The Corporate Practice of Medicine doctrine: it’s a favorite of enforcement authorities, corporate practice of medicine is like kryptonite to Superman.

In today’s video, we’ll talk about how to inoculate yourself against Corporate Practice of Medicine kryptonite, using some sound legal risk mitigation tools and tips.

I’m Michael H. Cohen, founding attorney of the Cohen Healthcare Law Group.  Since 1999, our law firm has counseled many healthcare industry clients each year on healthcare and FDA legal issues.

Why am I talking about a comic book superhero?

Because we have clients just like you: in the world of healthcare startups and established healthcare companies, you’ve got superpowers—supportive investors who pour in capital, a superb business plan, a revenue-generating model that will rapidly transform you into a next business goliath.

You may be a medical spa, or a wellness center, or a digital health company that pushes the boundaries of telemedicine; or perhaps you’re using AI, artificial intelligence, for your app, let’s say it diagnoses cancers better and faster than any human radiologist.  (We’ve represented a client with that kind of technology).

You were born under a red sun, on the planet Krypton; and here on Earth, where we have a yellow sun, mysteriously, you can fly, you can generate revenue faster than a speeding bullet, you’re able to do just about anything …. As long as the villain doesn’t bring out the regulatory enforcement kryptonite.

The reason we call the Corporate Practice of Medicine doctrine, “kryptonite,” is because it robs the healthcare venture of its strength.

Once enforcement authorities find a corporate practice of medicine violation, they can stop the business cold in its tracks.

As well, although the corporate practice of medicine prohibition really derives from the prohibition against unlicensed practice of medicine, which is considered a crime, private plaintiffs have taken advantage of the rule in civil lawsuits.  In some cases, the courts have let these plaintiffs out of a contract, finding that the contract violated the corporate practice of medicine and thus was void as a matter of public policy.

Now, this is a nuanced area, and the strength of the corporate practice of medicine prohibition varies across the states. Some have a very “strong” corporate practice of medicine rule, and others have a “weak” form, in which all they care about is that the business not actually be controlling clinical decision-making.

We can get into these nuances more during a Legal Strategy Session.

For now, it’s important to know that the corporate practice of medicine prohibition has to do with arrangements that regulators could regard as unlawful intrusions by administrative persons and entities into the clinical practice of medicine, psychology, and certain other licensed healthcare professions.

In California, the California Medical Board (“Medical Board of California”) has been particularly zealous in its pronouncements and enforcement activity.

On its webpage, Corporate Practice of Medicine, the Medical Board of California describes its expansive view of what constitutes Corporate Practice of Medicine.

First, the Medical Board of California includes as “examples of some of the types of behaviors and subtle controls that the corporate practice doctrine is intended to prevent,” the following actions and avtivities:

Determining what diagnostic tests are appropriate for a particular condition.

Determining the need for referrals to, or consultation with, another physician/specialist.

Responsibility for the overall care of the patient, including treatment options available to the patient.

Determining how many patients a physician must see in a given period of time or how many hours a physician must work.

Sound familiar?

Second, the Medical Board of California points to the following “‘business’ or ‘management’ decisions and activities, which, according to the board, resulting in control over the physician’s practice of medicine,” and these are those that “should be made by a licensed California physician and not by an unlicensed person or entity” such as a management services organization (MSO).

Let me give you some example. The Medical Board says:

Ownership is an indicator of control of a patient’s medical records, including the contents, and should be retained by a California-licensed physician. So, ownership of records, those should be retained by the physician.

Selection, hiring/firing (as it relates to clinical competency or proficiency) of the clinical staff.

Setting the parameters under which the physician will enter into contractual relationships with third-party payers.

Decisions regarding coding and billing procedures for patient care services.

Approving of the selection of medical equipment and medical supplies for the medical practice.

This is a long and broad list of activities.

The Medical Board of California points out that in its view, these “types of decisions and activities” can be made by a physician who consults with the MSO, but not by the MSO.

This can be a problem when the MSO controls so many of the business decisions, such as approving medical supplies and equipment, or, making decisions about marketing and advertising. It’s really tough to navigate when the board pronouncement is so broad.

Last, the Medical Board of California states that the following types of ownership and operating structures are prohibited:

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 the physician’s medical practice (non-physician exercising controls over a physician’s medical practice, even where physicians own and operate the business).

A physician acting as “medical director” when the physician does not own the practice. For example, a business offering spa treatments that include Botox injections, laser hair removal, and medical microdermabrasion, that contracts with or hires a physician as its “medical director.”

We talked in prior videos about the “medical director” issue, and how, rather than legitimizing a medical spa or digital health venture, this practice can in fact create an enforcement red flag.In fact, The Medical Board of California explains that its enforcement stance is “intended to prevent unlicensed persons [and companies] from interfering with or influencing the physician’s professional judgment.”

In all of the above examples above, Medical Board of California asserts, it would find not only a corporate practice of medicine violation by the company, but also that “the physician may be aiding and abetting the unlicensed practice of medicine.” That in itself is a crime.

To help mitigate the risk of a corporate practice of medicine violation, one thing that you can do is have a clear management services agreement, or MSA, between the business entity and the medical arm of the venture.  Even if the healthcare venture isn’t a brick-and-mortar operation such as a medical spa, but rather is a telemedicine operation that relies on connecting with consumers through the Internet and on their mobile devices, a modified MSA for technology platform can be useful to help clarify the respective roles of the business venture on one side, and the medical side of the enterprise on the other side.

A second risk mitigation tip we use, particularly in California, is to separate out the advertising component from the marketing.  Typically, we prefer that marketing services be compensated on a flat fee basis, so that they don’t vary by value of volume of patients; this way, we help mitigate fee-splitting and kickback issues.

Advertising costs are just costs, they are not professional fees.  They can be paid for under a separated budget.

By reducing the risk of a fee-splitting or kickback violations, normally, we also simultaneously reduce corporate practice of medicine risks, because these violations often go hand in hand.  In other words, the Board or prosecutor tends to find that the business overreached and intruded into the medical side, and thus both split fees and violated the prohibition against letting the business, “practice medicine.”

This may sound like a lot to absorb, so we would encourage you to book a Legal Strategy Session with us.  That gives us time to assess your business model, at least preliminarily, or proposed arrangements, and provide valuable legal insight as well as recommendations for risk mitigation.

Thanks for watching. Here’s to the success of your healthcare venture, we look forward to speaking with you soon.