Fee Splitting and Referral Payment Restrictions

The prohibition, element by element

Subdivision (a) provides that, except as provided in Chapter 2.3 (commencing with section 1400) of Division 2 of the Health and Safety Code, the offer, delivery, receipt, or acceptance by any person licensed under this division or the Chiropractic Initiative Act of any rebate, refund, commission, preference, patronage dividend, discount, or other consideration, whether in the form of money or otherwise, as compensation or inducement for referring patients, clients, or customers to any person, irrespective of any membership, proprietary interest, or coownership in or with any person to whom these patients, clients, or customers are referred, is unlawful.

Several features repay slow reading.

All four positions are covered. Offer, delivery, receipt and acceptance. The physician who accepts and the entity that offers are both within the section, and an offer that is declined is still an offer.

The consideration need not be money. The enumerated forms — rebate, refund, commission, preference, patronage dividend, discount — are followed by “or other consideration, whether in the form of money or otherwise.” Below-market rent, free staff, subsidised equipment, marketing services and administrative support are all consideration. So is a “preference,” which is the least tangible item on the list and the one most likely to describe an ordinary commercial courtesy.

Ownership is foreclosed as an answer. The phrase “irrespective of any membership, proprietary interest, or coownership” exists to defeat the most natural defence: that a distribution from an entity one part-owns is a return on investment rather than a referral payment. Subdivision (a) says the ownership relationship does not by itself change the character of the consideration. Subdivision (d), discussed below, then supplies the conditions on which ownership can be a lawful basis for return.

“Patients, clients, or customers.” The section is not limited to clinical referrals. Directing a patient to a retail product or an ancillary service is within its language.

Who the section binds

The prohibition reaches “any person licensed under this division or the Chiropractic Initiative Act.” Division 2 of the Business and Professions Code is the Healing Arts division, so the section is not a physician-specific rule: it covers the licensed healing arts generally, and the Chiropractic Initiative Act is added because chiropractors are licensed under an initiative statute rather than under the division.

Two consequences follow for a physician assessing an arrangement. The counterparty is frequently also bound — a laboratory director, a pharmacist, an optometrist, a physical therapist — so a single arrangement can expose both sides independently. And the unlicensed counterparty is not bound by section 650 at all. A marketing company that pays a physician per patient is not itself a licensee committing a section 650 offence; the physician who accepts is. The statute is drafted around the licence, which means the party with the most to lose is usually the only one the section reaches.

What “other consideration” has covered in practice

The enumerated list is worth reading as a set of categories rather than a checklist, because each names a different mechanism for moving value without a visible payment. A rebate or refund returns part of a price already paid. A commission is a share of a transaction. A patronage dividend distributes surplus by volume of dealing rather than by capital. A discount reduces a price the licensee would otherwise pay. And a preference is not a payment at all — it is favourable treatment.

“Preference” is the item that catches arrangements nobody thought of as compensation: priority scheduling at a facility, guaranteed block time, expedited turnaround, first call on scarce capacity. Where any of those is provided because of referral flow rather than on terms available generally, it is consideration within subdivision (a) even though no money changed hands and no contract records it. The closing words — “whether in the form of money or otherwise” — are there to remove the argument that only cash counts.

The criminal penalty

Subdivision (i) is the part of section 650 least reflected in ordinary practice conversation. A violation is a public offence. A first conviction is punishable by imprisonment in a county jail for not more than one year, or by imprisonment pursuant to subdivision (a) of Penal Code section 1170, or by a fine not exceeding $50,000, or by both that imprisonment and fine. A second or subsequent conviction is punishable by imprisonment under Penal Code section 1170(a), or by that imprisonment together with a $50,000 fine.

Two consequences follow. Section 650 questions are not purely commercial questions, and the enforcement route is not confined to the Medical Board. The Board’s disciplinary jurisdiction runs alongside a district attorney’s.

Where percentage arrangements actually fail

Subdivision (b) provides that the payment or receipt of consideration for services other than the referral of patients that is based on a percentage of gross revenue or a similar type of contractual arrangement shall not be unlawful if the consideration is commensurate with the value of the services furnished or with the fair rental value of any premises or equipment leased or provided by the recipient to the payer.

Read carefully, that sentence contains two conditions and one permission. The permission is for percentage-based pricing, which California therefore does not treat as inherently suspect. The first condition is subject matter: the consideration must be for services other than the referral of patients. The second is quantum: it must be commensurate with the value of the services furnished, or with fair rental value.

The quantum condition is where arrangements fail, and it fails quietly. A management fee set at a percentage of collections was commensurate with the services when the practice had one location and modest volume. Five years later the services have not changed and the fee has tripled. Nothing was renegotiated; the arrangement simply drifted out of the subdivision (b) safe harbour, because commensurate value is a continuing condition rather than a fact fixed at signing.

The subdivision also offers two different benchmarks, and using the wrong one is a common error. Consideration may be commensurate with the value of the services furnished, or with the fair rental value of any premises or equipment leased or provided by the recipient to the payer. These measure different things. A services benchmark asks what the work is worth. A rental benchmark asks what the space or equipment is worth, and it applies only where the recipient is in fact leasing or providing premises or equipment to the payer.

An arrangement that bundles space, equipment and administrative services under a single percentage fee is being tested against whichever benchmark actually fits each component, and a fee justified by reference to the value of premises cannot carry the services element or the reverse. Where the components are not separately identified, there is nothing against which either benchmark can be applied.

Note also what subdivision (b) does not address. It concerns whether consideration is lawful under section 650. It says nothing about whether the same arrangement transfers control of a practice to an unlicensed entity, which is a separate question under the corporate practice doctrine. The Medical Board treats setting the doctors’ compensation as a flat percentage of gross receipts as an indicator of unlawful corporate practice — a different objection, on a different axis, to the same clause. An arrangement can satisfy subdivision (b) and still be evidence of corporate control. See the corporate practice of medicine and private equity and the practice.

The ownership exception and its backstop

Subdivision (d) is the provision that makes physician ownership of ancillary services workable. Except as provided in Health and Safety Code Chapter 2.3 and in sections 654.1 and 654.2, it is not unlawful for a licensee to refer a person to any laboratory, pharmacy, clinic — including entities exempt from licensure under Health and Safety Code section 1206 — or health care facility solely because the licensee has a proprietary interest or coownership in it. The proviso is the substance: the licensee’s return on investment for that interest must be based upon the amount of the capital investment or proportional ownership, and that ownership interest must not be based on the number or value of any patients referred.

The test is therefore structural rather than intentional. A distribution proportional to capital contributed is within the exception. A distribution that varies with the volume or value of a physician’s referrals is not, however it is labelled, and however genuinely the underlying services are needed. Tiered ownership units, tracking interests tied to a service line a physician feeds, and buy-in prices calibrated to expected referral volume are the structures that fail this proviso.

Then comes the sentence that distinguishes California’s approach: any referral excepted under this section shall be unlawful if the prosecutor proves that there was no valid medical need for the referral. A medical-necessity element is written into a financial-interest statute. Satisfying the ownership conditions does not immunise a referral that was not clinically needed — the exception is available only for referrals that had a valid medical basis, and the burden of showing the absence of one is placed on the prosecutor.

Subdivision (f) defines “health care facility” for these purposes as a general acute care hospital, acute psychiatric hospital, skilled nursing facility, intermediate care facility, and any other health facility licensed by the State Department of Public Health under Health and Safety Code Chapter 2 (commencing with section 1250).

Relationship to the self-referral provisions

Subdivision (d) opens with an express carve-out for sections 654.1 and 654.2, and California separately regulates physician self-referral through sections 650.01 and 650.02. Section 650.02 contains exceptions to the section 650.01 prohibition, including a rural exception where the licensee’s regular practice is located where there is no alternative provider of the service within either 25 miles or 40 minutes travelling time via the shortest route on a paved road, with an obligation to cease such referrals within six months of when the licensee knew or should have known an alternative provider had begun furnishing the service; a written disclosure obligation to the patient at the time of referral where the licensee has a financial interest; and further exceptions covering certain nonprofit corporations providing physician services under Health and Safety Code section 1206(l) and university-employed licensees.

Those provisions were not read in full for this page. They are identified here because subdivision (d) cannot be relied on without them, and an ownership arrangement that satisfies section 650(d) may still fail section 650.01.

The remaining exceptions

Federally qualified health centers. Subdivision (c) addresses consideration between an FQHC, as defined in 42 U.S.C. § 1396d(l)(2)(B), and an individual or entity providing goods, items, services, donations or loans under a contract, lease, grant, loan or other agreement, where the agreement contributes to the health center’s ability to maintain or increase the availability, or enhance the quality, of services provided to a medically underserved population. Such consideration is authorised only to the extent sanctioned or permitted by federal law. The subdivision does not create independent state permission; it defers to the federal position.

Health information technology. Subdivision (e) permits nonmonetary remuneration in the form of hardware, software, or information technology and training services as described in subsections (x) and (y) of 42 C.F.R. § 1001.952, as amended 4 October 2007 (72 Fed. Reg. 56632, 56644) and as subsequently amended. This is a state provision drafted by reference to a federal safe harbour, so its scope moves with the federal regulation.

Third-party advertising. Subdivision (g) provides that payment or receipt of consideration for advertising, where a licensee offers or sells services through a third-party advertiser, does not constitute a referral of patients when the third-party advertiser does not itself recommend, endorse, or otherwise select a licensee. The fee must be commensurate with the service provided. The subdivision then imposes a set of conditions that are frequently overlooked: if the licensee determines after consultation with the purchaser that the service is inappropriate, or the purchaser elects not to receive it and requests a refund, the purchaser receives a full refund of the purchase price as determined by the advertising service agreement; the licensee must disclose in the advertisement that a consultation is required and that an ineligible purchaser will be refunded; the advertising entity must be able to demonstrate that the licensee consented in writing to the subdivision’s requirements; the advertiser must make available advertisements for all licensees then advertising through it in the applicable geographic region; and any advertisement offering a discount price must also disclose the regular, nondiscounted price. Subdivision (g) does not apply to basic health care services as defined in Health and Safety Code section 1345(a), or to essential health benefits as defined in Health and Safety Code section 1367.005 and Insurance Code section 10112.27.

Internet services. Subdivision (h) provides that, to the extent consistent with federal law, regulations or guidance, payment or receipt of consideration for internet-based advertising, appointment booking, or any service providing information and resources to prospective patients does not constitute a referral if the provider does not recommend or endorse a specific licensee.

Subdivisions (g) and (h) share a single organising idea. Selling access to an audience is advertising; selecting a clinician for a patient is referral. A directory that ranks, matches, or steers has moved from the first activity to the second, whatever it is called and however the fee is computed.

Three regimes reach the same clause

A percentage-based management fee in a services agreement can be examined under three different bodies of California law at once. They ask different questions, apply different tests, and produce different remedies, and an arrangement can pass one while failing another. Keeping them apart is most of the analytical work.

Swipe the table sideways for the remaining columns

The practical differences matter more than the doctrinal ones. Section 650 is the only one of the three that is criminal. The corporate practice doctrine is the only one that reaches the physician’s licence directly for participating in the structure. Division 1.7 is the only one whose remedy operates automatically on the document, without a proceeding, and the only one confined to a defined class of owner.

They also fail at different points in an arrangement’s life. A section 650 problem typically develops through drift — a fee that outgrows the services. A corporate practice problem is usually present at signing, in the allocation of powers. A Division 1.7 problem arrives by operation of law on a date, which for existing agreements was 1 January 2026 whether or not anyone reopened the contract.

The Chapter 2.3 carve-out at the head of the section

Subdivisions (a), (d) and (e) each open by excepting Chapter 2.3 (commencing with section 1400) of Division 2 of the Health and Safety Code. That opening qualification is easy to skim past and it defines the outer edge of the section’s reach: where an arrangement falls within that chapter, section 650 is not the operative rule and the analysis moves elsewhere. This page does not state the content of Chapter 2.3, which was not read at source. It is flagged because a section 650 opinion that does not address whether the chapter applies has not finished the first sentence of the statute.

How it is enforced

Section 656 supports an injunction against violations of the article commencing at section 650. The Medical Board treats a section 650 violation as a ground of discipline, and its cite-and-fine authority under title 16 California Code of Regulations sections 1364.10 to 1364.13 lists section 650 among the citable offences. Subdivision (i) supplies the criminal exposure. And where the underlying services are billed to a government payor, a referral-payment violation is the kind of regulatory breach that plaintiffs plead as a predicate for False Claims Act liability — a derivative theory that turns on materiality and is discussed on the enforcement desk rather than asserted here.

The Medical Board’s guidance states the clearest case at its sharpest: a contract under which a physician’s compensation is tied to the number of patients he admits to a hospital is invalid as violating section 650. That is a volume-of-referrals term, and it fails without any inquiry into corporate structure.

How subdivision (a) and subdivision (d) fit together

Read in isolation the two provisions look inconsistent. Subdivision (a) makes referral consideration unlawful irrespective of any membership, proprietary interest, or coownership in the entity referred to. Subdivision (d) then says it is not unlawful to refer to a laboratory, pharmacy, clinic or health care facility solely because the licensee has a proprietary interest or coownership in it. One appears to remove ownership as a defence and the other to restore it.

They reconcile once the object of each is identified. Subdivision (a) is about the character of a payment: a distribution does not stop being referral consideration merely because it is routed through an ownership interest. Subdivision (d) is about the lawfulness of a referral: making a referral to an entity you part-own is not by itself the offence. The first prevents ownership from laundering a referral payment; the second prevents ownership from criminalising an otherwise proper referral.

The bridge between them is the subdivision (d) proviso, and it is what makes the two operate as one rule. Return on the ownership interest must be based on the amount of capital invested or proportional ownership, and the ownership interest must not be based on the number or value of patients referred. Where that holds, the distribution is a return on capital and subdivision (a) is not engaged, because the consideration is not compensation for referring. Where it does not hold — where the return tracks referral flow — subdivision (d) is unavailable and subdivision (a) applies with its ownership language doing exactly the work it was drafted for.

Put together, the statute permits physicians to own ancillary services and to use them, and prohibits the ownership interest from functioning as the payment mechanism for referrals. The valid-medical-need sentence at the end of subdivision (d) then guards the remaining gap: an arrangement can be structurally clean on capital-based returns and still fail if the referrals themselves were not clinically indicated.

What documentation is actually doing

Because subdivision (b) and subdivision (d) both turn on quantitative conditions — commensurate value, capital-proportional return — the evidentiary position matters as much as the drafting. Subdivision (b) does not state who bears the burden of showing that consideration is commensurate. What it does establish is that the lawfulness of a percentage arrangement depends on a fact about value, and a fact of that kind is either recorded contemporaneously or reconstructed years later under adversarial conditions.

The same is true of subdivision (d). Whether a return was based on capital investment or proportional ownership is a question about how the distribution was actually computed, not about how the operating agreement describes it. A capitalisation table, contribution records, and a distribution methodology that can be re-run against past periods are the materials that answer it.

Nothing in section 650 requires a valuation, and this page does not suggest that one is legally mandated. The observation is narrower: the statute makes lawfulness contingent on quantum is provable or it is not.

Questions that decide most arrangements

What is the payment for, in substance? Identify the service. If the answer describes an outcome — patients arriving, volume growing, a service line filling — rather than work performed, the arrangement is being paid for referral.

Is the amount still commensurate? Subdivision (b) is a continuing condition. An arrangement that was proportionate at signing and has since scaled with revenue while the services stayed constant has moved.

Does the return vary with referrals? Under subdivision (d) the return must track capital or proportional ownership, not the number or value of patients referred.

Was the referral medically needed? The subdivision (d) exception is unavailable for a referral with no valid medical need.

Does the intermediary select? For subdivisions (g) and (h), recommending, endorsing or selecting a licensee removes the protection.

Who else is bound? If the counterparty is also a Division 2 licensee, both sides are independently exposed. If it is unlicensed, section 650 reaches only the licensee — which is usually the physician.

Can the quantum be evidenced? Subdivisions (b) and (d) make lawfulness depend on facts about value and about how distributions were computed. Those are questions of record.

What this page does not decide

First, it states California law. The federal anti-kickback statute and the physician self-referral law are separate regimes with different elements — notably a scienter requirement in the federal kickback provision that section 650 does not contain — and neither is stated here. An arrangement lawful under section 650 may fail either.

Second, sections 650.01, 650.02, 654.1 and 654.2 were not read in full for this page. Subdivision (d) is expressly subject to sections 654.1 and 654.2, and the self-referral prohibition operates independently.

Third, Health and Safety Code Chapter 2.3 (commencing with section 1400), which qualifies subdivisions (a), (d) and (e), was not read here.

Fourth, subdivision (e) incorporates a federal regulation as subsequently amended, so its current content depends on the state of 42 C.F.R. § 1001.952(x) and (y) rather than on the California text.

Fifth, no judicial construction of section 650 is cited, because none was verified in writing this page.

Sources

1. Cal. Bus. & Prof. Code § 650(a)–(i) — current text: prohibition (a); percentage-of-gross permission conditioned on commensurate value (b); FQHC deference to federal law (c); ownership exception with capital-based return and the valid-medical-need backstop (d); health IT nonmonetary remuneration (e); health care facility definition (f); third-party advertiser conditions (g); internet-based services (h); criminal penalty (i).
2. Cal. Bus. & Prof. Code § 650.02 — exceptions to the self-referral prohibition, including the 25 mile / 40 minute rural exception, the written financial-interest disclosure, and the Health & Saf. Code § 1206(l) nonprofit and university provisions. Identified, not read in full.
3. Cal. Bus. & Prof. Code § 656 — injunctive relief for violations of the article commencing at § 650.
4. Medical Board of California, Enforcement Actions re Unlicensed Corporate Practice of Medicine — § 650 among citable offences; admissions-linked compensation invalid; percentage-of-gross compensation as an indicator of corporate control.
5. 16 Cal. Code Regs. §§ 1364.10, 1364.11, 1364.13 — citation and fine authority.
6. Cal. Health & Safety Code Division 1.7, §§ 1190–1192 — added by SB 351 (Cabaldon), Ch. 409, Stats. 2025, chaptered text; operative 1 January 2026. Cited here only for the comparison of regimes: clause-level voidness at § 1191(c)(2) and Attorney General enforcement at § 1191(e).
7. Cal. Bus. & Prof. Code §§ 2400, 2052, 2264, 2286 — the corporate practice doctrine and its disciplinary grounds, cited here only for the comparison of regimes; treated on the corporate practice of medicine.
8. Cal. Health & Safety Code Chapter 2.3 (commencing with § 1400); Cal. Bus. & Prof. Code §§ 650.01, 650.02, 654.1, 654.2; Cal. Health & Safety Code §§ 1345(a), 1367.005; Cal. Ins. Code § 10112.27; 42 U.S.C. § 1396d(l)(2)(B); 42 C.F.R. § 1001.952(x)–(y); Cal. Penal Code § 1170(a); Cal. Health & Safety Code § 1250 (health facility, as used in § 650(f)) — provisions cross-referenced inside the text of § 650 and identified where they appear. Not read at source for this page.

Related analysis

• The Corporate Practice of Medicine Doctrine in California
• Private equity and the medical practice
• Who controls clinical judgment
• The False Claims Act in healthcare
• Restrictive covenants in California physician employment