Corporate Practice of Medicine Doctrine: Exploring Emerging Trends

By: Matt Wilmot & Mills Fleming

As corporate ownership in the medical field grows, understanding the ‘corporate practice of medicine doctrine (CPOM) is more critical than ever.

A key consideration of medical practice owners and stakeholders when creating a compliant corporate ownership structure is the “corporate practice of medicine” doctrine (“CPOM”). In its most basic form, CPOM laws generally limit the ability of companies and non-licensed individuals to own medical practices, with the goal of preserving independent medical judgement. CPOM regulations are generally at the state level and may come into play even where the proposed structure is otherwise compliant with federal and state law (including the Anti-Kickback Statute).

At last count, 33 states have CPOM regulations that are enforced to varying degrees and in various manners. State attorney generals’ offices, state agencies, or applicable licensing boards actively enforce CPOM regulations against individual practitioners. Some states, such as California, New York, North Carolina, and Texas have robust CPOM enforcement regimes, while other states CPOM enforcement activities may be dormant.  Other states, like Georgia, fall somewhere in the middle, focusing on a physician’s ability to exercise independent medical judgement and how the corporate structure affects that ability. 

However, given recent developments, stakeholders involved in the healthcare space need to pay careful attention to the impact of CPOM regulations on their corporate structures and transactions, and take the necessary steps to ensure their compliance with this complicated, nuanced doctrine.

The State of CPOM and Recent Enforcement Activity

Consolidation of medical practices and private equity investment in the delivery of professional healthcare services has flourished in recent years. As a result, various investment and corporate structures have been implemented. These allow medical practices to transition from traditional, stand-alone offices to multi-state organizations, while maintaining compliance with various states’ CPOM regulations.

When a corporate entity seeks to invest in a medical practice, a customary technique to ensure compliance with CPOM regulations is to have a “friendly physician” remain as the owner of the medical practice while a separate management entity (e.g., a management services organization or “MSO”) owned by the investor provides operational, administrative, billing, and other non-medical support to the practice pursuant to a management services agreement. Thus, the licensed medical professional remains in ownership of the practice itself, while the corporate management group provides administrative and back-office services in return for compensation.

In the hospital setting, one of the most typical iterations of these management services arrangements involves ‘staffing groups,’ whereby professional organizations of hospitalists, emergency medicine physicians, anesthesiologists, radiologists, and the like, staff hospital departments. Given their size, large staffing groups are able to service facilities nationwide.

Recently, the ‘staffing group’ model faced legal challenges in California. The American Academy of Emergency Medicine Physician Group (“AAEM-PG”) sued Envision Healthcare (owned by private equity firm KKR & Co.), a 25,000-clinician medical group, alleging that “shell business structures” are used by Envision to circumvent CPOM regulations that improperly allow it to retain effective control of the emergency department staffing groups.  AAEM-PG alleged that the structure allowed laypersons to determine which physicians to hire, how much to pay them, their work schedules and employment terms, and their third-party payor contracts. Most pointedly, the suit requested that the court find such structures illegal under California law. The suit was also backed by the California Medical Association.  Despite the gravity of the allegations and requested relief, ultimately, Envision Healthcare filed for Chapter 11 bankruptcy, and the case was settled between the parties due to the fact Envision no longer operated in California. 

In its press release, AAEM-PG claimed that the court made early dispositive rulings that allegedly agreed with AAEM-PG’s theories that the staffing model demonstrated CPOM violations.  It framed the settlement as a result of Envision’s departure from California and a question of whether the AAEM-PG had standing to seek an injunction, it’s preferred remedy.  Perhaps tellingly, it received a partial reimbursement of its attorneys’ fees and costs from Envision.  Despite this, the legality of the staffing group model in California remains undisturbed for now.

However, we believe that this case serves as a harbinger for a renewed focus on CPOM enforcement at the state level. One particularly interesting aspect of the case is that it represents a private lawsuit to enforce a state’s CPOM regulations, where typical CPOM enforcement efforts are brought by state agencies or medical boards.  While this case was specific to California’s robust CPOM regime, it may engender further public and private enforcement actions in states throughout the country.

Focus on CPOM Compliance in Corporate Structures

Those who find themselves practicing, investing, or otherwise operating in or adjacent to the healthcare space should be aware of CPOM considerations, especially those involved in corporate restructuring, mergers and acquisitions, or multi-state operations.

Although any CPOM analysis is heavily dependent upon the various state laws at issue, generally applicable questions that should be asked include:

• Does the state in which the practice operates have active CPOM regulations and are they active or dormant?
• Does the operating entity (or medical group) conduct business in multiple states and, therefore, subject to various iterations of CPOM?
• Does the activity engaged in qualify as “practice of medicine” (or other covered medical activity) as defined by applicable state statute or regulation?
• Is there an overarching management or services agreement structure or an entity within the operating entity’s ownership structure that is not owned by a licensed medical professional?
• What is the role of the medical provider in the organization and who is in a position to influence or oversee their medical judgment?

Depending on how these key questions are answered, you and your organization may be at a higher risk of enforcement for violations of the CPOM Doctrine. 

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