Corporate Practice of Medicine on Steroids | Buchalter
At a time when many question the continued usefulness and viability of the ban on the practice of corporate medicine, California could double down. On May 3, 2021, the California Senate Health Committee approved SB-642, the stated purpose of which is to protect medical decision-making from unprofessional scrutiny. The bill is currently pending in the California Senate. Assembly Bill AB-705 is a substantially identical bill to the California Assembly.
SB-642 adds section 2408.5 to the Business and Professional Code, as follows:
2408.5. (a) The shareholders, directors and officers of a medical company as defined in Section 2408 shall manage and have ultimate control over the assets and business operations of the medical company and shall not be replaced, removed or otherwise controlled by a layman. entity or individual, including, without limitation, through inventory transfer restriction agreements or other contractual agreements and arrangements.
(b) For the purposes of this section, “ultimate control” means and shall comply with the definition provided by generally accepted accounting principles.
The new section 2408.5 directly targets the Management Services Organization (“MSO”) / Friendly Professional Society (“PC”) model. Under this model, an MSO, owned in whole or in part by unauthorized persons, provides administrative support services to a medical office in accordance with a written service agreement. Often times, the OSM provides anything that does not require a medical license, including space, supplies, equipment, non-professional staff, accounting, billing and collection, and accounts payable management. A well-designed management services agreement clearly recognizes the CP’s control over all clinical decisions and medical practice itself, including the authority to hire physicians, establish clinical protocols, and enter into agreements to provide medical services.
As currently used, the user-friendly MSO / PC model allows physicians to focus on the practice of medicine while delegating to experienced managers the myriad of non-clinical functions necessary to keep practice afloat. It also provides a vehicle for investment capital, providing a mechanism for unauthorized investors to provide funding to medical companies. For this reason, most telemedicine companies in California (and other states that prohibit the practice of corporate medicine) are organized using the user-friendly MSO / PC model, as are other specialized practices that require equipment. expensive, like radiation oncology. The model further enables medical practices to achieve economies of scale by pooling supportive resources while retaining control over their individual practices.
Section 2408.5 states that the shareholders, directors and officers of a medical company “manage and exercise ultimate control over the assets and business activities of the medical company”. Unfortunately, what this means in the MSO context is unclear. Does this mean that the doctor who is a shareholder of a professional corporation must personally invoice and collect his own professional services or must personally pay the invoice for the laundry service used by the practice? Is the professional corporation required to directly employ staff to perform these functions or can it purchase the services of a third party as long as it retains a principal’s rights in its dealings with an agent? How can this language be applied in practice? None of these questions are answered in the language of the SB-642.
In addition, the Section’s use of the financial accounting term “ultimate control” implies the ability of MSOs to consolidate financial results, an important practice for investors. Historically, health advocates have recognized that the definition of “control” used for a financial consolidation analysis does not resolve the issue for the practice of medicine in business, especially when the PT explicitly retains all clinical control. Confusing the two definitions of control could have the unintended effect of cutting California healthcare companies, including the burgeoning California telemedicine industry, from private equity under the guise of preserving physician autonomy.
Section 2408.5 also provides that the shareholders, officers and directors of a medical corporation “shall not be replaced, removed or otherwise controlled by any lay entity or individual, including, without limitation, through share transfer restriction agreements or other contractual agreements and arrangements. This part of the section is clearly aimed at agreements commonly known as succession agreements or stock transfer restriction agreements, which allow the OSM to require the shareholder of the PC to transfer ownership to a designated licensee at the occurrence of certain events, including the death, disability or loss of the shareholder’s license, breach of the service contract or simple formal notice from the OSM. The intention of this restriction, as stated in Section 1 of SB-642, is to prevent undue interference with the practice of medicine due to improper grounds, including discrimination, control of profits or costs, business or competition, or any other non-medical reason.
Section 2408.5 also involves the provision of managed health care in California. California generally uses a “delegated model” whereby health care plans delegate to medical groups or independent practice associations (“IPAs”) the delivery of health care services to a defined group of registrants. These medical groups and APIs are medical societies governed by section 2408.5. Most, if not all, have agreements with lay MSOs to manage their contract management, accreditations, and complaint submission, as well as to help with usage management and quality assurance. MSO services are provided by companies with extensive experience in the non-clinical aspects of healthcare service delivery under a delegated model. The same statutory wording that loosely mandates the control and management of physicians in the context of medical practice also fails to provide guidance in the context of managed care, potentially affecting the delivery of health care to millions of Californians.
The problems for the hundreds (if not thousands) of California PCs currently under contract with MSOs are obvious: First, do their existing service agreements comply with the imprecise requirements of Section 2408.5 in terms of the degree of control over practice that the PC must keep; and second, how can they attract investment capital if investors are not allowed to have a say in the shareholders, officers and directors of the medical company they support and are not allowed to consolidate financial results?
The ability of licensed physicians to practice medicine without undue influence from unauthorized persons or entities has been the goal of the California ban on the practice of medicine since its inception. There is no doubt that specific guidance from the legislature and the California Medical Board can help ensure that this goal is achieved. Unfortunately, SB-642 in its current form cannot achieve this goal, as its mandates are not concrete or specific enough to be applied in practice. California medical offices, IPAs and MSOs, in the exercise of the utmost good faith, will find it difficult to determine whether their existing agreements meet the conditions of the new Section 2408.5, and investors in medical companies may well avoid California until ‘under the authorized conditions of their agreements. can be determined.