational purposes and does not constitute legal advice. Corporate practice of medicine and fee-splitting rules are state law, differ substantially by state and by profession, and are enforced through mechanisms that vary from medical board action to payor recoupment to private litigation. State healthcare transaction review requirements are expanding rapidly and several impose pre-closing notice periods measured in months. Consult qualified healthcare regulatory counsel in every state of operation before structuring, acquiring, or operating a practice management arrangement.