Executive Summary
- Offering equity in MSOs to physicians can be permissible but must be structured to comply with both federal and state laws. Failure to comply with applicable fraud and abuse laws may result in civil and/or criminal penalties, repayment obligations, and exclusion from federal healthcare programs.
- From an investor's perspective, a company’s compliance with applicable fraud and abuse laws is a key diligence item, and violations can be dealbreakers that jeopardize an investment or exit.
- Always conduct a fact-specific legal review before offering equity to physicians.
In many states, the corporate practice of medicine (CPOM) doctrine prohibits non-physicians from owning or controlling a medical practice. A commonly used alternative structure is the management services organization/professional corporation (MSO/PC) structure, where a physician-owned PC provides the clinical care, while non-physicians and investors own the MSO, which provides non-clinical administrative and management services to the PC.1
Companies using an MSO/PC model frequently want to offer affiliated physicians equity in the MSO to align interests, attract and retain top clinical talent, and engage physicians to provide strategic and advisory services. Before equity in the MSO is offered, the arrangement must be carefully analyzed for compliance with the federal Anti-Kickback Statute (AKS), the federal physician self-referral law (Stark Law), the federal False Claims Act, state CPOM and fee-splitting laws, and state AKS and Stark Law corollaries.
While most of these laws are primarily triggered when the company receives reimbursement from Medicare, Medicaid, or commercial insurers, understanding each law’s applicable requirements and constraints is crucial if the company may consider billing insurance in the future. This frequently occurs when the company gains resources to build the administrative structure necessary to bill payors, insurance coverage expands for the services provided, or insurance reimbursement improves.
Failure to comply with applicable fraud and abuse laws may result in civil and/or criminal penalties, repayment obligations, and exclusion from federal healthcare programs. From an investor’s perspective, a company’s compliance with applicable fraud and abuse laws is a key diligence item, and violations can be dealbreakers that jeopardize an investment or exit.
Companies should work with experienced healthcare legal counsel before offering equity to physicians to ensure the arrangement is structured to meet applicable federal and state laws.
The Anti-Kickback Statute (AKS)
The AKS is a federal criminal law that prohibits offering, paying, soliciting, or receiving anything of value (including ownership interests such as stock) to induce or reward referrals for items or services reimbursable by federal healthcare programs.2,3 Violations can lead to substantial fines, treble damages, exclusion from federal programs, and imprisonment.4
Similarly, many states have enacted broader AKS-type restrictions. For example, in Florida it is unlawful for healthcare providers to offer, solicit, or receive kickbacks in connection with the referral of patients or services regardless of payor source.5 Likewise, Texas bars the exchange of remuneration for securing or soliciting patients in general, not limited to federal program beneficiaries.6
Offering equity in the MSO to a physician who can refer to or increase the utilization of federally covered services provided by the PC raises AKS concerns because the equity could be seen as indirect remuneration to induce or reward referrals to the PC. That is, the physician’s ownership in the MSO potentially creates an incentive for the physician to increase patient utilization of healthcare services at the PC, regardless of clinical need, to increase profits for the MSO. Even though the physician’s equity is in the MSO, a legally separate entity from the PC, the MSO’s profits are often tied to the PC’s revenue through a management services agreement.7
The AKS includes numerous “safe harbors” that, if met, protect the parties from prosecution under the AKS. Structuring arrangements within a safe harbor should be done whenever possible. Although failure to meet a safe harbor does not make the arrangement illegal, compliance with a safe harbor provides strong protection and reduces enforcement risk. Generally, the “Small Investment Interests” or the “Personal Services and Management Contracts” safe harbors can be suitable for arrangements involving offering equity in the MSO to an affiliated physician.8
Given the complexity of the AKS and the fact-specific nature of safe harbor compliance, companies should work closely with experienced healthcare regulatory counsel before offering equity in an MSO to physicians. Unresolved AKS risks are a common diligence red flag that can derail or significantly delay a potential investment.
The Stark Law
The Stark Law is a federal civil law that prohibits a physician from referring federal healthcare program patients for certain designated health services (DHS) to an entity with which the physician (or an immediate family member) has a financial relationship (including an ownership interest) unless an exception applies.9 DHS includes clinical laboratory services, physical, occupational, and speech-language therapy, radiology and certain other imaging services, durable medical equipment, and outpatient prescription drugs, among others. Violating the Stark Law can result in denial of payment, repayment obligations, civil monetary penalties, and exclusion from federal healthcare programs.
If a physician has equity in an MSO and that physician refers patients for DHS to an affiliated PC or MSO, the physician’s ownership can create a direct or indirect financial relationship under the Stark Law. In such cases, the referrals are prohibited unless the arrangement fits within a Stark Law exception. Careful analysis of the relationship between the entities and the services being referred is required to determine whether a Stark Law exception can be met; such analysis should be made in consultation with a knowledgeable healthcare attorney.
Several states have enacted their own physician self-referral laws. These state laws can be more expansive than the federal Stark Law because they apply to all payors, including commercial insurance and cash-pay patients. For example, California’s Physician Ownership and Referral Act applies regardless of payor source,10 Florida’s Patient Self-Referral Act prohibits certain referrals for designated health services for any patient,11 and Maryland’s self-referral law similarly extends beyond federal program beneficiaries.12
State CPOM Laws
State CPOM laws must also be analyzed before offering affiliated physicians equity in the MSO. Such laws generally require MSOs to be independent—if a physician PC owner also owns equity in the MSO, this can compromise the PC’s independence. For example, Oregon now limits physicians from owning an MSO that contracts with their own PC, and California has considered related restrictions.13,14 Other states, such as New York and New Jersey, aggressively monitor the relationships between PCs and MSOs to ensure such entities remain appropriately independent.
[1] For more information on the CPOM model, see our Essential Guide.
[2] 42 U.S.C. § 1320a-7b(b).
[3] The AKS is a federal law that applies to federal healthcare payors; however, many states have mini-AKS laws that apply to Medicaid programs, commercial payors, and in some situations, cash-pay patients.
[4] In contrast to the Stark Law, the AKS requires a knowing and willful intent to induce or provide referrals.
[5] Fla. Stat. § 456.054.
[6] Tex. Occ. Code § 102.001.
[7] The AKS is broad and isn’t limited to physicians or direct referral sources. Accordingly, AKS analysis should be done before offering equity in the MSO to a direct or indirect referral source or an individual or entity in a position to influence referrals. For example, the AKS is frequently triggered when advisory board members are offered equity in the MSO.
[8] The use of the Personal Services and Management Contracts safe harbor is often limited when offering equity because it is typically not set in advance.
[9] 42 U.S.C. § 1395nn.
[10] Cal. Bus. & Prof. Code § 650.01.
[11] Fla. Stat. § 456.053.
[12] Md. Health Occ. Code § 1-301 et seq.
[13] See Or. S.B. 951 (2025); Or. H.B. 3410 (2025).
[14] Cal. S.B. 351 (2025) proposes to prevent MSOs from interfering with the professional judgment of physicians by limiting their ability to exercise control over clinical staffing, payor contracting, billing and coding, selection of medical equipment and supplies, etc.
