Legal Intelligencer article by Lamb McErlane PC Health Law Attorneys Vasilios J. Kalogredis and Rachel E. (Lusk) Klebanoff.

Private equity and other non-doctor investment in U.S. healthcare has grown significantly over the past decade thanks to investors who have been keen on getting into a large market with potentially high returns. As business opportunities abound for both licensed physicians, dentists and other licensed and non-licensed entrepreneurs and investors in the ownership and operation of medical and dental practices, ambulatory care facilities, drug treatment facilities, diagnostic testing facilities and other types of healthcare facilities, doctors and business individuals and entities must ensure that the structure of their businesses comply with their states Corporate Practice of Medicine (“CPOM”) doctrine.

Under the auspices of protecting the public, the American Medical Association (AMA) promulgated the initial version of the CPOM doctrine. In simple terms, the CPOM doctrine generally prohibits non-licensed persons, including individuals and business entities, from employing physicians to practice medicine (or dentists to practice dentistry) on their behalf. The intent of the doctrine was to ensure that only licensed medical professionals delivered medical care and that lay persons and entities not influence treatment decisions. The premise underlying the doctrine was that it would protect patients from potential abuses because commercialized medicine would ultimately divide a physician’s loyalty between profits and the delivery of quality patient care.

In practice, states with CPOM laws permit professional service entities to practice medicine, but only if owned by physicians licensed in that state.

Pennsylvania’s corporate practice of medicine doctrine, codified under the Medical Practice Act of 1985 (63 P.S. § 422.1 et seq.), is rooted in the Pennsylvania Supreme Court’s decision in Neill v. Gimbel Brothers, Inc., 199 A. 178 (1938), which has not been overruled or modified in the 82 years since the original holding.

In Neill, the Pennsylvania Supreme Court ruled that a corporation is prohibited from engaging in the practice of optometry and may not employ optometrists for the rendering of such services to the public. Consistent with the premise underlying the CPOM doctrine, the Court reasoned:

“A corporation as such cannot possess the personal qualities required of a practitioner of a profession. Its servants, though professionally trained and duly licensed to practice, owe their primary allegiance and obedience to their employer rather than to the clients or patients of their employer. The rule stated recognizes the necessity of immediate and unbroken relationship between a professional man and those who engage his services.”

Subsequent case law is sparse and other authorities provide limited guidance on the applicability of the CPOM doctrine. However, two more recent cases applying Pennsylvania law (albeit by non-Pennsylvania courts), further caution about the structure of these private equity (or other non-licensed entities or people) and medical and dental arrangements. In OCA, Inc. v. Hodges, 615 F. Supp. 2d 477 (E.D. La. 2009) and Warren J. Apollon, D.M.D., P.C. v. OCA, Inc., 592 F.Supp.2d 906 (E.D. La. 2008), the District Court for the Eastern District of Louisiana, interpreting Pennsylvania law, found that the ability of a management company to participate in the profits of a dental practice pursuant to the parties’ business service agreement (which created the illegal partnership but were not severable) was akin to a partnership interest and would be precluded by the Pennsylvania CPOM doctrine.

Similarly, in Allstate Insurance Company vs. Northfield Medical Center, P.C., 228 N.J. 596, 159 A.3d 412 (2017), the New Jersey Supreme Court affirmed a trial court’s conclusion that a  New York lawyer and a California chiropractor violated the state’s Insurance Fraud Prevention Act (“IFPA”) because they “promoted and assisted in the creation of a practice structure that was designed to circumvent regulatory requirements with respect to control, ownership and direction of a medical practice.”

Following a model known as “Practice Perfect,” a New Jersey chiropractor incorporated a management company and a medical practice. The medical practice was owned by a physician, and the management company was owned by the chiropractor. The management company controlled the day-to-day operations of the medical practice, had responsibility for all financial matters, and had the right to seize control of the practice at any time through an undated resignation letter signed by the physician. The physician owner had no control over any decisions made by the medical practice, nor did the physician owner appear “in charge” of any of the practice profits or design. The court concluded that the medical practice was essentially under the control of the management company and the physician was a nominal owner; thus, because the medical practice was not legitimately structured, it was not allowed to submit medical insurance claims. This and resulted in a $4 million verdict in favor of Allstate.

There are a few exceptions to the CPOM doctrine in Pennsylvania, including practicing medicine through a professional corporation, limited liability partnership, or restricted professional company. Specifically, under Pennsylvania law, only licensed physicians may be shareholders of or partners or members in, as the case may be, professional corporations, limited liability partnerships or restricted professional companies which have been formed to provide medical services. The statutes require that all of the ultimate beneficial owners of these entities be licensed persons. In fact, the legislative intent of each of these laws is to authorize only licensed persons to render professional services through these types of entities. Pennsylvania also permits health maintenance organizations (HMOs) and licensed hospitals and health care facilities to employ physicians and provide health care services.

Because of the CPOM doctrine, non-physician investors desiring to offer physician services (alone or with other services) often set up two entities—a professional corporation that employs physicians through which physician services are furnished (often referred to as a “captive PC” or “friendly PC”), and a management services organization (MSO) that, under contract with the professional corporation, furnishes all non-physician services to the business (e.g., space, equipment, non-physician staffing, billing and collection, and other functions). The MSO is paid a fee for providing these services to the medical practice, which should be fair market value and commercially reasonable for the services provided. However, the MSO’s services must not interfere with the professional’s medical (clinical) judgment or otherwise result in MSO control over the medical aspects of the medical practice. If not done properly, this may not fly. We have seen many try to navigate the CPOM doctrine waters and not survive the rocky seas. This is not something that should be undertaken casually. Similar arrangements are happening in the dental space as well.

Things are state-specific. Healthcare providers must be careful to comply with the CPOM doctrine because violating these laws could result in a provider’s loss of license and repayment of all revenue for billed services to patients, insurance companies and the government, as well as other fines and penalties, including potential criminal issues.

Ultimately, there are a variety of business structures which allow practitioners to provide professional services while being employed, partnering with, and/or engaging the services of other licensed professionals, and even creating business arrangements with non-licensees.  However, given the structural complexity of many such medical entities, including MSOs, it is vital to ensure that any corporate/business arrangements comply with the requirements of the CPOM doctrine. Seeking the advice of knowledgeable and experienced professionals is imperative before taking any such steps.

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Vasilios J. (Bill) Kalogredis, Esq. has been advising physicians, dentists, and other health care professionals and their businesses as to contractual, regulatory and transactional matters for over 45 years. He is Chairman of Lamb McErlane PC’s Health Law Department. bkalogredis@lambmcerlane.com. 610-701-4402.

Rachel E. (Lusk) Klebanoff, Esq. is a senior associate at Lamb McErlane PC who focuses on health law and health care litigation. She represents physicians, dentists, medical group practices, and other health-related entities in transactional, regulatory, and compliance matters. rlusk@lambmcerlane.com. 610-701-4416.

Click here to view the December 1, 2020 Legal Intelligencer article.

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