California is one of several states that still prohibits the corporate practice of medicine. In its most basic form, the corporate practice ban prohibits lay entities from providing medical services to the public through the employment of physicians. The doctrine dates to the 1930's and was intended to preserve the traditional physician/patient relationship and keep physicians out of the control of lay corporations who are presumed to place commercial motives ahead of professional judgment. Through Medical Board pronouncements, Attorney General Opinions and court decisions, however, the corporate practice doctrine has been expanded from this simple core to affect numerous business relationships involving physicians, including the ability of "franchise" medical providers to operate in California, the requirements applicable to management service relationships, and the operation of med spas and convenience clinics in settings other than traditional medical offices. Further, California's prohibition on licensee fee-splitting makes work-arounds more complex to structure because it affects how a lay entity can legally be compensated by a professional entity.
The following are some examples of how California's corporate practice prohibition has been interpreted and applied:
1. Management Services Organization ("MSO"). An MSO or other non-professional entity may provide administrative services (billing, purchasing, managed care contracting) to a physician or medical group under a management services agreement. However, if the MSO interferes with decisions regarding the practice of medicine, the MSO may be engaged in the corporate practice of medicine. The California Attorney General issued an opinion in 2000 that invalidated a proposed agreement in which an MSO would arrange for radiology diagnostic services for union members. Because the MSO had discretion to choose the radiology provider, the Attorney General deemed the service to require professional expertise and therefore to violate the corporate practice ban.
The California Medical Board has published guidance for physicians on the corporate practice ban. That guidance identifies a number of "business" or "management" decisions and activities that result in lay control over a physician's practice of medicine. The medical board unequivocally states that these decisions must be made by a licensed California physician and not by an unlicensed person or entity: ownership of a patient's medical records; selection, hiring and firing of allied health staff and medical assistants; setting the parameters under which the medical group will enter into managed care contracts; decisions regarding coding and billing procedures for patient care services; and approving the selection of medical equipment and medical supplies for the medical practice.
In addition, to the extent that an MSO "purchases" an existing medical practice, the acquisition transaction itself is shaped by the corporate practice ban. An unlicensed entity may not purchase any "professional" assets of the practice. Consequently, the MSO may not purchase medical charts or the goodwill of a practice, but only assets that may be owned by a lay entity.
2. Medical Foundation. The need for integration between a hospital and its medical staff when the hospital cannot employ physicians led to the enactment of Section 1206(l) of the California Health & Safety Code. Subsection 1206(l) was crafted by the legislature when the Medical Board forced two hospitals to terminate employment of a number of physicians. 1206(l) specifically allows a nonprofit corporation to contract with a medical group composed of at least 40 physicians, two-thirds of whom are full-time, which does research, and is composed of at least 10 specialties, to be exempt from clinic licensure. Often, nonprofit hospitals will use their nonprofit corporation to contract with medical groups that meet these requirements or create nonprofit subsidiaries for this purpose. The foundation is the business arrangement closest to a hospital's direct employment of physicians available in California.
Other arrangements between hospitals and physicians may be considered stops on the way to a full blown foundation. For example, many hospitals enter in "co-management" agreements pursuant to which a single specialty medical group manages a particular service line offered by the hospital. Such arrangements feature cooperation between the two in order to enhance a particular area of practice and to bind the medical group to the hospital. If successful, co-management may lead to participation in a foundation.
3. Friendly Professional Corporation. Often hospitals or other lay entities find "friendly" physicians to own all of the equity in a medical group as a way to jointly conduct business while complying with the corporate practice ban. Sometimes the agreement between the professional and the lay entity requires the friendly physician to transfer ownership of the group to another physician when his/her contract terminates. These arrangements must be carefully structured to avoid giving the hospital too much control over the professional corporation's practice, lest they violate the corporate practice ban.
4. Med-Spas. If a "med-spa" provides services that constitute the practice of medicine (i.e., "us[ing] drugs or devices in or upon human beings and to sever or penetrate the tissues of human beings"), including laser services and cosmetic injectibles, care must be taken to assure that it is structured in a way that does not violate the corporate practice ban. The spa itself should either be owned and operated by a physician or the portion of the spa's business that constitutes the practice of medicine must actually be conducted by a physician or medical group. In the Matter of The Accusation Against Joseph F. Basile, M.D., the California Medical Board found that a licensed physician aided and abetted the unlicensed practice of medicine when he permitted his unlicensed wife to provide laser services to patients in a cosmetic center that she owned, in some instances when he was not on the premises. In that case, Dr. Basile had agreed to act as Medical Director to the center, although the Medical Board found that he exercised insufficient supervision of the services rendered by unlicensed persons at the center.
5. Advertising of Medical Services. A corporation's advertising of medical services, their availability or even their location may be deemed to implicate the corporate practice laws, even where the corporation is not providing the medical services. The mere advertising by a corporation of the availability of medical services or advertising in a manner that seems to suggest that the services are being provided by a lay entity (such as a management company) may be deemed by the Medical Board to be a type of corporate practice violation. Many national practice management companies attempt to "brand" their services under their corporate umbrella. Websites that may be completely acceptable in non-corporate practice states, however, can provoke a cease and desist letter from the California Medical Board.
Carol Lucas is a Shareholder in the Los Angeles office and Chair of the Health Care Practice Group.< /i>
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