Evading the Corporate Practice of Medicine Law ... The New "Millennium Prize Puzzle"

In 2000, the Clay Mathematics Institute in Peterborough, New Hampshire set forth seven (7) Millennium Prize Puzzles. These puzzles/problems were so maddeningly convoluted, complex and incomprehensible, that a correct solution to any of the problems would result in a $1,000,000 payment being awarded to the person who discovered the solution.  To date, only one of the seven puzzles has been solved.

The Corporate Practice of Medicine doctrine ("CPOM") is on the surface simple. And yet, its application is a mysterious puzzle with each layer increasing its complexity. Even its very name is a misnomer. States that have adopted this doctrine through statute, Attorney General opinion or via caselaw should more accurately entitle the provision “The Corporate Non-Practice of Medicine” doctrine. The simple version of this doctrine holds that corporations comprised in whole or in part of non-physicians cannot own or operate a medical practice. Simple. Concise. Easy to understand… and in application, perhaps the 8^th Millennium Prize Puzzle.

The Premise Behind and An Example of CPOM Language

So, what is the premise and reasoning supporting the CPOM doctrine?  Its purpose is to ensure that only licensed professionals deliver medical care to their patients and that unlicensed persons and entities do not influence treatment decisions. The needs of the patient predominate over everything and patients must always be protected from potential conflicts of interest. 

In a true capitalist democracy, for-profit corporations exist for one reason… to make a profit. That fundamental truth is irrefutable. That is the very essence of capitalism. However, when a corporation practices medicine or employs a physician it has the potential to commercialize and potentially debase the medical profession. The thirst and demand for profits has the potential to undermine the physician-patient relationship by placing the needs of the corporation over the needs of the patient. The pressure to generate profits also has the potential to override the physician’s exercise of independent medical judgment which has to be focused on the sole interest of the patient. Finally, the general intrusion into the practice of medicine by non-medical, unlicensed corporate entities results in those entities not being subject to the same exacting professional standards or regulatory control as licensed entities and resulting in an unbalanced playing field.

Let’s examine the State of Colorado’s Corporate Practice of Medicine statute. The Colorado statute, Co.Rev.Stat. §12-36-134 (2016) states in material part:

(1) Persons licensed to practice medicine by the board may form professional service corporations for such persons' practice of medicine under the "Colorado Business Corporation Act", articles 101 to 117 of title 7, C.R.S., if such corporations are organized and operated in accordance with the provisions of this section. The articles of incorporation of such corporations shall contain provisions complying with the following requirements:

(a) The name of the corporation shall contain the words "professional company" or "professional corporation" or abbreviations thereof.

(b) The corporation is organized solely for the purpose of permitting individuals to conduct the practice of medicine through a corporate entity, so long as all the individuals are actively licensed physicians or physician assistants in the state of Colorado.

(c) The corporation may exercise the powers and privileges conferred upon corporations by the laws of Colorado only in furtherance of and subject to its corporate purpose.

(d) (I) Except as specified in subparagraph (II) of this paragraph (d), all shareholders of the corporation are persons licensed by the board to practice medicine in the state of Colorado who at all times own their shares in their own right; except that one or more persons licensed by the board as a physician assistant may be a shareholder of the corporation as long as the physician shareholders maintain majority ownership of the corporation. The shareholders shall be individuals who, except for illness, accident, time spent in the armed services, on vacations, and on leaves of absence not to exceed one year, are actively engaged in the practice of medicine or as a physician assistant in the offices of the corporation. [emphasis added]

(7) (a) Corporations shall not practice medicine. Nothing in this section shall be construed to abrogate a cause of action against a professional corporation for its independent acts of negligence. [emphasis added]

And yet we know that a residential treatment program based in Denver, Colorado has had three separate private equity firms acquire a minority or majority ownership interest in it since 2008 when the Mental Health Parity and Addiction Equity Act was signed into law. None of the three private equity firms, Trinity Hunt, Lee Equity nor the current overlord, CCMP Capital Advisors is licensed to practice medicine in the State of Colorado. Nonetheless, these transactions resulted in the rapid expansion of this facility into seven different states while at the same time, exponentially increasing its debt structure into the hundreds of millions of dollars. All the while, neither the State of Colorado nor the applicable federal government agencies investigated any of the transactions to determine the legality of complying with the letter and "the spirit" of the CPOM.

The CPOM Millennium Prize Puzzle

Private equity firms routinely do not employ Dewey, Cheatum & Howe, shyster "street attorneys" as their legal counsel. Knowing that billions of dollars hang in the balance, they employ and pay for the most reputable, highest paid, elite law firms possible. Hourly rates for senior partners exceed $1,000.00. These law firms are not hired to tell their client that they cannot do something. They are hired to tell a client how they can get around legislation or case precedent which tells them they should not be able to do something.

So, let's speculate.

Since the CPOM doctrine ordinarily stipulates that an entity providing medical services be provider-owned, physician owned practices typically are structured as professional corporations or limited liability companies (these physician owned entities will be jointly referred to as “PC”) which own all of the assets of the medical practice.

To acquire a medical practice owning an eating disorder residential treatment center, a private equity firm either acquires or establishes a new Management Services Organization ("MSO").  For tax reasons, the MSO is often incorporated in the State of Delaware, Nevada or Texas. The infusion of investment funds into the MSO allows it to acquire all purported "unregulated assets" of the medical practice.  These assets could include the real estate owned by the PC, unlicensed staff, equipment, furniture, supplies, and account receivables.

The PC and MSO then enter into a “Managed Services Agreement,” whereby the PC pays fees to the MSO to manage the purported non-medical assets. The services provided by the MSO typically comprise all nonclinical services involved in the operation of a medical practice such as providing office space, overseeing nonclinical personnel, and handling business, office and administrative services, such as managed care contracting, recordkeeping, support services, marketing and public relations, accounting and legal services, billing and collections, financial planning and expansion goals and decisions.

Note that there is the possibility that at least one further level of “ownership” is instituted to further convolute the manner in which the entities operate with an additional holding company being formed (for example, a “Topco Holdings, LLC) which initially is wholly owned by the PC.  The MSO then buys ownership interest in that holding company purporting to represent its interest in the non-medical assets set forth in the MSA.

The physicians comprising the PC often have an incentive package with the MSO which was negotiated on their behalf by merger and acquisition specialists and which typically include very large payments to the physicians in the event additional expansion is successful or via capturing a greater share of the industry market. These incentive packages often greatly exceed the amount of revenue received by the physician from his/her actual practice of healing. On very rare occasions, the incentive package could include active participation in ground-breaking research resulting in new treatment regiments for an industry such as novel, microbiome-based interventions which benefit patients with severe eating disorders. However, without a direct connection to a research university, more often than not the PC physicians are in a position of merely saying “Me as well” as they build on the work and research performed by academicians and scientists.

With regard to private equity firms participating as MSOs, a number of states have opined on the role of a MSO vis-à-vis payors, providers and medical practices. The Attorney General for the State of California issued an opinion on July 27, 2000, expressing concern about the difficulty of separating business and medical decision-making by the MSO. “Where those two functions merge, there is the prospect that the MSO could be viewed as engaging in the unlawful practice of medicine.”

So, is this worthy of Millennium Prize Puzzle consideration? To the general public and most physicians, perhaps so. But, other issues exist which further complicate these transactions. 

Issues and Controversies with Acquisitions

The potential pitfalls and problems with private equity firms acquiring medical practices are many and complex. This is where the $1000 per hour law partner earns his/her payday.

The first and most obvious issue (besides the obvious violation of CPOM doctrine) is the issue of “fee-splitting.” Fee-splitting is broadly defined as, “any arrangement pursuant to which unlicensed individuals or business entities share in a medical provider’s professional fee income.” The prohibition on fee-splitting may be based on a state’s CPOM statute, another state statute, a federal statute or case law. These fees could include referral fees, office leases with “triple-net” payment restrictions, rental payments tied to a percentage of practice revenue, or an MSA contract fee based in whole or in part, which is a percentage of practice revenue, or other fee-sharing arrangements.

Any competent, cautious attorney will advise that an arrangement providing for a payment based, in whole or in part, upon a percentage of a health care provider’s revenues must be carefully analyzed under the applicable state fee-splitting statutes and regulations, and under the applicable CPOM laws because fee-splitting may be indicative of an impermissible ownership interest.

Federal courts have negatively opined upon the MSO “fee-splitting arrangement.”   In the case of  Virgiliu Necula, M.D. v. Martin J. Conroy et al., 2000 U.S. Dist. Lexis 8928 (S.D.N.Y. 2000) a physician established a radiology practice as a provider under the New York Medicaid program. In that case, the federal court was required to construe and apply New York’s fee-splitting statute, and ruled against the physician. Under review were contracts at different times that the physician had with two MSOs for management services. Those agreements specified that the MSO would provide facilities, x-ray and other medical equipment as well as non-physician staff and management of the finances for the radiology practice. The physician agreed to pay the MSOs a fixed percentage of his receipts for billing services and a fixed dollar amount for each procedure performed. During the period of these management services agreements, the physician received payments from the New York’s Medicaid program. The State audited Medicaid payments made to the physician, and a determination was made that the physician engaged in unlawful fee-splitting under the MSO arrangements. The court held the physicians violated the fee-splitting provision, required the physician to return Medicaid payments which had been received and excluded the physician from the state Medicaid program.

At this point, with the MSO and PC being inextricably intertwined, with fees being shared, and with courts sanctioning physicians for such conduct, private equity firms involvement in the medical industry “is looking like a duck, is walking like a duck and is beginning to learn how to sound like a duck.”

A far greater issue potentially arises if the PC receives any revenue from federal health care programs, i.e., Medicare, Medicaid or Tricare. The arrangement should be analyzed for compliance with the federal fraud and abuse laws, in particular the Anti-Kickback Statute. If there is an incentive package pertaining to the PC and the physicians and any revenue from the federal health care programs are going to the MSO, criminal sanctions and claims of Medicare Fraud would be a spectre lingering over the entire transaction.

Finally the greatest issue for physicians and private equity firms when the physician’s medical practice is based in Colorado is the express language of the Colorado Revised Statutes pertaining to the practice of medicine. Colo.Rev.Stat. § 12-36-106 states in material part:

(1) For the purpose of this article, “practice of medicine” means:

(a) …

(b) …

(c) The maintenance of an office or other place for the purpose of examining or treating persons afflicted with disease, injury, or defect of body or mind; [emphasis added]

(2) If a person who does not possess and has not filed a license to practice medicine, practice as a physician assistant, or practice as an anesthesiologist assistant in this state, as provided in this article, and who is not exempted from the licensing requirements under this article, performs any of the acts that constitute the practice of medicine as defined in this section, the person shall be deemed to be practicing medicine, practicing as a physician assistant, or practicing as an anesthesiologist assistant in violation of this article.

The express language of the Colorado statute, Colo.Rev.Stat. §12-36-134(7)(a) states, “Corporations shall not practice medicine.” [emphasis added]

By defining the practice of medicine to include maintaining an office, that the Colorado legislature has taken away the “non-medical asset” loophole through which private equity firms “snuck the camel’s nose into the tent.” The term “maintenance of an office or other place,” is a very broad phrase and is furtherance of the legislative mandate that corporations, and non-physicians shall not practice medicine with the practice of medicine being defined in very broad terms.

Ramifications for violating the CPOM Doctrine

At least in Colorado, the legislature set forth one possible remedy as follows:

(g) Pursuant to § 12-36-129(6), the board may apply for an injunction to enjoin any person from performing delegated medical acts that are in violation of this section or of any rules promulgated by the board.

In layman’s language, the State Attorney General has the legislative mandate of closing any medical practice violating the CPOM doctrine. Physicians who violate the doctrine are subject to civil and criminal liability, loss of medical privileges and removal from state and federal Medicaid programs.

Ordinarily, the state’s attorney general is tasked with enforcing the CPOM doctrine. But, if there is possible Medicaid or Medicare fraud involved, a private citizen can file a “qui tam” action on behalf of the state and not only would the offending physician or entity be subject to prosecution in this manner, but the prevailing qui tam plaintiff potentially could recover as much as thirty percent (30%) of the amount the state or federal governments were defrauded through the actions of the offending entities.

The Faustian Bargain between private equity firms and eating disorder residential treatment programs continues unabated … for the time being. But, the words of Dr. Faustus ring true today:

I do promise him in return that, when I be fully sated of that which I desire of him, twenty-four years also being past, ended and expired, he may at such a time and in whatever manner or wise pleaseth him order, ordain, reign, rule and possess all that may be mine: body, property, flesh, blood, etc., herewith duly bound over in eternity and surrendered by covenant in mine own hand by authority and power of these presents, as well as of my mind, brain, intent, blood and will.

I do now defy all living beings, all the Heavenly Host and all mankind, and this must be.

In confirmation and contract whereof I have drawn out mine own blood for certification in lieu of a seal.

Doctor Faustus, Adept in the Elementa and in Church Doctrine.

(From the Wolfenbüttel Manuscript. “Historia and Tale of Doctor Johannes Faustus.” )

The winds of litigation war continue to stir.