With growing patient demands, advanced technology and payer restraints, healthcare providers are increasingly exploring management agreements with experienced companies to handle the daily operations of their clinical practice. However, healthcare professionals need to be aware of the potential pitfalls in doing so, especially given the deeply rooted corporate practice of medicine doctrine in many states, which provides that practitioners, not corporations, should retain control of the business decisions that affect the practice of medicine. While the corporate practice of medicine is often thought of as an antiquated doctrine, the New York and New Jersey courts recently affirmed that the doctrine is indeed alive and well.

At its core, the corporate practice doctrine prohibits non-physician-owned business entities from engaging directly in clinical practice. States adopting the doctrine, whether through statutory law, common law or otherwise, commonly state that it ensures a clinician is responsible for the control and direction of a medical practice. Many states have adopted provisions that enable healthcare professionals to enter into arm’s length arrangements for services by non-physician entities. However, the medical professionals should have an integral role in the direction of their clinical practice at all times.

Earlier this year, in Andrew Carothers, M.D., P.C. v. Progressive Insurance Company, 150 A.D.3rd 192 (2017), the New York appellate court upheld a jury’s decision that a medical practice was not entitled to insurance payments for patient care because the practice was fraudulently organized. Dr. Carothers, a radiologist, formed a professional corporation to perform MRI services at three locations in New York. While Dr. Carothers was the sole owner of the medical practice, he leased the equipment and space from a non-physician-owned entity who also exercised considerable control over the daily operations of the facilities. The Court found that the physician-owner lacked knowledge about the day-to-day operations and finances of the medical practice and that under the totality of the circumstances, the jury properly concluded that the physician was not involved in the management and control of the business. As a result, the Court held that the practice was fraudulently formed and not entitled to any insurance payments.

Similarly, in Allstate Insurance Company vs. Northfield Medical Center et al., 228 N.J. 596 (2017), the New Jersey Supreme Court affirmed a trial court’s conclusion that a lawyer and a chiropractor violated the state’s Insurance Fraud Prevention Act 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.” While the relationships between the various parties were complex, the Court’s decision centered on whether a medical practice was formed in accordance with the state’s corporate practice principles. Using a model known as “Practice Perfect,” a New Jersey chiropractor incorporated a management company and a medical corporation. 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. 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 management company 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. Based on the regulations, and the facts stated above, the appellate court upheld the trial court’s conclusion that the medical practice was essentially under the control of the management company and the physician was a nominal owner.

The common theme gleaned from these cases is that in states where there is an express prohibition on the corporate practice of medicine, the medical practices must be structured in a manner that ultimately vests control in the physician-owner. To that end, transactions should be arranged in an artful manner that addresses the following key areas:

  • Contractual agreements with non-physician entities for management services should demonstrate that the physician-owner possesses the power and decision making authority to govern, control and direct matters relevant to the medical practice.
  • Ownership in a clinical practice, transfers of stock, issuance of shares and other practice transactions should involve a review of the state’s corporate practice of medicine restrictions. Many states provide guidance on proper ownership requirements through the state medical board, administrative agencies decisions, attorney general opinions and legal case law.
  • Negotiations for services with non-physicians must be made in good faith and for commercially reasonable fees.
  • Transactions must not interfere with the medical professional’s independent judgment with respect to patient care.
  • Regulatory requirements for compliance with the corporate practice of medicine may vary based on the type of medical services rendered.
  • Oversight and knowledge of the material business operations, staff composition and finances of the practice should involve the physician-owner of the medical practice.
  • Leases for equipment and space are permissible as long as they reflect an arm’s length relationship between the medical practice and the lessor.

These recent cases are a reminder of the importance of ensuring that medical practices avoid structural pitfalls by maintaining control of the direction and decision-making for a medical practice. As new business models and care delivery systems evolve, the foundation of a medical practice will affect reimbursement and the practitioner’s ability to maintain a successful practice. Providers must look to their state-specific laws to ensure that the corporate structure is sound and in compliance with corporate requirements.