The long standing prohibition against the corporate practice of medicine in Texas is contained in the Medical Practice Act, Tex. Rev. Civ. Stat. Ann. Article 4495b ("MPA"), Sections 3.07(e) and 3.08(12), (15) . The primary restriction is in Section 3.08(15) which prohibits: "aiding or abetting, directly or indirectly, the practice of medicine by any person, partnership, association, or corporation not duly licensed to practice medicine by the board." The Texas State Board of Medical Examiners ("TSBME") enforces the MPA.

The prohibition against the corporate practice of medicine has been interpreted to prohibit several specific practices. For example, a physician may not be employed by a lay person or allow the lay person to make decisions about how medicine is practiced. Rockett v. Texas State Board of Medical Examiners, 287 S.W. 2d 190 (Tex. Civ. App - San Antonio 1965, writ ref'd); Watt v. Texas State Board of Medical Examiners, 303 S.W. 2d 884 (Tex. Civ. App - Dallas 1957, writ ref'd, n.r.e.) cert. den., 356 U.S. 912 (1957). Similarly, HMO's may not hire physicians as employees. Garcia v. Texas State Board of Medical Examiners, 384 F. Supp. 434 (W.D. Tex. 1974). Finally, lay persons forming a management company to provide exclusive management services to a physician and keeping 67% of the profits of the entity while maintaining effective control over the medical aspects of the practice also violated the corporate practice prohibition. Flynn Brothers, Inc. v. First Medical Associates, 715 S.W. 2d 782 (Tex. Civ. App. - Dallas 1986, writ ref'd n.r.e.).

Complying With the Law

Physician practice management companies in Texas have coped with the corporate practice doctrine by developing several management models. Common to each model, however, is the understanding that the management company does not employ physicians; rather, the physicians typically are employees of a professional association, PLLC, or other medical group entity, which is wholly owned by physicians. That entity contracts with the management company for management services.

Some companies utilize a "Friendly PA" model, whereby a single physician owns the professional association, and agrees to certain restrictions on his ability to sell his stock or take actions inconsistent with the management company's interests. Other companies form non-profit 5.01(a) organizations, approved by the TSBME, which often have a management company "Member." Such jointly controlled entities are statutory exceptions to the corporate practice prohibition, and allow the manager some flexibility and input into corporate affairs of the clinic.

The more common model, however, is for the contracting physicians to form their own (usually new) P.A., and to enter into a long-term management agreement with the company, which typically can be terminated only for material default by the company. The P.A. is exclusively physician-owned and controlled.

In addition to the direct employment issue, and with respect to the legal models adopted by management companies in Texas, the factors that the TSBME and a court likely would look at in determining whether the corporate practice doctrine is violated would be the nature of the management fee, and the degree of control the company has over the medical aspects of the physician's practice. With those factors in mind, the Flynn Brothers case is most instructive. The Flynn Brothers set up a corporation, FBI, Inc. ("FBI") which signed an exclusive management agreement with First Medical Associates, a professional association comprised of one physician which secured a contract with a Dallas hospital to provide emergency room services. The physician later attempted to terminate the contract, and FBI sued to enforce the agreement. The Court of Appeals struck down the contract because it violated the MPA, focusing on several factors in reaching its decision:

(1) FBI retained 67% of the net profits of the practice;(1)

(2) Funds of the practice and FBI often were co-mingled and transferred directly to one of the Flynn brothers' personal bank accounts;

(3) FBI pledged the contract rights and other assets of FMA to secure a pre-existing FBI debt at a local bank;

(4) FBI had the right to select medical staff to work in the hospitals along with the doctor.

The above factors were of most concern to the Flynn Bros. court. And fourteen years later, the case remains the cornerstone of corporate practice analysis. In recognition of those concerns, under typical management service agreements in Texas, the management company contracts to provide administrative and business services to the medical group. The company typically owns all of the assets, and arranges for space and equipment leases. In turn, the manager receives an agreed percentage of the gross revenues or net profits of the enterprise. Often there is an adjustment mechanism designed to ensure that such fees do not exceed an agreed cap, or that the remaining amounts distributed to the doctors are no less than a specified floor percentage of gross revenues, e.g. 25%. The manager does not select or employ personnel performing medical services; those persons are contracted for directly by the P.A. Additionally, the service agreement usually provides language such as, "the Clinic shall be solely and exclusively in control of all aspects of the practice of medicine and the delivery of medical services . . .. The rendition of all medical professional services . . . shall be the sole responsibility of the Clinic. Manager shall have no authority whatsoever with respect to the establishment of fees or charges for the rendition of such services." In this way, the manager attempts to distance itself from clinical interference.

Also, service agreements often provide for the establishment of a joint planning board or similar entity, comprised of equal representatives designated by the manager and the P.A., or often, one more vote for the P.A. Decisions of the joint planning board are made by a majority vote, and thus the physicians often retain control over the decision making process under the jurisdiction of the joint planning board.

Thus, although the conclusion is not free from doubt, and the TSBME or Texas courts could ultimately adopt a contrary position, it appears that where management companies operate based upon these principles, and based upon the reasoning likely to be adopted by Texas courts, such companies' service agreements do not appear to violate the Texas corporate practice of medicine prohibition.

Fee Splitting

Related to the corporate practice issue in many states (and often confused with that issue) is the issue of fee splitting between physicians and non-physicians. Texas does not have a true "fee splitting" statute as might be found in other states. Texas' fee splitting prohibition is contained in Section 3.07(c) of the MPA which provides that:

"A physician or surgeon may not employ or agree to employ, pay or promise to pay, or reward or promise to reward any person . . . for securing, soliciting, or drumming patients or patronage. A physician or surgeon may not accept or agree to accept any payment, fee, reward, or anything of value for securing, soliciting, or drumming for patients or patronage for any physician or surgeon . . . The preceding shall not be construed to prohibit advertising . . ."

The prohibition more accurately could be termed an anti-kickback statute, and it is seldom if ever enforced by the TSBME. In fact, much of its language was incorporated into Texas' anti-kickback statute. § 161.091 Tex. Rev. Civ. Stat. Ann. It strikes at the straightforward referral fee arrangement where a physician pays or receives a referral fee in exchange for the referral of a particular patient. Management companies are not providers, however, and typically do not make "referrals" of individual patients. Rather, the services they provide relate to increasing profitability and patient revenues generally, or are designed to secure managed care contracts or advertise generally to the public, not to cause the referral of individual patients. Thus, most management agreements would not appear to violate the fee splitting prohibition of the MPA.


1. With respect to the fees, the Court noted that "FBI received the majority of profits made through Dr. Adcock's practice of medicine", concluding that FBI thus indirectly was practicing medicine without a license. 715 S.W.2d at 785 (emphasis added).