3 Steps to Navigate Through the Corporate Practice of Medicine
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What is the Corporate Practice of Medicine?
While many Americans are aware of laws limiting the practice of medicine to licensed medical individuals, many may not have considered the impact these laws have on corporations. Many would agree that an individual who has not attended medical school, graduated with a professional medical degree and passed the required exams to obtain state licensure to practice medicine should not be trusted to provide the public with patient care. But how do these laws apply to corporations? In some cases, corporations are able to improve the quality of care by providing physician groups with significant capital and advancements in technology that might otherwise be out of reach. However, many believe that when corporations entangle themselves in the practice of medicine and are in a position to control physicians’ compensation, they may also negatively influence patient care. Furthermore, the primary focus of any corporation is to achieve and increase profits, which is at odds with an industry that upholds patient care as its highest concern. This very issue was pondered by the American Medical Association at the turn of the nineteenth-century with the development of the Corporate Practice of Medicine Doctrine. Through the Doctrine, the AMA sought to ensure only licensed medical professionals practice medicine and prohibit the commercialization of medicine.
Implications of the Corporate Practice of Medicine Doctrine
In today’s healthcare environment, the Doctrine has manifested itself in various states’ laws, regulations and court rulings in a variety of forms and to varying degrees. Although specific state laws vary, states that have adopted the Doctrine in one form or another generally address four key areas:
- Some states prohibit business entities from employing physicians to provide medical care.
- Certain states require entities that provide medical services be owned and operated by licensed medical doctors.
- Some states prohibit professional fee splitting between licensed medical professionals and non-licensed individuals or business entities.
- The management fees stated within management services agreements must be set at fair market value. Upon drafting an agreement, an FMV opinion from a third-party valuation expert can alleviate compliance concerns from the beginning. The importance of this consideration is highlighted in the following section.
Though exceptions and safeguards vary by jurisdiction, these laws all seek to address arrangements in which physicians providing medical care are controlled through direct or indirect compensation by a non-licensed individual or entity.
Increased scrutiny of management services agreements
In states where the Doctrine has been implemented in some fashion, healthcare providers must also be cognizant of the implications it has on management services agreements. Through these agreements, an outside company is engaged to perform management functions for a medical practice or group. The services provided by the managing entity usually include day-to-day administrative functions and non-professional operations such as bookkeeping, budgeting, purchasing of supplies and personnel management. These companies essentially incur all costs associated with the practice with the exception of physician compensation, benefits and malpractice costs. In order to comply with the basis of the Doctrine, it is imperative the management fees outlined in these agreements are set at FMV. If management fees are set below the FMV of the agreed upon services, the physician practice or group is granted an inequitable surplus of income after the deduction for management fees. By charging sub-FMV fees for these services, the management company may be able to improperly influence the manner in which the physicians provide medical care, which is in clear violation of the premise behind the Doctrine and supporting regulations.
3 Steps to navigate through the implications of the Doctrine
Those involved in the structuring of relationships with physicians through employment, ownership or service agreements must consider the following:
- First, determine if the applicable state is subject to corporate practice of medicine regulations. If it is established that the applicable state is affected by the Doctrine, specific state laws, regulations and court cases must be examined to ensure full compliance.
- Each state’s safeguards should also be explored. For example, some states allow not-for-profit corporations and educational institutions to employ physicians, while some allow physicians to practice medicine through a professional corporation that is wholly owned by licensed physicians.
- Finally, upon drafting a management services agreement, a third-party expert is able to opine on whether or not the subject agreement is within the parameters of FMV. When structuring relationships with physicians, professional assistance in the beginning stages can eliminate legal difficulties in the future.
Complying with the Doctrine can be a tedious undertaking. However, with a little research and planning, as well as the expertise of a trusted valuation professional, the process is much more navigable.
Jennifer Brunkow, ASA, CPA/ABV/CFF, is a manager at VMG Health and is based in the Nashville office. Ms. Brunkow specializes in valuing a variety of professional services including medical directorships, subsidies, billing, co-management and management, clinical coverage and quality initiatives.
Overview
By Health Law Resources
Many states prohibit what is commonly known as the “corporate practice of medicine” (CPM). The CPM doctrine generally prohibits a business corporation from practicing medicine or employing a physician to provide professional medical services. Some states, including New York, New Jersey, Colorado, and Illinois, have carved out certain corporate employers as exceptions to the CPM prohibition, such as hospitals, health maintenance organizations, and of course, professional corporations.
Policy
The CPM prohibition manifests itself in a variety of state laws, regulations, and court opinions addressing ownership or control of healthcare providers by individuals or corporations that cannot directly provide healthcare services. Some states merely prohibit the practice of medicine without a license or the sharing of fees between licensed and unlicensed individuals, while other states flatly prohibit the ownership of medical practices or employment of professionals by nonprofessionals.
Authority
The rationale behind the CPM is rooted largely in considerations of public policy. Corporate employment of a licensed professional has been prohibited on the grounds that such a relationship “tends to the commercialization and debasement of those professions” (Barton v. Codington Country, 2 N.W. 2d 337, 343 (S.D. 1942)); undermines the physician-patient relationship and the physician’s exercise of independent medical judgment in the sole interest of the patient (See Garcia v. Texas State Bd. of Med. Exam’rs, 348 F. Supp. 435, 437 (W.D. Tex. 1974) and causes the general intrusion into the practice of medicine by corporate entities that are not licensed and therefore not subject to the same professional standards or regulatory control as licensed entities. See, e.g., State v. Boren, 219 P.2d 566, 568-69 (Wash. 1950); Funk Jewelry Co. v. State ex rel. La Prade, 50 P.2d 945, 945-47 (Ariz. 1935).
Nevertheless, even in the most restrictive of CPM states, there are a number of exceptions to the rule. For example, in New York, where the CPM doctrine is of long standing, a medical school may hire physicians and treat patients as part of its mission to promote medical science and instruction. Albany Med. Coll. v. McShane, 104 A.D.2d 119 (N.Y. App. Div. 1984); aff’d 489 N.E.2d 1278 (N.Y. 1985). School health programs constitute another exception to the CPM bar. N.Y. Educ. Law §§ 901 et seq. In addition, physicians may practice medicine through partnerships, professional corporations, professional service limited liability companies and registered limited liability partnerships comprised exclusively of physicians and certain other licensed professionals, and share fees and profits among themselves. N.Y. Educ. Law § 6531.
This “exception,” however, which exists in all CPM states, actually functions as more of a complement to, rather than a departure from the CPM doctrine, because it also is concerned with (and therefore prohibits) lay ownership of healthcare entities. Finally, hospitals (and other licensed medical facilities) in New York may employ physicians to render medical services to the hospital’s patients without violating the CPM prohibition. People v. John H. Woodbury Dermatological Instit., 192 N.Y. 454 (N.Y. 1908).
Future Direction
While it may seem like common sense for hospitals to be able to employ physicians (and many CPM states have in fact carved out such an exception (See, e.g., Berlin v. Sarah Bush Lincoln Health Ctr., 688 N.E.2d 106, 114 (Ill. 1997) (finding that a “duly-licensed hospital possesses legislative authority to practice medicine by means of its staff of licensed physicians and is excepted from the operation of the corporate practice of medicine doctrine”); St. Francis Reg’l Med. Ctr. v. Weiss, 869 P.2d 606, 618 (Kan. 1994) (holding that physicians may be employed by hospitals because such employment does not violate the public health, safety or welfare); MI Op. Att’y Gen. No. 6770 (Sept. 17, 1993) (stating that nonprofit corporations, including hospitals, may employ physicians to provide medical services)), a few states, such as California, Iowa, and Texas, have declined to create such an exception. (Among these states there also are exceptions: Iowa hospitals may employ pathologists and radiologists, and Texas public hospitals and California teaching hospitals may employ physicians).
Excerpt from Nili Yolin, The Corporate Practice of Medicine Prohibition and the Hospital-Captive PC Relationship—Can They Coexist? (American Health Lawyers Association Business Law and Governance Practice Group Executive Summary Sept. 2010).
