Can an MSO control physicians given corporate practice of medicine?

Can a medical management company or MSO control physicians given corporate of medicine concerns, especially in a strong corporate practice of medicine state?    Whether the MSO can control physicians given corporate practice of medicine concerns is a question many of our law firm clients ask, when they have a telemedicine company, medical spa, or another health and wellness venture where non-physicians seek to enter into business with medical doctors.

Of course, this is less of an issue in a state that does not have a strong corporate practice of medicine prohibition. In a state like California, which enforces strict separation between medical doctors and laypersons, control by the general corporation or LLC--which is often the venture driving capital and the enterprise (whether it's primarily through a website, app, or brick-and-mortar)--becomes problematic.

Varieties of MSO Control

We've thought through some of the ways that the MSO can exert greater control over its physicians.  These range in enforcement risk.  Here are some of our current ideas, from more to less aggressive & risky:

  • Sign a stock transfer restriction agreement, where the medical doctor essentially agrees to transfer his or her shares on certain designated events (including when "called" by the MSO), and to allow the MSO to basically appoint another MD to head the professional medical corporation (PMC) with which the PMC contracts.  (Some medical boards may view this as too much control by the MSO and as a corporate practice of medicine violation).
  • Require the physicians to actively be seeing patients referred via the app, telemedicine platform, or otherwise through the MSO.  (Ditto.  And can also raise fee-splitting concerns.)
  • Require physicians to allow the MSO to feature them on its website or app, and to withdraw the profile if/as the MSO decides.  (Throughout, the different practices we recommend can raise medical board scrutiny; we've tried to order them in terms of risk, although this is really a subjective assessment.  The control over physicians in this bullet raises concerns in a strong CPM state such as California, which lists a variety of ways MSOs can exert too much control).
  • Give physicians an equity stake in the MSO. (Raises conflicts of interest issues; also is quite common.  Further discussed below.)
  • Have a long term specified in the management agreement (for example, 5 years instead of 1), thus tethering the physician or physician group to the MSO.
  • Give the MSO the contractual opportunity to terminate without cause, on short notice, but require cause and opportunity to cure before the MDs can terminate.

Reason for Greater MSO Control

The MSO wants control because that creates more long-term stability for the venture, and as a side benefit, may give greater assurance to the investors who are funding the MSO.  Stability also brings many operational benefits as well.

Note that besides corporate practice of medicine and fee-splitting concerns, there may also be rules against locking up the docs' economic opportunities.  For example, California's non-compete law provides that every contract "by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void."

Giving the Physician a Stake in the MSO

While there are some concerns about this in terms of a conflict of interest, giving the physician an equity stake in the MSO is very common.

We typically recommend that any equity investment be:

  • Structured in a written agreement
  • Supported by independent, third-party valuation
  • As payment at fair market value (FMV) for some defined, administrative (i.e., non-clinical) contribution by the physician, apart from his or her medical duties

This makes sense in terms of delineating the equity stake as compensation for something other than providing medical services or referring patients to the venture.

Ending the relationship

There's an old saying that "guests, like fish, stink after 3 days."

OK, maybe I've been watching The Godfather too much or seen too much litigation.

The point is that having gotten tethered contractually, the MSO and physician may wish to part ways.  The management (MSO) agreement might give the MSO an easy out in the termination provisions, but what if the MD still retains his or her equity stake in the MSO?

For one, it's a good idea to establish vesting, before giving away shares at the outset - to be sure that any equity stake is earned.  It's also important to have buy-back provisions in case of an altercation.

Advance planning with risk mitigation in mind, can prevent a lot of legal expense and business complication down the road.

If you're involved in a venture between physicians and non-physicians, contact our healthcare legal team.

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Michael H Cohen Healthcare & FDA Lawyers

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