Corporate Practice of Medicine: The Unseen Hurdle in Telehealth

When evaluating the various legal and regulatory hurdles associated with telehealth—such as licensure, reimbursement, and privacy—one hurdle that often goes overlooked is the corporate practice of medicine.  Many states have enacted laws which directly or indirectly are viewed as prohibiting the “corporate practice” of medicine.  While variations exist among states, the doctrine generally forbids a person or entity, such as a general business corporation, other than a licensed physician, professional corporation (“PC”) or a professional limited liability company (“PLLC”), from owning an interest in a medical practice or employing physicians for the purpose of practicing medicine.  These laws against the corporate practice of medicine are generally designed to prevent non-clinicians from interfering with or influencing the physician's professional judgment, and will affect the ability of business entities to enter into agreements with physicians and other health professionals.

Some states like Florida do not have a law specifically prohibiting physicians from engaging in the practice of medicine through a corporate structure.  The Florida Board of Medicine has stated that the statutory prohibition against the unlicensed practice of medicine does not prohibit the practice of medicine by physicians as employees of a Florida corporation or partnership.  California, on the other hand, prohibits the corporate practice of medicine, which among other things, requires that business or management decisions and activities resulting in control over a physician' practice of medicine, be made by a licensed California physician and not by an unlicensed person or entity. In order to avoid the direct violation of state prohibitions on the corporate practice of medicine, many companies use the so-called “friendly PC” model.  Under the “friendly PC” model a PC, PLLC, or other legal entity permitted in the state, whose shareholders are all physicians, employs the licensed health care professionals and contracts with a Management Service Organization (“MSOs”) that provides management services to the PC.  The PC is kept “friendly,” or aligned through the use of a stock transfer restriction agreement and/or by the MSO employing the physician owner.

Generally, the restrictive stock transfer agreements prevent the member from transferring his or her shares without the consent of the MSO.  Additionally, these agreements usually require the member to transfer the shares in the PC to an individual selected by upon demand by the MSO. The combination of business management control and the threat of exercising its rights under the transfer agreement allow the MSO to maintain control over the administrative and management side of the entity without infringing on the professional judgment of the physicians.

We should note that enforcement by relevant authorities (e.g., state boards of medicine) regarding the prohibition against the corporate practice of medicine with respect to the “friendly PC” model generally is inconsistent.  As a practical matter, the most frequent forum in which the issue is asserted is in the context of commercial disputes between the MSO and the physician owners of the PC or PLLC it manages. Specifically, in these disputes the physician owners seek to invalidate all or part of the agreements between themselves and the MSO by arguing that the agreements are unenforceable as a matter of law because it creates a relationship that constitutes the corporate practice of medicine.

Although there is no hard and fast rule as to when a given arrangement may be deemed to constitute corporate practice, the focus in any enforcement action likely will be on the level of control the MSO exercises over the operation of the medical practice, specifically the professional judgment of licensed health care professionals. Where a high level of control exists, the arrangement may be found to be a sham intended to disguise the de facto practice of medicine by an unlicensed entity.  Factors that will be considered in evaluating whether a structure violates the prohibition on the corporate practice of medicine include the extent to which the MSO controls decisions or extracts revenue.

Telehealth companies, along with licensure and all the other regulatory issues we have written about in this blog, also need to take the corporate practice of medicine into consideration when developing their business models.  We advise that companies look into whether the states into which they are considering operating have a prohibition against the corporate practice of medicine, and if so, analyze how their model will need to be modified to fit within the law.  The good news is that many states (e.g., Hawaii, Mississippi, Ohio) have no such prohibition.