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 8th 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.
The winds of
litigation war continue to stir.
