Your Medical Spa Fire Physician or Physician Sue Medspa for Breach of Contract

A physician called our law firm, complaining that the management company had “embezzled” funds from the account for the medical doctor’s clinic. What should he do?

Case Study: Doctor in a Medspa

Our doctor client ran a practice – call it an aesthetic medicine practice inside a medical spa; a functional medicine and integrative medicine center, a medical marijuana (“420”) clinic, an anti-aging and longevity wellness center, or a concierge medical practice.  (Note: Many of the details below have been changed or facts from various situations have been amalgamated so as to preserve confidentiality.  This is why, for example, we say that this situation could be applicable to a conflict between MD and MSO in a variety of settings, whether a medical spa, integrative medicine clinic, anti-aging medical center, aesthetic medical / cosmetic surgery practice, or medical group).

The medical doctor felt that the manager (or management services organization (MSO)) was draining the treasury of money and “taking over the clinic.” The MD gave us a litany of grievances against the MSO.

“I gave notice,” the MD told us. “He’s a crookCorporate Practice of Medicine & and I’m going to take him down.”

Our MD client, a psychiatrist, also gave us the diagnostic run-down on the self-aggrandizing, narcissistic, ego-maniacal MSO president, who had become the physician’s “business partner” over the last year. “The management company is also conducting telemedicine visits with patients without my consent. He’s jeopardizing patients.”

“Give me my options,” the medical doctor said. “This guy is pocketing all the money.”

Corporate Practice of Medicine Issues

We reviewed the situation in a one-hour initial consultation.

First, we gave our medical doctor the legal lay of the land. We explained two legal rules that control his situation (in California): corporate practice of medicine, and kickback / fee-splitting rules.

Corporate practice of medicine is a variation on the prohibition against unlicensed medical practice. A company, such as a management company / MSO, cannot intrude into the practice of medicine. While the simplest example is when the MSO decides what treatment regimen the patient should be given, in some states (such as California), there is a very strong corporate practice of medicine prohibition, which means (among other things) that the MSO cannot hire and fire the physician.

In addition, the California Medical Board regards even such things as selecting the equipment and controlling the advertising to be an intrusion by the MSO into clinical practice, and thus a corporate practice of medicine violation.

Thus, our medical doctor client has the relationship backwards. He thinks the MSO has hired him, and is not paying the MD his share. The reality is that the MSO cannot hire the doctor; the MD, rather, must hire the MSO as manager (under a management or administrative services agreement). It’s the MD that is looking to fire the MSO – the MD is not “giving notice” like an employee would.

The patients belong to the medical doctor, not the management company. The medical doctor can always find a different MSO to manage his or her practice or clinic (ordinarily, assuming the MD complies with the termination provisions).

There is a money flow issue, too. Patient revenues ideally should flow from the patient, through the MD, and then to the MSO. Otherwise, it appears as though the management company is taking patient monies for providing clinical services to patients, and “kicking back” a share to the doctor for referring the patients to the management company.

In other words, there should be no money to “pocket” – the patient revenues belong to the MD, and the management fee should come out of those revenues (i.e., it’s not that the doctor should get paid a “stipend” by the management company). This may seem like a language game, but the underlying conceptual piece is that the MD runs the practice, the MSO the administration. These are separate worlds and it’s illegal to assign the MSO any greater role. The problem here is one of structure.

Kickback and Fee-Splitting Concern

When asked to provide counsel, our law firm ordinarily will advise on federal anti-kickback law, if the physician or professional medical corporation is providing medical services that are reimbursable by Medicare or Medicaid.

Otherwise, our Stark, self-referral, and anti-kickback lawyers will look solely to state law (in this case, California Business & Professions Code 650, which prevents fee-splitting and kickbacks).

Our medical doctor is in a high enforcement risk situation. He has signed on as medical director to an arrangement that appears to be constructed, operated, and maintained by the non-MD — raising corporate practice of medicine flags. The non-MD is guzzling the patient fees, and then paying our medical doctor a pittance. While the MD is outraged by the non-MD’s behavior, this arrangement is likely to result in medical board investigation and discipline for the MD.

Where there is corporate and unlicensed practice of medicine by the non-medical corporation or layperson, there can be aiding and abetting unlicensed practice of medicine by the MD.

That the non-MD’s hand is in the till is concerning enough financially; from a disciplinary perspective, the question is why the MD has let the non-MD control patient revenues and set up a structure whereby the MD gets a small percentage of return from those revenues? The arrangement suggests that the MD is splitting his patient revenues (fees) with the non-MD.

To the extent there is a management agreement between the MD’s professional medical corporation and the non-MD’s management company, the management fee must reflect fair market value for management services rendered. In California, this can be either a flat fee or a percentage of gross revenues, as long as commercially reasonable and justified by fair market value. 99% is not fair market value – it’s what the medical board would call “rent-a-license.”

Contract Issues

Our MD reports that while the management agreement has a staggering number for the monthly management fee (and he has no idea whether it bears any correlation to what the management company is doing for his practice), the actual practice is, as mentioned, even worse – the MD feels she gets very little for his efforts, which means that not only is there no fair market value, but there is also no real management arrangement, and the non-MD is running the show.

Can the MD terminate the management agreement?

We look to the “Term” section and the management agreement term is for 5 years, of which only a few months have elapsed.

There are “Termination” provisions but they grossly favor the management company. Among them, the professional medical corporation must inform the management company of any material breach by the management company of the arrangement, and give the management company 90 days to cure the alleged breach.

Our MD can’t wait 90 days – in fact, every day this arrangement poses a risk that the medical board investigators will come and find a sham arrangement.

If our MD truly reports what is going on, as a “breach,” this could be a smoking gun for corporate practice of medicine and fee-splitting violations.

Another point to consider is that if a court deems a given agreement to be illegal, it will likely declare the agreement unenforceable. In other words, it is doubtful the physician could enforce the terms of the management agreement against the manager if those terms themselves raise corporate practice of medicine and fee-splitting issues.

At the same time, the flip side of this is good news for our MD — if the physician walks away from the 5-year term, it is doubtful the management company can successfully sue the physician for breach of contract.

Other Compliance Issues

There are so many other compliance issues as we go down the intake rabbit hole with the MD. For example:

  • Who owns and maintains the records — the physician or management company?
  • Has any thought been given to HIPAA compliance?
  • If the physician walks away, what about notifying the patients, so as to avoid a medical board charge of patient abandonment?
  • What other liabilities does the MD have – for example, has the MD signed a sublease?
  • Whose name is on the door and on the website? Is it clear to the public that there is a medical practice inside?
  • Who, on the inside, is marketing medical services to patients? Are there risks of unlicensed medical practice from marketeer “upselling” inside the walls?
  • Will the MD be at risk of counterclaims from the management company (such as defamation, for writing about the manager’s “embezzlement”)?
  • Will the MD be at risk for signing a “medical director” agreement with the management company/promoter?

These kinds of issues can arise not only when parties begin disputing the money.

They can also happen to a successful spa or other healthcare venture that is looking for an exit strategy. The successful healthcare venture finds a buyer or new investors, and these people do due diligence, inquiring into healthcare compliance. Now, the potential buyers learn, for example, that the management agreement contains illegal terms; or has been implemented in ways that raise corporate practice and fee-splitting red flags; or that clinical personnel are hired and paid by the management company; or that there is inadequate physician supervision of nurses, physician assistants or medical assistants.

Now the exit gets closed, because buyers are aware that the healthcare venture has toxic, unaddressed compliance issues.

An ounce of legal prevention is worth a pound of cure.


Signing onto a medical spa venture or any medical clinic or arrangement in which a non-MD entity (such as a management company) is calling the shots, carries risks for a medical doctor. Many in the industry do not structure arrangements in a compliant way, leading not only to wide enforcement risk, but also disputes between the parties, hoarding of monies, cross-claims and counterclaims, and in general, a legal mess.

Contact our medical spa legal team for laws and updates so we evaluate your business structure, and to create a legal strategy for the regulatory path to market.

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Michael H Cohen Healthcare & FDA Lawyers

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