Corporate Practice of Medicine: Medical Management Organizations and Professional Medical Corporation–Who Controls What?

The Corporate Practice of Medicine (CPM) doctrine continues to befuddle, beleaguer, and bewilder healthcare companies seeking to venture with physicians and non-physician entrepreneurs.

See, for example, our prior posts:

Control Issues in the Healthcare Venture

The corporate practice of medicine (CPM) rule or doctrine forbids medical management organizations (MSOs) from meddling with and effectively, directly or indirectly, control or in some way influencing, the affairs of medical practice.

The challenge is that the healthcare venture managed by able healthcare entrepreneurs wants to call the shots.  The non-physician entrepreneur dreams up the healthcare venture, gets it funded, even staffs it with the right medical doctor.  And yet this same entrepreneur can’t be in control—that’s what the corporate practice of medicine says.

In the eyes of the law, the services offered by a managed care company can blur the distinction between professional judgment and utilization review. In other words, medical judgment and practice should not by unduly influenced by the MSOs.  But what does this mean and how far does the practice of medicine doctrine go?

California corporate practice of medicine – strict prohibition

In California—as one example, the prohibition against corporate practice of medicine imposes strict rules on contractual arrangements between physicians and non-physicians.

One of the purposes of the CPM doctrine is to separate medical from business decision-making. Under this doctrine, neither non-physicians nor lay corporations (corporations that are not medical professional corporations) nor limited liability companies (LLC) may contract to provide medical services. Nor may they contract with a physician to have the physician provide medical services, either as an employee or an independent contractor. (Business & Professions Code §§2052 and 2400.)

Because of the CPM doctrine, non-physician in California cannot own a medical clinic or hire physicians. However, they can own a management entity which can serve as an administrative and non-medical, management services organization (“MSO”) for the clinic or medical practice, which is frequently organized as a professional medical corporation (“Professional Medical Corporation”).

This is the MSO model.

Deeper into the MSO Model

In this model, the MSO contracts with the professional medical corporation (Professional Medical Corporation) so that the Professional Medical Corporation agrees to provide professional services, and the MSO agrees to provide administrative and management services, such as:

  • front desk, receptionist, and scheduling
  • advertising and marketing
  • sublease space and/or provide equipment (each under a written lease or management agreement with the Professional Medical Corporation)
  • book-keeping
  • billing and collecting on behalf of the Professional Medical Corporation.

All of these services are subject to applicable legal requirements (including more specific CPM prohibitions), and rules relevant to billing and collecting, and would require specific contractual provisions between the Professional Medical Corporation and the MSO.  This is typically accomplished by a management services agreement between the Professional Medical Corporation and MSO.

California Medical Board Steps In

To help clarify these muddy waters, the Medical Board of California (MBC) has stepped in and created a document containing “Decision Making Criteria” to make sure that the Professional Medical Corporation is not contaminated by any conflict of interest which may result in a breach of his medical judgment and practice.

According to the MBC, certain things require complete Professional Medical Corporation’s control and decision, while others require that Professional Medical Corporations have at least shared control with the MSO and other aspects do not necessarily require the Professional Medical Corporation’s involvement at all.

To get this down on paper, the California Medical Association's Board of Trustees authorized the formation of a Technical Advisory Committee (TAC) to examine the issues surrounding the corporate practice of medicine bar and the various financial and contractual arrangements currently in place between hospitals, physicians, and other interests and to develop a response to those arrangements. The TAC developed a list of those decisions which would affect, directly or indirectly, the practice of medicine and assigned the decision making authority of those decisions to the appropriate party, i.e.  Professional Medical Corporation or MSO and the level of decision making Authority the Professional Medical Corporation or MSO should exercise: exclusive, consultative, shared or joint.

We will be focusing on the exclusive decisions of the Professional Medical Corporation/Practicing Physician and the MSO respectively and decisions where neither party may solely make ultimate decision. Bear in mind that these are simply guidelines and should not be construed as exhaustive.

Exclusive Decisions vested in the Professional Medical Corporation/ Practicing Physician – Professional Medical Corporation/ Practicing Physician has sole responsibility for the decision. Professional Medical Corporation/ Practicing Physician has no duty to consult with the MSO, even on an informal basis.

  • Setting purely medical practice policies
  • What conditions can be referred to another physician specialist
  • What diagnostic tests are appropriate for a particular condition
  • What gets included in a particular patient’s medical records
  • Whether a particular patient visit requires a particular billing code
  • Communications of a purely clinical nature with patients
  • Determination as to whether an emergency medical condition exists

 The above are in the domain of the medical doctor and cannot be intruded upon by the MSO.

Exclusive Decisions vested in the MSO - has sole responsibility for the decision. MSO has no duty to consult with the Professional Medical Corporation/ Practicing Physician, even on an informal basis. 

  • Compensation for allied health and lay staff
  • Selecting purely administrative staff that do not hold key positions

These are business decision – nothing more.

Neither Party May Solely Make Ultimate Decision - Both the Professional Medical Corporation/ Practicing Physician and the MSO must agree when making a decision.

  • How many hours a physician should work?
  • Non-clinical decisions concerning medical records
  • Contractual relationships with third-party payors
  • Level and scope of malpractice coverage
  • How much the physician group (including cost of all benefits) should be compensated
  • Settling cases for all parties named
  • Marketing
  • Setting the global budget for limited license practitioner compensation
  • Mergers, acquisitions, conversions and affiliations
  • Ownership and scope of ancillary ventures
  • Establishing grievance policies
  • Making a decision to transfer a stable patient
  • Level of indigent care provided
  • Employment matters
  • How much the lay entity, including the entity’s executive management should be compensated

These are mixed questions—in other words, they touch on the medical practice but also require business judgment.  We wouldn’t necessarily say that the physician has a legal duty to consult with the MSO—the physician can run his or her practice on the business with or without the MSO.  Let’s just say that these are appropriate arenas for MSO involved.

Additional Guidance on MSO Activities

Further to the guiding/ non-exhaustive lists provided above, in these cases, there must be a clear distinction between who is providing professional services and who is providing the management services. Failing to do so may result in professional misconduct and/or unlicensed practice of the profession.

For example, a MSO may, find jobs for licensed professionals; find licensed professionals for potential employers; and manage the services of licensed professionals, including providing services to the professional for a fee, e.g., scheduling or billing.

Because of the separation between clinical and non-clinical activities, a Professional Medical Corporation may not serve as a management services corporation.

In general, a Professional Medical Corporation may only provide services in its field. For example, a hypothetical Professional Medical Corporation named "Occupational Therapists For Everyone a Professional Medical Corporation" may only provide occupational therapy services. It cannot offer physical therapy services, speech services or any other professional services. Also, because it is allowed only to provide professional services, it can only manage the services that it provides. That is, it cannot provide management services to other occupational therapists.

There are exceptions to the “one field” rule, notably in the Moscone Knox Professional Corporations Act, which allows some licensed healthcare professionals to be directors, employees, or shareholders in another professional corporation.  For example, chiropractors and nurses can be up to 49% shareholders in a Professional Medical Corporation.

When is MSO Control Too Much

On a final note, according to CMB, under California Law, the following "business" or "management" decisions and activities, resulting in control over the physician's practice of medicine, should be made by a licensed California physician and not by an unlicensed person or entity:

  • Ownership is an indicator of control of a patient's medical records, including determining the contents thereof, and should be retained by a California-licensed physician.
  • Selection, hiring/firing (as it relates to clinical competency or proficiency) of physicians, allied health staff and medical assistants.
  • Setting the parameters under which the physician will enter into contractual relationships with third-party payers.
  • Decisions regarding coding and billing procedures for patient care services.
  • Approving of the selection of medical equipment and medical supplies for the medical practice

Furthermore, the types of decisions and activities described above cannot be delegated to an unlicensed person, including (for example) management service organizations. While a physician may consult with unlicensed persons in making the "business" or "management" decisions described above, the physician must retain the ultimate responsibility for, or approval of, those decisions.

In Conclusion

Because of the CPM doctrine, generally -physicians in California cannot own a medical clinic or hire physicians. However, they can own a management entity which can serve as an administrative and non-medical, management services organization (“MSO”) for the clinic or medical practice, which is frequently organized as a professional medical corporation (“Professional Medical Corporation”). The MSO may provide services used by professionals. Further to the guiding/non-exhaustive lists provided above, in these cases, there must be a clear distinction between who is providing professional services and who is providing the management services. Failing to do so may result in professional misconduct and/or unlicensed practice of the profession.

Because unlicensed and corporate practice of medicine are considered crimes, it’s important before starting up any healthcare venture to consult a law firm that knows the ins and outs of the corporate practice of medicine doctrine.

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Michael H Cohen Healthcare & FDA Lawyers

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