Accountable Care Organizations (ACOs) are organizations that have accepted responsibility for the overall quality, cost and care of a defined group of beneficiaries in compliance with the rules established by the federal government. Because ACOs are the product of a concept established by the federal government, some might overlook the application of state laws. But federal laws and waiver programs relating to ACOs do not preempt state laws. Understanding who can employ physicians, who can control or direct medical decisions, and how much control can be asserted over healthcare providers from a state law perspective is essential to properly structuring and operating an ACO.

A number of categories of state laws may apply to an ACO’s formation and operation. This article discusses how the “corporate practice of medicine” doctrine (CPOM doctrine) in Michigan may impact the formation and operation of an ACO located in Michigan. The CPOM doctrine varies from state to state but, in general, it prohibits a layperson from asserting direct or indirect control over the medical decision-making of a licensed person.

Must Be Professional Service Entity

Generally, an ACO must be a professional services entity in order for the CPOM doctrine to apply. Michigan law prohibits corporations and limited liability companies, other than professional service entities, such as professional corporations and professional limited liability companies, from engaging in activities of a “learned profession” which includes the professional services of a physician or surgeon.

What’s the difference between a typical entity and a professional service entity? All of the entity’s members and managers must be licensed to provide the same professional service, and no layperson can be a member or manager of the entity as they are not allowed to directly or indirectly practice medicine. This rule is grounded in the theory that necessary confidential and professional relationships between physicians and patients would be harmed by laypeople interested only in profit.

Only the Michigan Attorney General has the standing to take action against an entity that is improperly formed (i.e. an entity performing a professional service that is not registered as a professional service entity). Thus, payors may not assert lack of proper formation in a CPOM defense to avoid payment obligations.

Nonprofit corporations, such as hospitals, are exempted from the CPOM doctrine so long as the purpose may not involve a “pecuniary gain” to officers, directors, shareholders or members.

Assess Your Structure and Operations

Michigan’s CPOM doctrine is not as fully developed as other states’ doctrines. In Michigan, an ACO seeking to employ physicians to perform professional services would obviously implicate the CPOM doctrine, unless it is organized as a non-profit or is a professional entity owned and managed by duly licensed physicians. But, unlike other states, Michigan law is not clear about how much control may be asserted over a healthcare provider – such as the requirements set forth by an ACO in order to become a physician participant – before the control invokes the CPOM doctrine.

In the interest of promoting evidence-based medicine, coordinating care and improving the quality of care to beneficiaries, ACOs may engage in various activities that could be considered directing or controlling the provision of medical care, and in that case could in the future invoke the ban on CPOM in Michigan. For example:

• ACOs may outline appropriate uses of diagnostic tests for specific conditions and may expect its physician participants to use certain labs, imaging services and so on.

• ACOs may directly or indirectly decide the need to referrals.

• ACOs may determine what treatment options are available to patients.

• ACOs may set the number of hours worked or number of patients a physician must see.

• ACOs may select allied health staff.

• ACOs may select medical equipment for the practice.

• ACOs may require participants to provide 24/7 care as part of its care management processes.

To help minimize that risk, ACOs could initiate a formal mechanism to resolve concerns that physician participants might have over-intrusion into their private practice. They could structure their board in a fashion that would allow only appropriately licensed persons to make decisions on activities that could implicate the CPOM doctrine. Nevertheless, ACOs should continually assess how their structure and activities are viewed under the Michigan CPOM doctrine to minimize risk under state law.