When Healthcare Entrepreneurs & Medical Doctors Collaborate, Corporate Practice of Medicine Legal Issues Rule

Jill’s Healthcare Venture

Jill’s healthcare venture requires her to source a medical doctor (MD) who can collaborate with Jill’s startup (let’s call it Healthcare Startup) to provide a series of innovative healthcare therapies to users (let’s call them customers, or clients, of Healthcare Startup who then become “patients” of the MD).

The MD is President of a professional medical corporation (let’s call it, Professional Medical Corporation) which has some fancy name that nonetheless indicates to the public that the company is in the business of providing professional medical services to patients.  Unlike Healthcare Startup, which is either a regular business corporation or an LLC.

Jill asks her healthcare lawyers how she can structure her business idea.  Whether it’s a medical spa, a telemedicine venture, a business involving a brick-and-mortar medical practice or health and wellness clinical entity, or some other variation; whether the therapeutic side involves hormones, anti-aging and longevity, functional medicine, integrative medicine, concierge medicine, some privately branded dietary supplements or cosmetics, or the therapeutic approach of the day—Jill wants a “partnership” with the doctor, yet knows she is in a state that takes corporate practice of medicine seriously.

What does Jill do?

Just the Facts, Mam

Jill’s healthcare & FDA lawyers start by plotting out some of the basic business assumptions.

  • Professional Medical Corporation is a California professional medical corporation.  Dr. Smith is the President and sole shareholder. (It’s always Dr. Smith.  I watched too many episodes of Lost in Space as a kid.)
  • Healthcare Startup is a California S corporation that does not have any ownership interested by a licensed health care physician in California. Essentially Healthcare Startup wishes to function as an MSO (management services organization).
  • The MD sole shareholder of Professional Medical Corporation has no stake or equity in Healthcare Startup.
  • Professional Medical Corporation would like to engage Healthcare Startup for management services organizations (“MSO”) services. These MSO services include:
    • Front office, scheduling appointments and appointment reminders
    • Checking in patients
    • Billing and collecting payments from patients and insurance
    • Marketing including patient lead generation
    • Other administrative support responsibilities
  • Healthcare Startup intends to lease space and then sublease the space to Professional Medical Corporation.

Now so far, all of this sounds like a standard MSO arrangement.

The thing is, the Healthcare Startup wishes to provide a host of ancillary services such as cooking classes and seminars, yoga and specialized exercise classes, and educational services involving meditation; and most of Professional Medical Corporation’s patients would benefit from those activities, so Dr. Smith will refer a lot to Healthcare Startup.

The question is how (if at all) Dr. Smith can make money from making those friendly referrals?


This is a story about how Harry, a healthcare entrepreneur, worked through a proposed arrangement that was raising Stark and Anti-Kickback issues.

Why is California so Strong on Corporate Practice of Medicine Enforcement

Why is enforcement in California so strong with respect to the corporate practice of medicine (CPM)?

We don’t know.  It has something to do with “evil” (really, it does).  It is the evil the legislature sought to proscribe …. Read those words and you’ll know that the rationale and policy behind the CPM prohibition goes back a long way … many decades if not centuries.

Not to make light of legitimate concern about companies practicing medicine.  We don’t want patients to be exploited and to be sure, in the eyes of the law there is something sacrosanct about the relationship between doctor and patient where we don’t want corporate interests to unduly intrude.

Notice the qualifier – unduly. What is undue intrusion?

Because, if you’ve ever negotiated with a healthcare insurance company, or submit for reimbursement, you know that corporate interests have in fact penetrated the sacrosanct relationship.  It’s a fact of life.

And also perception can be reality; with all the enforcement against medical spa owners and legal ambiguities around the “good faith exam,” for example – and the sheer fact that the way healthcare is practiced today is completely different from the way medicine was delivered only a few years ago, and certainly since the many years since the CPM prohibition was formulated.

The fact is, this little technological development called the Internet has forever altered the landscape for delivery of healthcare services.  In fact, the “practice of medicine” is in many ways becoming the deliverable of healthcare products.

That is why Jill’s “users” transform into patients and back again into Jill’s customers.

There are multiple realities: the seamless “user experience” that Jill is trying to create; the world that Enforcement sees in terms of a Def-Com 10 level of CPM alert; and, the carefully crafted legal arrangements behind the scenes—and not so behind the scenes in case of an investigation—that are intended to help protect Jill from corporate practice of medicine charges.


The Corporate Practice of Medicine (CPM) doctrine continues to befuddle, beleaguer, and bewilder healthcare companies seeking to venture with physicians and non-physician entrepreneurs.

The California Medical Spells out Corporate Practice of Medicine Violations

On its webpage, Corporate Practice of Medicine, the Medical Board of California (“Medical Board of California”) describes its expansive view of what constitutes CPM.  Medical Board of California lists a broad range of activities that constitute corporate practice of medicine.

As we’ve noted before, 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:

  • 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 ultimate 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.

Second, Medical Board of California points to the following “‘business’ or ‘management’ decisions and activities, resulting in control over the physician’s practice of medicine,” as those that “should be made by a licensed California physician and not by an unlicensed person or entity” such as Healthcare Startup:

  • Ownership is an indicator of control of a patient’s medical records, including determining the contents thereof, and should be retained by a California-licensed physician.
  • Selection, hiring/firing (as it relates to clinical competency or proficiency) of physicians, allied health staff and medical assistants.
  • 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.

Medical Board of California points out that these “types of decisions and activities” can be made by a physician who consults with the Healthcare Startup, but not by the Healthcare Startup. In other words, Medical Board of California also looks to whether in its view, non-physicians are exercising control over a physician’s medical practice, even where physicians own and operate the business.

Last, 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 a 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 medical procedures such as Botox injections, laser hair removal, and medical microdermabrasion, that contracts with or hires a physician as its “medical director.”

Medical Board of California explains that the rule 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 a CPM violation, and “the physician may be aiding and abetting the unlicensed practice of medicine.”

Under California Business & Professions Code, Section 650(b), the Healthcare Startup can receive compensation based on a percentage of gross revenues (not net), so long as this represents fair market value for the Healthcare Startup’s services to the PC.


You, MSO is my own variation on I Claudius. Poor Uncle Claudius, everyone said. Ended up becoming Emperor of Rome. Through craft and careful strategy. So you have an MSO and want to operate […]

Kickbacks and Fee-Splitting, the Evil Twins of CPM

Elsewhere in this healthcare law blog, we’ve described the rule against kickbacks and fee-splitting as the “evil twin” of the prohibition against corporate practice of medicine (or something like that; the point is the word, “evil”).  It’s all bad.  Enforcement can lead to catastrophic consequences—including bad press.

Recently, we consulted with a client who tried to take a “shortcut” around the “good faith exam,” because the client had concluded that RN’s were “cheaper” than Nurse Practitioners.  The result: the MD involved with the project was subject to a disciplinary hearing.

The healthcare startup client itself did not come under enforcement scrutiny, and at first, somewhat miraculously escaped, unscathed.  The client concluded from this incident that only the MD was at risk as the Medical Board did not go after the healthcare startup for a CPM issue; only after the doctor for not having the good faith exam.

Some months later, a competitor sued the healthcare startup for “unfair business competition”—or the equivalent in the local state; and, the press got ahold of the story.  The ultimate cost to the client was steep, even though those exacting the penalty were not government officials but rather, the competitor and the public (customers).

Lesson learned.


Fundamentally, you’re worried about legal rules prohibiting kickbacks, fee-splitting, corporate practice of medicine, as well as Stark law; you don’t know whether the MSO or management structure […]

What’s for the MSO?

The services Jill’s Healthcare Startup has outlined are pretty much services an MSO can offer—e.g., essentially, these are management, marketing and advertising, and other administrative services to the Professional Medical Corporation. As we’ve noted, the Healthcare Startup must provide these services at fair market value (“FMV”) to the Professional Medical Corporation.

The clinical providers should be employed by, and under the employment umbrella of, the Professional Medical Corporation.  Even in a state which does not have the strong enforcement that California has, we typically recommend that clinicians be hired by their supervising clinicians or appropriate Professional Corporation, and not by the MSO.

With respect to Jill’s Healthcare Startup, the MSO is offering a number of services that are not traditional MSO services.  One exercise our healthcare clients find useful is listing the services in several buckets: Clearly MSO Services, Clearly Professional Medical Services, and Services where the Client questions into which bucket they belong.

For example, as suggested, front office, appointment scheduling and reminders, and patient check-in are typically management functions that do not intrude into clinical decision-making.  The same with subleasing space from the MSO to the professional medical practice (the sublease should be at fair market value (FMV)).

A key point for Jill’s Healthcare Startup is that the physician and/or their professional medical corporation should not be compensated for sending referrals of patients or customers (clients) to the MSO even for educational workshops, yoga, and the like.  Even if this is not strictly a kickback or fee-splitting under the fine points of a given statute, a financial interest does create a conflict of interest and can result in heavier enforcement scrutiny or a more adverse enforcement or judicial result should the practice come to light.

The kickback issues will come particularly into play if either Professional Medical Corporation, or Healthcare Startup, are seeking to receive (or in any way contemplate receiving) compensation for a referral of the patient or customer.

As well, the activities of the healthcare startup should be scrutinized to be sure that, if provided by non-licensed practitioners, none of the activities run afoul of the prohibition against unlicensed practice of “medicine” or “psychology.”

We haven’t gotten to some of the many other healthcare legal and regulatory issues that Jill’s healthcare startup would want to tackle—for example, HIPAA and privacy & security issues, or compliance questions involving the startup’s advertising with respect to the practice.

For questions, Contact Cohen Healthcare Law Group, PC to schedule a consultation with an experienced healthcare compliance lawyer.

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