When contemplating a healthcare transaction between licensed healthcare professionals and non-professionals, a key issue is whether the state in question has a prohibition on the corporate practice of medicine, dentistry or other professions, and, if so, to what degree that state enforces the prohibition. 

The recent 2015 settlement between Aspen Dental Management, Inc. (ADMI) and the New York State Attorney General’s Office puts all New York dentists and dental management companies on notice that New York’s corporate practice of dentistry prohibitions (CPOD) are comprehensive and will be enforced − and that such enforcement could be cost prohibitive to any violators. 

Virtually all states have some form of CPOD, whether by statute or case law. In addition, such states have fee-splitting prohibitions which are frequently intertwined with the CPOD. Although it is common for CPOD violations to occur when a professional unintentionally renders services through an improper business entity rather than a professional entity, more significant risks arise when a non-professional vendor is engaged to manage or consult a licensed professional or an entity comprised of licensed professionals.  In such an instance, the consultation, or the vendor’s service, can overstep with respect to the licensed professional’s direct or indirect clinical regulated decision making.  

In the settlement we discuss in this alert, the New York AG found that ADMI overstepped such boundaries in New York, infringing and acting within the ambit of the New York dental licensees’ clinical domain.  The outcome of this settlement may  serve as a good example of the types of activities and issues to be considered when structuring a transaction between licensed and non-licensed professionals. 

The background 

ADMI is a dental practice management company which provides business support and administrative services to individually owned Aspen Dental branded practices across the US.  New York, a heavily regulated state, happens to be one of the jurisdictions in which ADMI provides these  services.  The New York State Attorney General’s Office, however, determined that in New York state, ADMI did not simply provide business support and administrative services.  In a report, the AG determined that ADMI subjected these dental practices to extensive “undue control”; that is, the practices were individually owned in name only, and ADMI was acting effectively as a de facto owner  – a contravention of New York law.  ADMI’s “undue control” was evidenced, in pertinent part, by a compensation arrangement grounded on a percentage of the practices’ revenue, as well as the control ADMI exercised over bank accounts, advertising and marketing practices (deemed to be untruthful and deceptive by the AG) , decisions involving patient care and treatment plans, and clinical staff employment matters. All of the foregoing are activities legally allocated to licensed New York dentists. 

In accordance with the settlement agreement (specifically, the assurance of discontinuance), ADMI agreed to pay a hefty civil penalty; stop the practice of controlling the clinical decision making of the New York dental practices (including the hiring and firing of clinical staff); maintain distinct bank accounts; and not share in the dental practices’ fees for professional services  (i.e., move away from a percentage-based compensation methodology).  ADMI further agreed to transform its marketing practices to provide clarity to its consumers and the patients of the dental practices.  It agreed to no longer hold itself out as a dental practice in the State of New York: to provide only management support to dental practices owned by licensed professionals, and to show clearly demonstrate that ADMI itself is not a licensed dentist or dental practice. 

In sum, the ADMI settlement clearly provides that under no circumstances should a manager (non-licensee) exercise any control whatsoever over patient care decisions.  When patient care is affected, regulatory bodies will take note and act: not just regarding the licensed professional’s qualifications, but also regarding operations. 

Eight key takeaways

When operating in a highly regulated environment, take care.  Each state’s requirements for compliance with CPOD may vary. An important lesson arising from the ADMI settlement: structure transactions to comply with each specific state’s CPOD. 

Companies providing management services to medical and dental professionals should keep these key points in mind. 

  1. Is the dental practice/practitioner really in control? Under New York law, concerns generally arise when fees are payable to a management company (or other vendor) based on a percentage of revenue generated by a medical entity.   In the ADMI case, the AG rendered null and void any contractual provisions or agreements with ADMI that might prevent the individual practice owners from having full and complete control over their revenues, profits, incomes, disbursements, bank accounts and other financial matters and decisions.  The ADMI settlement further served to prohibit ADMI from restricting a dental practice’s ability to retain patient charts and records after its contract with the practice terminates.  It is vital to note that in New York, patient records belong to the practice, not to the treating physician or licensee.  The takeaway: ensure that the boundaries between the individual practice/practitioner and the provision of arms-length administrative services are drawn with complete clarity. 
  2. Renegotiate fees with caution. The AG voided all compensation arrangements establishing that a percentage of a dental practice’s earnings were to be provided to ADMI.  The settlement, however, permits ADMI and the practices to renegotiate fixed fees on a quarterly basis during the first four years of any services agreement and on a semi-annual basis. This is thought-provoking because the Federal Anti-Kickback Statute’s safe harbor for service arrangements has a one-year term requirement, which has been interpreted to prohibit the renegotiation of fees prior to the end of the first year term.  With the foregoing in mind, professionals and management companies should be cautious in how they structure fee renegotiation terms. 
  3. Is compensation to the administrative provider (i.e., manager) on a fixed fee basis, based on the fair market value for the services provided as determined by an independent third-party appraiser? 
  4. Does the administrative service provider (i.e., manager) have any authority or control over the hiring and firing of licensed professionals (clinicians or dentists)? 
  5. Are all salaries of licensed professionals (i.e., dentists, or allied healthcare professionals)paid by the dental practice, not the administrator (i.e., manager), and is all income earned by the practice controlled by the dental practice itself? 
  6. Are all fees for dental services established by the licensed dentist or allied healthcare professionals? 
  7. Does an administrator (i.e., manager exercise dominion or control over patient care decisions or clinical decisions? 
  8. Does a management or services agreement between a licensed professional and non-licensed individual include restrictive covenants that place limitations on the licensee’s ability to practice within a certain geographical area post termination? 

Conclusion 

Virtually all states have some form of corporate practice of professionals doctrine, either by statute or case law, and the ADMI settlement underscores the importance of complying with the doctrine.  Companies providing management services to medical and dental professionals should aim to structure their transactions in conformity with applicable laws. The ADMI settlement underscores the importance of compliance which may often be achieved through conducting a comprehensive structure, or restructure, of an arrangement between licensed medical professionals and non-professionals.