Addressing the Prohibition on the Corporate Practice of Medicine

Many states prohibit the “corporate practice of medicine.” In general, this doctrine bans corporations from practicing medicine or employing a physician to provide professional medical services. It is based on a number of public policy concerns, including the commercialization of the practice of medicine and the potential for interference with the physician’s independent medical judgment. Homecare providers should ensure they are not violating these prohibitions.

A Look at California

California has a strict practice of prohibiting corporations from practicing medicine. The Medical Practice Act, Business and Professions Code section 2052 of California says that: “Any person who practices or attempts to practice, or who holds himself or herself out as practicing…[medicine] without having at the time of so doing a valid, unrevoked, or unsuspended certificate…is guilty of a public offense.”

California Business and Professions Code section 2400 within the Medical Practice Act reads: “Corporations and other artificial entities shall have no professional rights, privileges, or powers.”

This policy is intended to prevent unlicensed persons from interfering with or influencing a physician’s professional judgment. From the California Medical Board’s perspective, the following health care decisions should be made by a physician licensed in the state:

• Determining what diagnostic tests are appropriate for a particular condition
• Determining the need for referrals to, or consultation with, another physician or specialist
• Responsibility for the ultimate overall care of the patient, including treatment options available to the patient
• Determining how many patients a physician must see in a period of time or how many hours a physician must work

The following types of medical practice ownership and operating structures are also prohibited in California:

• Non-physicians owning or operating a business that offers patient evaluation, diagnosis, care and/or treatment
• Physician(s) operating a medical practice as a limited liability company, a limited liability partnership or a general corporation
• Management service organizations arranging for, advertising or providing medical services rather than only providing administrative staff and services for a physician’s medical practice
• A physician acting as “medical director” when the physician does not own the practice

Case Review: New York State

A recent decision by the New York Court of Appeals (New York state’s highest court) exposed the interplay between a management service organization (MSO) and a health care provider. In Andrew Carothers, M.D., P.C. v. Progressive Insurance Company, the court held that payers can withhold amounts paid to a provider if the provider violates the corporate practice of medicine by ceding too much control.

In the case, Carothers established a professional corporation (PC) to provide MRI services, leasing facilities and equipment from companies owned and controlled by non-physicians, which acted as an MSO to the PC. A jury found that the PC breached the corporate practice of medicine doctrine as applied in New York by ceding too much control to non-physicians. The PC was therefore “fraudulently incorporated.”

On appeal, the court agreed with the jury’s verdict because:

• The equipment leases were above fair market value;
• The MSO had the right to terminate each lease without cause but the PC could not terminate the leases;
• Carothers failed to provide oversight of the medical services provided by the PC;
• Carothers was not involved in evaluating or disciplining employees; and
• He was not involved with the business operations and delegated his duties to a non-physician.

If you are involved with or considering becoming involved with an agreement between an MCO and a health care provider, you should consult your health care attorney to determine whether the arrangement is prohibited by the applicable state’s corporate practice of medicine doctrine.