The Corporate Practice of Medicine: A Roadmap with an Eye Towards Compliance

What is the Corporate Practice of Medicine Doctrine?

Imagine the Corporate Practice of Medicine (CPOM) as a set of state laws–often called Corporate Practice of Medicine Acts or Statutes–that prohibit certain businesses from participating in the unauthorized practice of medicine. Although most states have adopted some form of the CPOM, nearly all of them provide broad exceptions including for professional corporations and the employment of physicians by certain healthcare entities. There are also certain ways for businesses to properly engage in the medical field despite the general prohibition. But, in order to do so, compliance is a must.

The existence of the CPOM doctrine is driven by several public policy concerns. One such concern? Preventing the commercialization of medicine by prohibiting corporations from practicing it. To this end, the doctrine imposes certain restrictions on businesses owning medical practices.

Policy concerns also include addressing potential conflicts between a corporation's duty to its shareholders and a physician's responsibility to their patients. To avoid such conflicts of interest that could arise between a corporation's profit motive and a patient's best interests, the CPOM ban works to separate business decisions from medical decisions, ensuring that patient care is never compromised by corporate greed.

Further, at its core, the doctrine is geared towards protecting a physician's independent medical judgment from being influenced by their corporate employers. The aim here is simple–to preserve the quality of patient care, which, after all, is a public health concern.

The interesting part? The CPOM is not uniform across the board. It's not a one-size-fits-all doctrine. Each state that has adopted the CPOM has put its unique spin on it, molding it to fit its public health perspectives and local realities. And, to put the cherry on top, not every state has a CPOM doctrine.

Does the Corporate Practice of Medicine Doctrine Apply to You?

Before you start navigating this landscape, it's crucial to figure out if the CPOM applies to you. Your type of business and the state you operate in are key factors. Professional corporations, hospitals, health maintenance organizations (HMOs), and non-profit corporations often have some exceptions. For example, physicians in many states cannot be employed by unlicensed entities, general business corporations, or general business limited liability companies (LLCs). However, they are often allowed to form a professional corporation.

Why is this important, you ask? Well, let's consider the broader implications. "Practicing medicine" under the CPOM can encompass a range of activities. [1] This includes employing healthcare professionals, owning professional practices, providing medical diagnoses, fee-splitting, or even the treatment or care of patients. For example, these prohibitions could extend to prevent ownership of diagnostic testing facilities by anyone other than a fully-licensed physician. It may even touch upon the concept of "excessive influence" over physicians and their clinical judgment.

State Variations of the Corporate Practice of Medicine Doctrine

Many states have adopted and implemented their own versions of the CPOM. Some states have laws in place that prevent a business from being owned by a non-physician to prevent it from exercising influence over practicing medicine. Others have restrictions relating to the employment of physicians. This means that, for example, if an Integrated Delivery System (IDS) [2] wants to hire doctors directly, they need to check state laws to see if there are any restrictions on such hiring.

Most states following the CPOM doctrine allow for exceptions, allowing physicians to be employed by health maintenance organizations (HMOs) and other licensed facilities. Licensed entities like hospitals, fraternal organizations, and other state-licensed entities often can employ physicians and other health care practitioners in limited roles. However, various states have CPOM statutes that prohibit even a hospital from employing a physician. [3]

In a nutshell, the applicability of the CPOM doctrine and any exceptions are state-specific and require individual research.

Compliance: Understanding the Management Services Organization (MSO) Model

When it comes to compliance with the CPOM, there are several ways to structure your business to ensure compliance. And of course, your approach will be influenced by a range of factors such as the state where you’re operating. One such approach is utilizing the Management Services Organization (MSO) model. Under this model, a management company—often a for-profit corporation—handles all non-medical services. A separate, physician-owned professional corporation takes care of all the medical services.

Boiled down, MSOs are entities–the backstage crew–that provide various administrative and management services to healthcare providers, ranging from billing and collection to HIPAA compliance and managed care. If structured properly, non-physicians can work with physicians to deliver health care services. However, in deciding on which type of structure is most appropriate for your business practice, you should take a holistic approach that considers tax, liability, financial, and other business concerns in addition to the CPOM’s parameters and any other applicable laws and regulations.

Navigating the complexities of the CPOM doctrine and successfully setting up an MSO can feel like a Herculean task. It requires thorough planning, such as properly structuring and incorporating the entities, establishing a compliant agreement like a personal services [4] or management contract between the professional and management arms of your business, and tackling other specific issues based on the particular CPOM provisions at hand. In order for an MSO contractual arrangement to fit within the safe harbor, it would have to satisfy all of the criteria of that specific safe harbor.

Remember, the golden rule is that patient care comes first. A clear understanding of the CPOM, can help to maintain this commitment. The structure must not allow the management company to interfere with or unduly influence the physicians' professional judgment. If it does, it could be a violation of the CPOM.

Also, the structure and operations of MSOs must be properly designed to avoid violations of various healthcare fraud and abuse laws such as Stark and the Anti-Kickback Statute, which regulate potential referral relationships. For instance, the ownership structure of the MSO must be carefully considered. Typically, MSOs are wholly owned by healthcare services providers such as hospitals or groups of physicians. If multiple parties own the MSO, investments must be proportionate to avoid legal complications. For example, if a physician invests only 20 percent of the capital but gets 60 percent ownership of the MSO, it could lead to Stark, Anti-Kickback, False Claims Act violations, and even potential tax problems. Therefore, the formation of an MSO should always take into account the relevant legal and ethical considerations to ensure fair practice and avoid potential scrutiny.

Making Sense of the CPOM: Key Questions to Ask

Based on all the information we discussed, here are some key questions that can help you understand whether and how the CPOM applies to you:

1. Does the state where your practice is located actively enforce CPOM rules? If yes, what are the specific details of these rules?

2. Does your medical group or business operate in multiple states? If so, you'll need to understand the CPOM rules in each of these states.

3. Are the services you provide considered the "practice of medicine" or another regulated medical activity according to the specific state law?

4. Do you have a management or services agreement in place, or is there an entity within your business structure not owned by a licensed medical professional?

By addressing these questions, you can make headway into determining how the CPOM might impact your business and what steps you need to take to comply. But this is just the beginning–understanding the doctrine is one thing, and ensuring compliance is another.

Navigating the CPOM landscape can feel like a daunting task due to variations in state laws and the high level of complexity involved in properly structuring your business. But don’t worry. With the right understanding and proper guidance, you can successfully align with these rules, ensuring the best possible outcome for your business.

Please feel free to reach out to your preferred healthcare lawyer or consultant. I'm here to help you navigate this complex landscape, avoid pitfalls, and confidently reach your business goals.

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[1] The prohibition on corporate medicine is against any person or entity other than a licensed physician/dentist/optometrist holding herself out as a provider of diagnoses, treatment, or care of patients, billing in the name of such non-licensed entity for such diagnoses, treatment or care of patients, and/or ownership or other control of professional medical, dental, or optometric delivery systems by non-licensed persons or entities. Patient Care and Professional Responsibility: Impact of the Corporate Practice of Medicine Doctrine and Related Laws and Regulations, NHLA/AAHA (1997), available at https://www.healthlawyers.org/hlresources/PI/ConvenerSessions/Documents/PatientCare.PDF; see also Mary Michal “et al., Corporate Practice of Medicine Doctrine: 50 State Survey Summary (September 2006), available at https://www.nhpco.org/sites/default/files/public/palliativecare/corporate-practice-of-medicine-50-state-summary.pdf (briefly stating the law in each state as of 2006 along with a short summary of legal guidance).

[2] Integrated Delivery Systems (IDSs) refer to an assortment of healthcare providers unified under one corporate structure or system. The structural organization of IDSs can significantly vary–one might encompass multiple hospitals, physician groups, and a DME company within a single corporation, while another could involve a hospital, nursing home, physician group, HMO, and management services organization, each operating as separate entities under a common parent company.

[3] See, e.g., Ohio Rev. Code Ann. § 1701.03 (prohibiting a corporation formed for the combination of professional services from controlling the professional judgment of doctors and other health care providers); see also Colo. Rev. Stat. Ann. § 25-3-103.7 (3); Conrad v. Med. Bd. of California, 55 Cal. Rptr. 2d 901 (Cal. Ct. App. 1996) (hospitals may not employ physicians but may use them as independent contractors); Gupta v. E. Idaho Tumor Inst., Inc., 140 S.W.3d 747, 752 (Tex. App. 2004) (illegal for a corporation comprised of lay persons to hire physicians to treat patients); Iowa Op. Att’y Gen. 91-7-1 (July 12, 1991) (the legality of employment of physicians is determined on an individual basis and depends on the degree of control exercised). [4] The requirements of the personal services and management contracts safe harbor are as follows: (i) the agreement must be in writing and signed by the parties; (ii) the agreement specifies all of the services provided and covers all of the services provided by the agent; (iii) if the services are sporadic, the agreement has a schedule for such services and the resulting charges; (iv) the term of the agreement is for at least one year; (v) the aggregate service charge is set in advance and based on arm’s-length negotiations, and does not take into account any referrals of government-sponsored patients; (vi) the services under the agreement do not promote or involve a business activity that violates any state or federal law; and (vii) the aggregate services contracted for do not exceed those that are reasonably necessary to accomplish the commercially reasonable business purposes of the services. 42 C.F.R. § 1001.952(d).