The History of the Corporate Practice of Medicine: How a 1930s Court Doctrine Still Shapes Every Med Spa

A Rule Older Than the Med Spa

Most med spa owners meet the corporate practice of medicine, or CPOM, as a surprise: a lawyer or a medical board tells them the entity they built cannot own the clinic. It feels like a rule invented for aesthetics. It is not. It is roughly a century old, it was built for a very different world of company doctors, contract clinics and prepaid plans, and it has been argued over in courts, ethics committees and legislatures ever since.

The logic has not changed. A medical license is issued to an individual who has met education, examination and character requirements, who answers to a licensing board, and who can lose the license. A corporation cannot sit the exam, cannot take an oath and cannot be disciplined the way a person can. So, the doctrine reasons, a corporation cannot itself practice medicine, and a business that is not controlled by licensed physicians should not be able to direct what a physician does for a patient. California's statutes put it in those terms: its Business and Professions Code declares that corporations have no professional rights, privileges or powers.

Where It Came From: Ethics First, Then Licensing Law

Legal scholars trace the doctrine to inside the medical profession. Around 1900 it existed as an ethical restriction, a view that physicians should not take salaried jobs with lay organizations or share their fees with people who were not physicians. State medical licensing acts gave that ethical view something to hang on: if only licensed individuals may practice, then an unlicensed company that hires physicians looks like it is practicing through them.

Early landmark decisions came in dentistry, which the same licensing logic covered. In Parker v. Board of Dental Examiners, decided in 1932, the California Supreme Court upheld a five-year license suspension and reasoned that practice could be limited to natural persons, that the business side cannot be separated from the professional side, and that the profession is not open to commercial exploitation. In 1935 the Illinois Supreme Court held in Dr. Allison, Dentist, Inc. v. Allison that a corporate charter could not authorize a corporation to practice dentistry.

The First Medical Cases

Medicine followed within a year. In People v. United Medical Service, decided in 1936, the Illinois Supreme Court ousted a for-profit corporation that ran clinics staffed by licensed physicians. The court reasoned that only individuals may obtain a license and that practicing medicine takes more than the financial ability to hire competent people. Courts in later cases cite it as one of the foundational decisions.

Two more decisions show that courts did not all take the same route. In 1938 the California Supreme Court held in People v. Pacific Health Corp. that a for-profit prepaid medical plan could not avoid the doctrine by calling its doctors independent contractors. In Bartron v. Codington County, decided in 1942, the South Dakota Supreme Court found that the licensing statute did not itself bar corporate employment of physicians, but still held the arrangements void as contrary to public policy, citing the commercial exploitation of professional services. Some states built the doctrine on their licensing statutes and others on public policy, which is one reason state rules still differ so much today.

Organized Medicine Enforces the Rule

For decades the rule was enforced as much by the profession as by the courts. The American Medical Association's ethics principles discouraged physicians from working for lay organizations, and a secondary account of the AMA's 1934 principles reports that they condemned corporate and contract practice broadly. Scholars describe the doctrine as having originated in these ethical codes, with the courts later adopting their reasoning.

The most dramatic example reached the Supreme Court. In American Medical Association v. United States, decided in January 1943, the Court affirmed Sherman Act convictions for obstructing Group Health Association, a Washington, D.C. prepaid plan run by salaried physicians, a method of operation the defendants considered contrary to their code of ethics. Nine years later, in a case involving the Oregon State Medical Society, the Court described organized medicine's objections to contract practice in financial and ethical terms: a physician serving two masters, the patient and the paying organization.

Antitrust Takes Away the Ethics Rule, Not the Law

In December 1975 the Federal Trade Commission issued a complaint against the AMA over its ethics rules. The Commission found that the AMA's guidelines on corporate practice restrained group health plans, hospitals and similar organizations from structuring their businesses as they chose, and it issued an order against them in 1979. The Second Circuit enforced the order as modified in 1980, and on March 23, 1982 the Supreme Court affirmed by an equally divided Court, 4-4, with one Justice not participating.

The AMA's ethics principles changed. Its 1980 version told physicians they were free to choose whom to serve and with whom to associate. But the ethics rule was never the only source of the doctrine. State courts and legislatures had adopted it as law, and that part survived. What changed was that the profession could no longer enforce it by discipline against members.

The HMO Era: Exceptions, Not Repeal

The next pressure came from managed care. The federal Health Maintenance Organization Act of 1973 did not expressly abolish the doctrine, but it preempted state laws that inhibited HMOs, and states responded by writing HMO exceptions of their own. California's Knox-Keene Act, passed in 1975, is the best-known example. Hospitals also gained room to employ physicians. In Berlin v. Sarah Bush Lincoln Health Center, decided in 1997, the Illinois Supreme Court declined to apply the doctrine to licensed hospitals, the same court that had applied it so firmly in 1936.

A 1991 federal study cited in California's own research found that only five states clearly barred hospitals from employing physicians: California, Colorado, Iowa, Ohio and Texas. So by the 1990s the doctrine had become a patchwork: strict where it was enforced and thin or absent elsewhere, with carve-outs for the organizations that had the most political weight.

Why the Friendly PC and the MSO Exist

That patchwork is the environment the modern MSO model grew up in. The arrangement used across med spas today, a physician-owned professional corporation that holds the license and the patients, contracting with a separate management company that provides everything that is not the practice of medicine for a documented fee, is the structure scholars describe as a friendly PC or an MSO model. A 2023 article in the New England Journal of Medicine describes how these structures are used to work within the doctrine, and also how critics view them as a way around it.

The doctrine is why that structure has the shape it does. The PC, not the management company, bills patients and holds the revenue. The management fee is flat and set at fair market value rather than a share of collections, because sharing professional fees with an unlicensed party is prohibited in most CPOM states regardless of entity type. And clinical decisions stay with the physicians, because a management company that starts directing treatment is the arrangement regulators and courts have always looked for.

Where the Doctrine Stands Now

California remains the clearest example of a strict state. The Medical Board's position is that corporations generally cannot practice medicine directly or indirectly, and its guidance treats a physician who serves as medical director of a lay-owned business as aiding unlicensed practice. State research has listed med spa medical director arrangements and MSOs that arrange or provide medical services among the structures the doctrine reaches. In 2025 California went further, with SB 351 barring private equity and hedge fund interference with clinical judgment, effective January 1, 2026, and AB 1415 requiring 90 days' notice to the state before certain health care transactions. In June 2026 the state attorney general's settlement with Carbon Health, which included a $4.4 million payment and a bar on MSO ownership interests in the practices it served, was described by law firms as another enforcement action aimed at the friendly-PC model.

Oregon moved first and furthest. SB 951, signed on June 9, 2025, bars management companies from owning or controlling professional medical entities and from exercising de facto control over them. Texas has no general corporate-employment exception, and the main one it does have covers nonprofit health organizations certified by the Texas Medical Board. In September 2026 three senators introduced the Stop Corporate Takeovers of Physicians Act, modeled on Oregon's law, with a House companion bill. It would be the first federal CPOM law, and commentators consider passage unlikely, but it shows how far the conversation has moved.

Why It Persists, and What Critics Say

The rationale has been consistent for a century. A profit motive, the argument goes, leads to commercial exploitation of patients, a divided loyalty for the physician between patient and employer, and lay control over clinical choices. California's research bureau lists those three concerns when it explains why the state keeps the doctrine.

Critics are just as consistent. Law reviews since the 1980s have called the doctrine an anachronism, and California's own research bureau has called its application inconsistent. The 2023 NEJM article observes that enforcement is dormant in some states and that MSO structures can circumvent the doctrine, which is part of the argument for the new, stricter state laws. The AMA's current ethics opinion on physicians' relationships with private equity firms and MSOs addresses the doctrine directly, so the profession that began it is still engaged with it.

A Timeline

• 1932: Parker v. Board of Dental Examiners (California): an early landmark decision applying the doctrine's logic, in dentistry.
• 1935: Dr. Allison, Dentist, Inc. v. Allison (Illinois): a corporate charter cannot authorize a corporation to practice dentistry.
• 1936: People v. United Medical Service (Illinois): a for-profit clinic corporation employing physicians is ousted.
• 1938: People v. Pacific Health Corp. (California): a prepaid plan using independent-contractor doctors is illegal corporate practice.
• 1942: Bartron v. Codington County (South Dakota): corporate employment contracts void as against public policy.
• 1943: American Medical Association v. United States: the Supreme Court affirms Sherman Act convictions for obstructing a prepaid group plan.
• 1973 to 1975: The federal HMO Act preempts state laws that inhibit HMOs; California's Knox-Keene Act follows.
• 1975 to 1982: The FTC challenges the AMA's ethics rules; the Supreme Court affirms the FTC's order 4-4 on March 23, 1982.
• 1997: Berlin v. Sarah Bush Lincoln Health Center (Illinois): the doctrine is not applied to licensed hospitals.
• 2025: Oregon SB 951 and California SB 351 and AB 1415 tighten the doctrine against management companies and private equity.
• 2026: California's Carbon Health settlement (June) and the federal Stop Corporate Takeovers of Physicians Act (September).

What It Means for Your Clinic

The history explains three practical things. First, the rule is not going away, and the direction of travel in 2025 and 2026 is toward stricter enforcement and closer scrutiny of management agreements, not looser. Second, a structure that is built to the doctrine, with a physician-owned PC that holds the patients and the revenue, a flat fair-market management fee, and clinical decisions reserved to the physician, is the structure that holds up whichever way a state moves. Third, the form of the entity matters: MedGrid forms professional corporations rather than PLLCs, for reasons covered on our PC versus PLLC page.

If you already operate and are not sure your structure matches your state's rules, that is exactly what a structure review is for. Your state guide on this site lays out where your state sits on the spectrum, and our explainer on what CPOM is covers the doctrine in practical terms.

Sources

• California Research Bureau, 2007: Report on the corporate practice of medicine, sbp.senate.ca.gov (doctrine, HMO era, hospital study, rationale).
• Case law: Parker, 216 Cal. 285 (1932); Allison, 360 Ill. 638 (1935); United Medical Service, 362 Ill. 442 (1936); Pacific Health Corp., 12 Cal.2d 156 (1938); Bartron, 68 S.D. 309 (1942); AMA v. United States, 317 U.S. 519 (1943); AMA v. FTC, 455 U.S. 676 (1982); Berlin, 179 Ill. 2d 1 (1997).
• Scholarship: Hampton, 66 U. Cin. L. Rev. 489 (1998); Chase-Lubitz, 40 Vand. L. Rev. 445 (1987); Zhu, Rooke-Ley and Fuse Brown, New England Journal of Medicine (2023).
• Recent developments: Oregon SB 951 (2025); California SB 351 and AB 1415 (2025); California Attorney General settlement with Carbon Health (June 2026); Stop Corporate Takeovers of Physicians Act (September 2026), as reported by law firm summaries including Sidley, Holland and Knight and Arnall Golden Gregory.

This article is general educational information, not legal advice. It summarizes court decisions and secondary sources, and some dates and effective dates for recent legislation differ between sources, so verify any specific point with counsel before relying on it. State law varies and changes, and whether a particular structure is compliant depends on its facts.