Although ownership and control of health care providers engaged in the practice of medicine has traditionally been limited to either non-profit enterprises or licensed medical professionals (and their regulated, professional enterprises), the industry in recent decades has seen an escalating infusion of capital from enterprises including private equity firms, and business structures have been created to accommodate funding from non-licensed, for-profit entities. Given the continued for-profit commercialization of health care and its $4 trillion plus market share, it is unlikely such private investment in the health care ecosystem will voluntarily slow in the foreseeable future.

Recent calls for greater regulatory scrutiny of such investments in certain health care-related entities, such as medical practices and health care systems, further complicate the already complex regulatory landscape for for-profit health care enterprises, their owners and medical professionals.

Michigan Medical Group Asks Michigan Attorney General to Investigate Ownership of For-Profit Health Care Organizations

The Michigan State Medical Society, which represents thousands of Michigan physicians, recently sent a letter to Michigan Attorney General Dana Nessel asking her to investigate what it argues are “widespread violations” of Michigan’s Corporate Practice of Medicine doctrine. The Attorney General’s office stated that it is reviewing the allegations and determining if and how to proceed. Whether the Attorney General initiates a widespread investigation of certain health care organizations’ compliance with the Michigan Corporate Practice of Medicine doctrine remains to be seen.

Michigan Corporate Practice of Medicine Doctrine: The Basics

Michigan’s Corporate Practice of Medicine doctrine, as explained in more detail in this advisory, prohibits unlicensed individuals from owning entities that engage in the practice of medicine in Michigan. Put differently, most entities intending to operate a medical practice must generally be owned by individuals who hold a license to practice medicine. While there is a recognized doctrinal exception enabling non-profit health care entities, such as certain health care systems, to employ licensed individuals providing medical care, there is no such exception permitting private equity firms and other for-profit entities that are owned by non-licensed persons from owning Michigan medical practices. The basic policy rationale animating this legal principle, which the Michigan State Medical Society highlighted in its letter to the Attorney General, is that patients are best served when medical decisions are made by licensed medical professionals.

Sophisticated Structuring: The Use of Management Service Organizations

The Michigan State Medical Society argues in its letter that in part through their unique use of management service organizations (MSOs), private equity firms circumvent Michigan’s Corporate Practice of Medicine doctrine. MSOs, a separately established entity from the medical practice, are a common structuring device that are established to contract with the medical practice to provide non-medical administrative and management services. Frequently, in private equity acquisitions of businesses involved in medical practices, the private equity firm establishes an MSO that it wholly owns. In recognition of the requirements of the Michigan Corporate Practice of Medicine doctrine, the licensed individuals retain ownership of the professional entity that functions as the operating medical practice engaged in the practice of medicine while the MSO manages the business aspects of the medical practice. In effect, the management contract vests MSOs with management rights over the business of the medical practice.

Federal Regulator Challenges Private Equity Fund’s Health Care Roll-Ups

Investments in certain health care-relaed entities by private equity firms and other unlicensed individual investors has also garnered recent attention from federal regulators. On September 1, 2023, the Federal Trade Commission (FTC) initiated a suit against U.S. Anesthesia Partners, the leading provider of anesthesiology services in Texas, and Welsh Carson, a private equity firm that founded U.S. Anesthesia Partners. The FTC alleges Welsh Carson’s roll-up acquisition strategy aimed at consolidating anesthesiology services in Texas to profit from various synergies violates The Clayton Antitrust Act of 1914 and Federal Trade Commission Act of 1914, both antitrust laws designed to halt anticompetitive practices. Lina Khan, the chair of the FTC, explained “[t]he FTC will continue to scrutinize and challenge serial acquisitions, roll-ups, and other stealth consolidation schemes that unlawfully undermine fair competition and harm the American public.”

Both licensed medical professionals considering selling their practice and unlicensed investors, including private equity firms, considering investing in the health care sector, should carefully review these latest regulatory developments.