The Modern Corporate Practice of Medicine
by Kirk Doan
Since the prohibition against the corporate practice of medicine originated in the early 20th century, the methods for delivering health care services have changed dramatically.
The doctrine’s objective was to prohibit corporations from practicing medicine. It was believed that requiring professional ownership and control of health care entities would assure that medical decisions were made in the best interests of patients, and not shareholders.
Legal Complications
The prohibition of corporate practice of medicine takes many forms. One example is that corporate ownership of entities providing medical services is prohibited unless all shareholders are licensed professionals. Another forbidden arrangement is the splitting of professional fees with non-professionals, or allowing another person or entity to use a licensee’s license.
Further complicating healthcare business arrangements are federal and state laws against physicians referring business to entities with which the physician has an ownership or other financial relationship. The prohibition on lay ownership of professional entities creates operational difficulties by limiting the movement of capital and possibly resulting in lower values for some medical enterprises.
Local Examples
Even with the surrounding complications, the doctrine continues to have vitality and often leads to unexpected consequences. The Kansas Supreme Court recently invalidated a surgeon’s covenant not to compete because it was held by a general business corporation rather than a professional corporation with solely professional ownership. The Kansas Board of Healing Arts recently sent a letter to physician medical spa directors notifying them that the ownership structure of the spas must comply with the Board’s interpretation of the Kansas Healing Arts Act which requires that only a board licensee may open and maintain an office for the practice of the healing arts. The potential penalty: they could be subject to discipline for unprofessional conduct.
Additionally, classification of a health care professional as an independent contractor instead of an employee to achieve tax goals may also have unintended consequences for purposes of the corporate practice of medicine doctrine, and eligibility for medical malpractice or liability insurance coverage.
Avoiding Corporate Practice Obstacles
To avoid the obstacles presented by the corporate practice of medicine and related doctrines, it is important to structure transactions and relation-ships appropriately. One technique involves creation of a corporation or limited liability company owned solely by licensed professionals to provide all medical services. A second entity is then set up, which may have lay ownership, to provide non-professional services such as marketing, billing and collection, reception and scheduling and other services. These entities are coupled through a management arrangement whereby payments for all services go first to the professional entity, which then pays over a portion to the lay entity as compensation for services not constituting the practice of medicine. To avoid splitting professional fees, the non-medical services are compensated at fair market value and not as a percent of gross revenue.
Another variant is where the professional services are provided to the consumer of the services under one contract, and the managerial and other non-medical services are provided to the consumer of the services under a separate contract.
Many non-professionals are seeking to enter the healthcare market to capitalize on opportunities. In structuring health care business transactions, the participants must be aware of the corporate practice of medicine doctrine and related prohibitions. They also need to be aware of the consequences of violating these prohibitions, either intentionally or unintentionally, and carefully structure transactions to comply with applicable laws, regulations and policies.
Kirk H. Doan is Partner, Health Care Group Stinson Morrison Hecker LLP.
P | 816.691.2739
E | kdoan@stinson.com