3 Steps to Navigate Through the Corporate Practice of Medicine

What is the Corporate Practice of Medicine?
While many Americans are aware of laws limiting the practice of medicine to licensed medical individuals, many may not have considered the impact these laws have on corporations. Many would agree that an individual who has not attended medical school, graduated with a professional medical degree and passed the required exams to obtain state licensure to practice medicine should not be trusted to provide the public with patient care. But how do these laws apply to corporations? In some cases, corporations are able to improve the quality of care by providing physician groups with significant capital and advancements in technology that might otherwise be out of reach. However, many believe that when corporations entangle themselves in the practice of medicine and are in a position to control physicians' compensation, they may also negatively influence patient care. Furthermore, the primary focus of any corporation is to achieve and increase profits, which is at odds with an industry that upholds patient care as its highest concern. This very issue was pondered by the American Medical Association at the turn of the nineteenth-century with the development of the Corporate Practice of Medicine Doctrine. Through the Doctrine, the AMA sought to ensure only licensed medical professionals practice medicine and prohibit the commercialization of medicine.

Implications of the Corporate Practice of Medicine Doctrine

In today's healthcare environment, the Doctrine has manifested itself in various states' laws, regulations and court rulings in a variety of forms and to varying degrees. Although specific state laws vary, states that have adopted the Doctrine in one form or another generally address four key areas:

  1. Some states prohibit business entities from employing physicians to provide medical care.
  2. Certain states require entities that provide medical services be owned and operated by licensed medical doctors.
  3. Some states prohibit professional fee splitting between licensed medical professionals and non-licensed individuals or business entities.
  4. The management fees stated within management services agreements must be set at fair market value. Upon drafting an agreement, an FMV opinion from a third-party valuation expert can alleviate compliance concerns from the beginning. The importance of this consideration is highlighted in the following section.

Though exceptions and safeguards vary by jurisdiction, these laws all seek to address arrangements in which physicians providing medical care are controlled through direct or indirect compensation by a non-licensed individual or entity.

Increased scrutiny of management services agreements

In states where the Doctrine has been implemented in some fashion, healthcare providers must also be cognizant of the implications it has on management services agreements. Through these agreements, an outside company is engaged to perform management functions for a medical practice or group. The services provided by the managing entity usually include day-to-day administrative functions and non-professional operations such as bookkeeping, budgeting, purchasing of supplies and personnel management. These companies essentially incur all costs associated with the practice with the exception of physician compensation, benefits and malpractice costs. In order to comply with the basis of the Doctrine, it is imperative the management fees outlined in these agreements are set at FMV. If management fees are set below the FMV of the agreed upon services, the physician practice or group is granted an inequitable surplus of income after the deduction for management fees. By charging sub-FMV fees for these services, the management company may be able to improperly influence the manner in which the physicians provide medical care, which is in clear violation of the premise behind the Doctrine and supporting regulations.

3 Steps to navigate through the implications of the Doctrine
Those involved in the structuring of relationships with physicians through employment, ownership or service agreements must consider the following:

  1. First, determine if the applicable state is subject to corporate practice of medicine regulations. If it is established that the applicable state is affected by the Doctrine, specific state laws, regulations and court cases must be examined to ensure full compliance.
  2. Each state's safeguards should also be explored. For example, some states allow not-for-profit corporations and educational institutions to employ physicians, while some allow physicians to practice medicine through a professional corporation that is wholly owned by licensed physicians.
  3. Finally, upon drafting a management services agreement, a third-party expert is able to opine on whether or not the subject agreement is within the parameters of FMV. When structuring relationships with physicians, professional assistance in the beginning stages can eliminate legal difficulties in the future.

Complying with the Doctrine can be a tedious undertaking. However, with a little research and planning, as well as the expertise of a trusted valuation professional, the process is much more navigable.

Jennifer Brunkow, ASA, CPA/ABV/CFF, is a manager at VMG Health and is based in the Nashville office. Ms. Brunkow specializes in valuing a variety of professional services including medical directorships, subsidies, billing, co-management and management, clinical coverage and quality initiatives.

More Articles From VMG Health:

6 Best Practices to Streamline a Physician Practice Valuation
4 Tips on Reducing the Frustrations of the FMV Process for Physician Service Agreements

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