Legal Corner

Legal Corner Private Equity, Gastroenterology

Consolidation, and the Corporate Richard E. Moses, DO, JD Practice of Medicine Doctrine

@therealgidoc

The healthcare environment is changing. Practice consolidation is extremely active, especially in the Gastroenterology field, largely being driven by private equity partners. Gastroenterology is particularly interesting to investors because of lucrative services such as endoscopy, ambulatory facilities, and numerous ancillary services.

The American Medical Association propagated the initial version of the Corporate Practice of Medicine (“CPOM”) doctrine under the auspices of protecting the public. CPOM generally prohibits non-licensed persons, including individuals and business entities, from employing physicians to practice medicine on their behalf. The intent of the doctrine was to ensure that only licensed medical professionals delivered medical care and that lay persons and entities not influence treatment decisions. The idea was to protect patients from potential abuses because commercialized medicine could divide a physician’s loyalty between profits and the delivery of quality care. Private equity and other nonphysician investment deals create a managed services organization (“MSO”) that in turn buys out the Gastroenterologists from the practice being acquired. In exchange for a cash payout, the physicians give up managerial control of nonclinical decisions through a managed services agreement with the MSO. All nonclinical services to the practice are then managed by the MSO, which is a partnership between the private equity group and the practice. Physicians need to be sure that the structure of the entity formed complies with the state’s CPOM doctrine.

States with CPOM laws allow professional service entities to practice medicine if owned by physicians licensed in that state. Pennsylvania’s CPOM doctrine is codified under the Medical Practice Act of 1985 (63 P.S. §§ 422.1, et seq.). Exceptions to the CPOM doctrine in Pennsylvania include practicing medicine through a professional corporation, limited liability partnership, or restricted professional company. Only licensed physicians may be shareholders of or partners or members in professional corporations, limited liability partnerships, or restricted professional companies that have been formed to provide medical services. The statute requires all beneficial owners of these entities be licensed persons. Health Maintenance Organizations, licensed hospitals, and health care facilities may also employ physicians and provide health services in Pennsylvania.

As a consequence of the CPOM doctrine, nonphysician investors desiring to offer physician services, either alone or with other services, set up two entities. These are a captive, or friendly, professional corporation (PC) and the MSO that contractually furnishes all nonphysician services to the PC. The MSO is paid a fee for providing these services to the GI practice. Fees need to be paid at fair market value for the services provided. MSO services may not interfere with the professional’s clinical judgement, and the MSO may not control the medical aspects of the medical practice.

Health care providers must be extremely careful in complying with the CPOM doctrine. Violating these laws could result in a physician’s loss of license and repayment of all revenue for billed services to patients, insurance companies, and the government, in addition to fines, penalties, and potential criminal charges.

In light of the structural complexity of these business deal, it is mandatory to ensure that the corporate or business arrangements comply with the complex requirements of the CPOM doctrine. Physicians must consult with a health care attorney to get advice and recommendations prior to getting involved with private equity or other business ventures.