A primary consideration of medical practice owners and stakeholders in developing and implementing a compliant corporate ownership structure is what is known as the “corporate practice of medicine” doctrine (“CPOM”). Although there are state-level variations as to its scope and breadth, in its most basic form, CPOM prohibits or otherwise restricts the ownership of medical or medical-adjacent practices or businesses by non-licensed medical professionals. CPOM regulations were developed primarily at the state level to prevent corporate ownership of medical practices and to promote the physician-patient relationship.

Currently, 33 states have CPOM regulations that are enforced to varying degrees. Some states, such as California, Texas, New York, and North Carolina, have robust CPOM enforcement regimes, while other states’ CPOM enforcement activities may be dormant.

However, given recent developments such as those described below, stakeholders involved in the healthcare space should consider the impact of CPOM regulations on their corporate structures and transactions and should take the necessary steps to ensure their compliance with this complicated, nuanced doctrine.

Recent CPOM 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 to allow medical practices to transition from traditional, stand-alone offices to multi-state organizations that operate throughout the country and that are able to maintain 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 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 and practices medicine, while the corporate management group provides administrative and back-office services in return for compensation.

One of the most typical iterations of these management services arrangements in the hospital context 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 has been challenged in the State of California. The American Academy of Emergency Medicine Physician Group has sued Envision Healthcare (owned by private equity firm KKR & Co.), a 25,000 clinician medical group, in the United States District Court for the Northern District of California 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.^[1] Most pointedly, the suit requests that the court find such structures illegal under California law. The suit is backed by the California Medical Association and is currently in its beginning stages.

This case has drawn interest throughout the country, and we believe that it could serve as a harbinger for a renewed focus on CPOM enforcement at the state level. AAEMP V. Envision is particularly noteworthy in that it represents a private lawsuit to enforce a state’s CPOM regulations, where typical CPOM enforcement efforts stem from state agencies or medical boards.

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 situationally specific due to nuances among the various state laws, generally applicable questions that should be asked include:

• Does the state in which the practice operates have active CPOM regulations?

• Does the state in which the practice exists have active or dormant CPOM regulation enforcement regimes?

• Does the operating entity (or medical group) conduct business in multiple states?

• 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?

If you are in or adjacent to the healthcare space and have questions or concerns regarding your corporate structure, a potential transaction, or other corporate reorganization or operations matters, please contact a member of our experienced team.

FOOTNOTES

^[1] AAEMP v. Envision Healthcare Corporation, et al., (Complaint)