Chester County Medicine Magazine article by Lamb McErlane attorneys Vasilios (Bill) J. Kalogredis, Esq. and Sonal Parekh, Esq.

Background

Medical practices are subjected to various state and federal laws and regulations, whether related to business formation, licensure, general compliance or otherwise. While most healthcare practitioners are generally aware of more well-known legal requirements, such as HIPAA compliance, many remain blissfully unaware of other requirements or regulations hidden in the weeds. Depending on the circumstances, these lesser-known laws and regulations may come to haunt a healthcare practitioner and others after-the-fact.

One such that all healthcare practitioners (physicians, dentists, podiatrists, and the like) should be aware of is the Corporate Practice of Medicine Doctrine (the “CPOM”). The CPOM is very state specific. Some states have no such restrictions while others have stringent proscriptions. Pennsylvania and New Jersey are two examples of the latter. In Pennsylvania, the CPOM is rooted in Neill v. Gimbel Brothers, Inc., 199 A.178 (1938). In 1938, the Pennsylvania Supreme Court in Neill ruled that a corporation (here, a department store) is prohibited from engaging in the practice of optometry and may not employ optometrists for the rendering of such services to the customers of the corporation where the contractual relationship of the client or customer is not with the optometrist but with the latter’s unlicensed employer. The Court reasoned that a corporation’s employees, 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 Court emphasized the necessity of an immediate and unbroken relationship between a professional man and those who engage his services.

The CPOM can come into play when structuring a medical, dental, or other healthcare-related entity or transaction. As business opportunities for both licensed practitioners and non-licensed entrepreneurs and investors proliferate with regard to the ownership and operation of medical and dental practices, med spas, and other healthcare facilities, licensed practitioners and businesspersons must be mindful to structure their businesses in accordance with the CPOM rules of the jurisdiction in question.

In essence, the CPOM prohibits or otherwise restricts the ownership of medical or medical-adjacent practices or businesses by non-licensed professionals. In other words, the CPOM can prohibit a licensed practitioner from providing healthcare services as an employee of a general business corporation or other type of business entity in which the owners are not licensed practitioners. The CPOM is rooted in public policy concerns that the corporate employment or control of a licensed professional: (1) commercializes and dilutes licensed professions; (2) interferes with the physician (or practitioner)-patient relationship and the practitioner’s exercise of independent medical judgment; and (3) allows unlicensed corporate entities to practice medicine and healthcare without being subject to the various professional standards and regulations. Suitably, the CPOM is aimed at protecting healthcare practitioners from external influence or control, particularly from non-physician-owned corporate entities which might abridge or diminish patient care and treatment decisions to maximize profits and reduce costs. While the CPOM is generally associated with a physician’s provision of medical services, depending on the jurisdiction, such as in Pennsylvania, the CPOM prohibitions also extend to other licensed health care professionals, such as dentists, optometrists, psychologists, podiatrists, etc.[1]

Permissible Business Structure

Given the rise in private equity investment and other non-licensed entrepreneurial interest in the ownership of businesses providing professional healthcare services, various investment, contractual, and entity structures have been implemented in an attempt to accomplish these goals.

One of the most typical business structures to attempt to comply with the CPOM is a Captive PC Structure. Here, a professional corporation (“PC”) owned by a licensed professional in that state would engage with a management services organization (“MSO”) to run the practice. Under the Captive PC Structure, the PC would employ physicians or other healthcare practitioners through which healthcare services are furnished. The MSO, pursuant to a management services agreement (“MSA”) with the PC, would handle “back-office functions” by furnishing all non-healthcare services to the PC including space, equipment, staffing, billing and collection, financial management, administrative duties, and in some cases, marketing. This Captive PC approach is structured such that the licensed professional remains in ownership of the entity practicing medicine and provides services pursuant to his or her license, while the MSO provides administrative services to assist in the efficient operation of providing healthcare to patients.

Common Pitfalls and Considerations

When setting up a Captive PC Structure, licensed professionals should be mindful to carefully structure each agreement (MSA, business associate agreement, stock transfer restriction agreement, among others) to adhere to the CPOM rules of the state in question. The focus in any regulatory investigation likely will be on the level of control the MSO exercises over the operation of the practice and the professional judgment of licensed health care professionals from a professional services perspective. When the MSO exerts a high degree control, the arrangement may be found to be a sham intended to disguise the unauthorized practice of medicine by an unlicensed entity. A few considerations to keep in mind include the following.

1. The MSO’s services must not interfere with the licensed professional’s medical, dental, or clinical judgment or patient relationships, whether in regard to types of diagnostic tests needed, referrals, patient schedules, or otherwise.
2. MSO services should be carefully structured so that the PC and its licensed professionals retain control and have ultimate responsibility over the practice of medicine, dentistry, or other healthcare specialty in accordance with CPOM principles of that state.
3. The MSO’s services should be in exchange for a fair market value or commercially reasonable fee.
4. The MSO’s fee arrangements must strictly adhere to state and federal law to avoid implicating state fee-splitting, Anti-Kickback statutes, Stark, and other laws.

The CPOM presents a significant concern to healthcare-related business ventures as failure to comply may result in: (1) professional licensure action or revocation; (2) civil liability for non-professional partners or entities engaging in the practice of medicine (or other specialty) without a license; (3) repayment of all revenue for billed services to patients, insurance companies, and the government as a result of an improperly structured arrangement; (4) fines and penalties; and/or potential criminal liability.

Advantages

Given the complexity in nature of the CPOM, why bother setting up any business structure other than a professional corporation or entity owned by licensed professionals? A licensed owner of a healthcare practice may choose to engage with a non-professional corporation or entity for a variety of reasons, including the following.

1. The business structure may allow healthcare practitioners to focus mainly on the practice of healthcare and patient relationships, leaving the business management and “back office” functions to be streamlined and handled by the MSO. This relationship might provide a high quality of patient care while maintaining the necessary efficiency to run the practice from a business standpoint.
2. Healthcare practitioners may have access to more capital than would have been the case without this outside investment to develop a platform for better delivery of healthcare services.
3. Oftentimes, in transition planning, such a structure expands the pool of potential buyers or partners with deeper pockets, which may result in a bigger sale price.

Conclusion

There are several advantages for licensed professionals to use Captive PC Structure for their healthcare practice. However, given the complexity and heightened scrutiny of the CPOM and other laws surrounding the practice of regulated professions, licensed professionals and businesspersons should be mindful to strictly adhere to all applicable laws and regulations. Accordingly, licensed professionals and businesspersons should consult with an experienced healthcare attorney before structuring a business arrangement for the provision of healthcare services.

Click here to view the article online in the Chester County Medicine magazine.

This article is for educational purposes only and is not intended to provide legal advice. Should you require legal advice on this topic, feel free to reach out to Vasilios J. Kalogredis, Esq. and/or Sonal Parekh, Esq.

Vasilios J. (Bill) Kalogredis, Esq. has been advising physicians, dentists, and other healthcare 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. Bill can be reached by email at bkalogredis@lambmcerlane.com or by phone at 610-701-4402.

Sonal Parekh, Esq. is an associate at Lamb McErlane PC who focuses on healthcare transactional matters and a broad range of healthcare regulatory-related issues on behalf of healthcare systems, physicians, dentists, and other healthcare providers. Sonal can be reached by email at sparekh@lambmcerlane.com or by phone at 610-701-4416.

[1] 15 Pa.C.S.A. §§ 2923 and 8105.