Corporations Cannot Practice Medicine in New Jersey, Part II – Is It A Sham Operation?

Given the recent Supreme Court opinion in Allstate Insurance Company v. Northfield Medical Center, P.C., an update to our prior post on why “Corporations Cannot Practice Medicine in New Jersey” was timely and appropriate. In that prior blog post, we discussed the regulation guiding this prohibition, N.J.A.C. 13:35-6.16 (the “CPOM Regulation”).  The Supreme Court’s recent decision provides further guidance to providers and reemphasizes the care with which such arrangements must be structured.

Control, Ownership, and Direction of a Medical Practice

Under the CPOM Regulation, a plenary licensed health care professional and a lesser-licensed (allied) health care professional cannot together own a medical practice that results in its control and direction by the lesser-licensed health care professional.  Moreover, an unlicensed individual cannot own a medical practice with a health care professional.  The objective behind these prohibitions pertains to the medical judgment involved in the practice of medicine.  Essentially, cost considerations of a corporate partner should not interfere with a health care professional’s medical judgment and patient interactions.

For similar reasons, a general business corporation cannot employ or otherwise engage (e.g., through an independent contractor relationship) a health care professional.

One way that health care professionals and non-professional owners have structured relationships in an effort to stay within the parameters of the CPOM Regulation is to create two separate entities.  One entity is a management company that is owned by a lesser-licensed or unlicensed individual.  The other entity is a professional corporation with a sole shareholder who is a medical doctor.  A management services contract runs between the two entities.  The key question is: What do the terms of that management services contract and its implementation entail?

Following Allstate, especially, we caution interested stakeholders: Do not try to fit a square peg in a round hole.  In other words, if the purpose of the CPOM Regulation is to prevent control by a lesser-licensed or unlicensed individual over medical judgment, do not inject such control through a structure of interconnected contracts between a management company and a medical practice.

Some fear that, following Allstate, the management company/medical practice structure in and of itself is too risky and may even be illegal, but, if written and implemented properly, a clear delineation of roles may be achieved and would likely be upheld.  Indeed, the regulations permit administrative contracts between management companies and professional practices.  N.J.A.C. 13:35-6.17.

A Question of Fact

Allstate sued an attorney and a chiropractor involved in promoting a multi-disciplinary structure that resulted in payment by Allstate for patient services rendered.  The structure included three key types of contracts: (1) space rental leases, (2) equipment leases, and (3) management contracts.  The purpose of these contracts was to prevent a nominal doctor-owner of a medical practice from seizing control of the practice from the real investor, the chiropractor.  The contracts permitted the chiropractor-owned management company to extract profits from and maintain control over the affiliated medical practice through various means.

Although the majority of stock in the medical practice was owned by the doctor, the doctor did not participate in day-to-day patient care (other doctors would be employed by the medical practice to provide the care).  Profits made by the medical practice would be turned over to the management company in exchange for the provision of management services, leased space, and leased equipment.  The doctor-owner of the medical practice would be asked to sign an undated (1) resignation letter and (2) affidavit of non issued or lost certificate bearing an unexecuted notary attestation for the doctor’s signature and date; this would permit the chiropractor to remove the doctor from his or her position and have it appear that the controlling interest in stock certificates previously held by the doctor were being transferred by the departing physician to another physician.  Finally, the leases between the management company and the medical practice included a “break fee” of $100,000 to penalize the medical practice’s doctor-owner for breaking the lease.

Following a bench trial, the trial court found the defendants violated the Insurance Fraud Prevention Act (IFPA), N.J.S.A. 17:33A-1 to -30, by knowingly assisting a New Jersey chiropractor in the creation of an unlawful multi-disciplinary practice, which submitted medical insurance claims to Allstate.  The trial court found that the practice structure, which the defendants promoted and assisted to create, was designed to circumvent regulatory requirements with respect to the control, ownership, and direction of a medical practice.

The Appellate Division reversed the trial court’s ruling, finding a lack of evidence of intent.  The Supreme Court, however, disagreed with the Appellate Division, finding that a fact finder could reasonably conclude the structure was “little more than a sham intended to evade well-established prohibitions and restrictions governing ownership and control of a medical practice by a non-doctor.”  The Court stated that considering the broad anti-fraud liability imposed by the IFPA, defendants should have anticipated being held responsible for “promoting and assisting in the formation of an ineligible medical practice” which was created to obtain reimbursement for the care provided at the practice.  Indeed, the Court reasoned that the defendants knew what the laws were and their purposes but nonetheless, in order to protect the investment, developed a structure to circumvent the law and cover up the circumvention.

Accordingly, the Supreme Court upheld the trial court’s finding of intent to circumvent the CPOM Regulation and remanded the case to the Appellate Division for further evaluation.

Factors to Consider in Future Arrangements

Below are some factors to consider when structuring future arrangements between plenary licensed and lesser or unlicensed individuals.  The factors are meant to place with the licensee complete discretion of his or her judgment in rendering health care services.  The list is not meant to be exhaustive nor applicable to every scenario.  Attorney advice should always be sought when assessing these factors and developing these types of arrangements.

  1. The physician owner of the medical practice should contribute startup capital to the entity.
  2. Any voting rights / shares in a medical practice should be divided with a majority of rights / shares to the physician.  (This factor would apply only if ownership in the medical practice was split between a physician and a lesser-licensed health care professional.  Direct ownership in a medical practice by an unlicensed individual is prohibited.)
  3. The physician owner of the medical practice should not be paid a salary (versus a profit distribution) while the management company sweeps the practice’s accounts of all remaining profits.
  4. A management company should not make above-market loans to the medical practice.
  5. The physician owner of a medical practice should have the right to terminate the management contract with a management company.
  6. The management contract should contain no provision (nor require the execution of documents) which would allow for the termination and replacement of the physician/medical director should there be a conflict of interests, e.g., medical judgment v. cost considerations.
  7. A medical practice should not contract with a management company that also leases space and equipment to the medical practice.
  8. The physician owner of the medical practice should either participate or oversee the day-to-day treatment of practice patients.  Supervision within the medical practice should not run to the management company.
  9. The medical practice should pay fair market value for services performed by the management services company.
  10. Monies earned for the provision of patient services should be kept within the medical practice to pay salaries, bills, etc.

In conclusion, when structuring a multi-disciplinary practice, do not try to fit a square peg into a round hole.  Control and direction over a medical practice and patient care must stay with the licensee at all times.

Value-Based Reimbursement for Care through a Clinical Integration Network

The current environment in health care reimbursement is causing providers to reassess the way in which they are reimbursed for services. For many years now, reimbursement has been moving away from fee-for-service and toward value-based reimbursement, and most notably alongside the implementation of the Affordable Care Act. Implementing models for such reimbursement, however, has had a certain lag time.  Among other reasons, change is time-consuming, expensive, and uncomfortable. However, over time, factors such as competition have encouraged providers to dip their toe in the value-based reimbursement for care model.  This article discusses a particular type of model that reimburses for value-based care, that is, the clinically integrated network.

Most commonly, a clinically integrated model brings together hospitals and physicians in a newly formed entity known as a clinically integrated network.  A CIN may take on a few different forms. One form may involve a hospital (or its captive professional corporation if we are in a corporate practice of medicine state) as the sole member of the CIN, with participating physician agreements running to the CIN.  The physicians would have a strong presence on the governing board of the CIN. Physician empowerment is a key component of the CIN as the physicians are the front line to the provision of and reporting on care.  Structuring the CIN this way alleviates the regulatory issues (e.g., the Stark Law) that physician ownership in the CIN would present.  Another form of CIN may involve physician ownership (in addition to physicians provider agreements) running to the CIN.  The hospital (or its captive PC) would also have equity in the CIN.  Board membership in this scenario would likely be based on percentage of ownership in the CIN. The physician equity model would require fitting the arrangement into a Stark exception, which may be challenging.

Once formed, a major value proposition of a CIN is to leverage the network with governmental and commercial payers in contracting for payment arrangements, particularly given the CIN is now in a position to receive payment based on performance for quality and efficiency metrics.

In setting quality metrics, a CIN may borrow from the Medicare Accountable Care Organization Shared Savings Program model.  (Both the CIN and the ACO strive for quality care and reward participants for the resulting shared savings.)  Those metrics fall into one of the following four domains: (1) Patient / Caregiver Experience, (2) Care Coordination / Patient Safety, (3) Preventive Health, and (4) At-Risk Population.

Patient / Caregiver Experience measures may include timely care, appointments and information; doctor/patient communication; patient rating of doctor; access to specialists; health promotion and education; shared decision making; and health/functional status.

Care Coordination / Patient Safety measures may include readmissions; admissions for certain conditions (e.g., asthma, heart failure); percentage of primary care physicians who qualify for EHR incentive payments; medication reconciliation; and falls and screening for fall risk.

Preventive Health measures may include influenza immunization; pneumococcal vaccination; adult weight screening and follow up; tobacco use assessment and cessation intervention; depression screening; colorectal cancer screening; mammography screening; and blood pressure screening.

Finally, At-Risk Population measures would address chronic conditions such as diabetes and hypertension.

Physician participants in the CIN, guided in their care of patients by these measures, would then also report on the data they have gathered for each measure, the idea being that savings to payers stemming from positive results would be shared with the CIN and trickle down to the physician participants.

The CIN is just one model that encourages value-based care to obtain value-based reimbursement.  Other models for the provision of medical care that consider value-based measures include integrated physician associations, physician-hospital organizations, and patient-centered medical homes.  Whether or not a new health care law is passed (or the ACA is amended) in the near future, it appears that value-based reimbursement for care is here to stay.

A Light at the End of the Telemedicine Tunnel Appears (on the New Jersey Side)

Upon recently reviewing the healthcare coverage benefits under a particular health plan, I was almost giddy to note that telemedicine services (both medical and mental health) were covered and reimbursable at the same rate as traditional in-person services. While some carriers have come to appreciate this form of health care service delivery, standards for licensure, practice, reimbursement, and prescription of medication have to date been unregulated and thus unclear in New Jersey.

Nevertheless, New Jersey lawmakers are working hard toward enacting legislation that would provide clarity by regulating the practice of telemedicine. The Senate Health and Human Services Committee and the Senate Appropriations Committee unanimously recommended the passage of Bill No. S291, while testimony was recently taken by the Assembly Health and Senior Services Committee on an identical Bill No. A1464.

What is Telemedicine?

The bill’s definition of “telemedicine” is quite technical and I would refer you to the bill for that technical definition. In sum, telemedicine is the delivery of a health care service using electronic means or technology to remotely bring together a health care practitioner (e.g., a physician, nurse practitioner, psychologist, and psychiatrist) with a patient typically via two-way videoconferencing or store-and-forward technology. (Store-and-forward technology is the transmission of medical data from a patient’s location to a distant site practitioner for later assessment.) This form of communication is meant to replicate the in-person encounter experience; thus, real-time visual and auditory communication is a must. Telemedicine is not a simple phone call, email, instant message, text, or fax.

Standard of Care

Another important issue, particularly if a health care practitioner is located out-of-state, is which state’s standard of care would apply? One view has been to look to the standard of care where the patient is located. The proposed bill confirms, for New Jersey, a health care practitioner is subject to the same standard of care as he/she would be subject to if the patient encounter was physically located within New Jersey. This would apply to recordkeeping rules as well as maintenance of patient confidentiality.

Added Responsibility of Hospitals

Where a health care practitioner wishes to engage in telemedicine with patients in a hospital, the hospital’s governing body must first verify and approve the credentials of, and grant telemedicine practice privileges to, the practitioner based solely upon the recommendations of the medical staff. The medical staff recommendation is based on information provided by the originating site employer (i.e., employer of health care practitioner at location where service rendered).


License portability is an added challenge. Most states that permit telemedicine require that a health care practitioner be licensed in the state where the patient is located. This makes sense given the state’s responsibility to protect its residents. Pursuant to the telemedicine bill, the process to obtain a New Jersey license by an out-of-state practitioner wishing to practice here will be easier or harder depending on the laws of the practitioner’s home state. If the following criteria are met, the appropriate licensing board will be required to grant a reciprocal license to an out-of-state health care practitioner: (1) the other state has substantially equivalent requirements for licensure, registration, or certification; (2) the applicant has practiced in the profession within the five-year period preceding application; (3) the respective New Jersey State board receives documentation showing that the applicant’s out-of-state license is in good standing, and that the applicant has no conviction for a disqualifying offense; and (4) an agent in New Jersey is designated for service of process if the non-resident application does not have an office here. Further, the bill proposes clarifying State Board regulations that provide only for discretionary reciprocal license: the discretion is limited to permit a reciprocal license where not all of the criteria above are met; if they are all satisfied, a license must be granted.

Face-to-face Encounter for Online Prescribing

Federal law makes if generally illegal to prescribe a controlled dangerous substance based solely on an online questionnaire completed by a patient. The question with online prescription of medication is always whether a health care practitioner (who is authorized to prescribe medication) must have an in-person encounter with a patient before prescribing medication to that patient via telemedicine. The bill permits a physician to prescribe, dispense or administer medication to a New Jersey patient if (1) the physician first performs a face-to-face examination of the patient (which examination may occur in-person or via telemedicine and must comply with the standard of care) and (2) the physician adheres to particular laws that apply to that medication. 


Last, but certainly not least, there is the issue of reimbursement. Even though state regulators currently may permit various providers to engage in telemedicine, the issue of reimbursement remains. The bill would generally prohibit New Jersey Medicaid and New Jersey FamilyCare programs and private health benefit plans from requiring in-person encounters between a health care practitioner and patient, or establishing location restrictions, as a condition of reimbursement under the pertinent program. Further, parity is required for benefits covered and reimbursement rates whether the encounter is in-person or via telemedicine. A drawback to the reimbursement parity, cited by insurance plans, is that it will prevent the use of telemedicine as a cost-savings tool. Of course, the use of telemedicine in the particular situation would have to make sense (and not be contraindicated).

To date, there has been no indication on when the Assembly Health and Senior Services Committee will be voting on Bill No. A1464. If the bill were to pass, it would go before the Governor for review and consideration.

Amarin Sues FDA Because It Cannot Promote Off-Label Use of Vascepa

A small pharmaceutical company called Amarin — based out of Dublin, Ireland –recently filed a Complaint for declaratory relief against the FDA in the United States District Court for the Southern District of New York. Amarin along with four physicians that prescribe its drug, Vascepa (omega-3 fatty acid derived from fish), allege constitutional violations of the First (freedom of speech) and Fifth (restriction against vague laws) Amendments of the United States Constitution. An Answer has not yet been filed.

The promotion of off-label drugs is the heart of this case. Amarin would like to share with potential prescribers the results of its 2011 clinical study that Vascepa lowers triglycerides, a kind of fat in the blood associated with heart disease, in patients with “persistently high” levels. However, the FDA currently only approves the drug for use in patients with extremely high levels of triglycerides.

Amarin seeks to provide the off-label information to prescribers and not the general public. Physicians, who are permitted to prescribe off-label, are already prescribing the drug in line with the clinical study and Amarin takes the position that these physicians are currently inadequately informed. Further, Amarin seeks to disclose information that is truthful and not misleading.

Opponents have said that Amarin seeks to sidestep the FDA.  If drug companies were permitted to share the results of clinical studies with physicians, there would be no motivation to obtain FDA approval. The FDA has declined to comment other than to state that more comprehensive guidance is on the way. The resolution of the lawsuit as well as the FDAs anticipating guidance may have far-reaching implications for off-label promotion of drugs.

Cesarean Section Rates: Standard of Care or Standard of Fear and the Potential Impact of the Affordable Care Act

A recent New York Times article reported the filing of a lawsuit on behalf of a Staten Island woman alleging a forced cesarean section.  This may provide an impetus to look – once again – at the high rate of cesarean section deliveries and perhaps take the initiative to bring about some reforms within the context of reimbursement policy and the Affordable Care Act.

The concerns regarding cesarean section rates involve both the initial or primary delivery of a woman’s baby and the handling of repeat pregnancies.   In particular, controversy persists regarding vaginal birth after cesareans, the so-called VBAC procedure.  For a number of years, the cesarean section rate in New   Jersey has been in excess of 30% and approaching 40%.   The rate for c-sections in repeat pregnancies where the primary delivery was by c-section may even be higher, and the common belief is that once a woman delivers by c-section, she is destined to deliver all subsequent children by the same method.  According to some scales, New Jersey has the second highest cesarean section rate in the United States.  A 2009 publication of the World Health Organization stated that the acceptable level of cesarean section births is “not more than 15%.”  The United States Public Health Service had a similar target figure in 1998.

The New York lawsuit presents a number of challenging issues involving patient autonomy, bioethical standards, and the balancing of the sometimes divergent interests of mother and unborn child.  A published opinion of the New Jersey Appellate Division in Draper v. Jasionowski, 372 N.J. Super. 368, 858 A.2d 1141 (2004), recognized a duty on the part of the obstetrician to not only the pregnant mother but to her unborn child in the context of informed consent and the possibility of a cesarean section as opposed to a vaginal birth.   As a result of the vaginal birth in that case, the child developed an Erb’s palsy and suffered hypoxia and brain damage.  In contrast, the patient in the New York case had previously given birth by cesarean section procedures but wished to have a vaginal delivery for this child.  She refused consent.  The attending physicians explicitly “overrode” her decision and did the cesarean section because of the fetus being “at risk for serious harm without the C-section.”  There was an injury to her bladder in the course of the operation but a healthy child was born.

The decision-making leading to the performance of a cesarean section has many facets.    There are a number of clinical situations that present risk to the well-being of the fetus.  But there are times when c-sections have been done for the convenience of either the laboring mother or the attending physician.  The availability of staffing in some hospitals has also come into play.  Nonetheless, there are a number of studies that have demonstrated that the medical-legal concern of liability exposure influences the judgment of many physicians so as to lower the threshold for doing the operation.  See, e.g., Minkoff, Fear of litigation and cesarean section rates, 36 Semin. Perinatol. 390 (2012); Yang, Mello, Subramanian, & Studdert, Relationship between malpractice litigation pressure and rates of cesarean section and vaginal birth after cesarean section, 47 Med. Care 234 (2009).

The impact of the Affordable Care Act on malpractice claims remains to be seen.  In the view of some, the number of claims will increase as the number of people using healthcare services expand.  On the other hand, there are those who believe that fewer patients will need to bring claims because they will now have a means for covering the expense of their injury claims.  Medical malpractice reform is barely mentioned in the Affordable Care Act. Section 6801 articulates the nonbinding “sense of the Senate,” and recognized that health care reform presented an opportunity to address issues related to medical malpractice and “encouraged” States to develop and test alternatives to the existing civil litigation system to improve patient safety, reduce medical errors, and stimulate efficiency in the resolution of disputes while preserving an individual’s right to seek redress through the courts. Moreover, Section 10607 provides potential federal grant money to support demonstration or pilot programs to develop alternatives to tort litigation.

The many evolving changes being implemented through the Affordable Care Act make it likely that the malpractice aspect of healthcare will also change.  And change brings opportunity.

The issue of cesarean section rates can be one of these opportunities.

One path to consider involves effective use of Clinical Practice Guidelines (CPGs), an approach considered in the past but meriting renewed evaluation.   There are several underlying assumptions necessary for practice guidelines to exert influence in the context of litigation.  They have to be developed for conditions or procedures that frequently lead to events for which negligence claims are filed.  They have to be widely accepted in the medical profession and fully integrated into clinical practice.  They also must be straightforward and readily interpreted in a litigation setting.  Proposals have been advanced to give CPGs a role in medical malpractice litigation in several different ways. One requires that courts take judicial notice of CPGs as the standard of care, with deviations conclusively establishing negligence. An alternative and more sensible approach would have compliance with CPGs constitute an affirmative defense for physicians, but that deviations from CPGs should not be used as inculpatory evidence.  See, e.g., Bovbjerg & Berenson, The Value of Clinical Practice Guidelines as Malpractice “Safe Harbors,” Timely Analysis of Immediate Health Policy Issues: Urban Institute (2012);  Mello, Of Swords and Shields: The Role of Clinical Practice Guidelines in Medical Malpractice Litigation, 149 U. Penn. L.Rev. 645 (2001).  The increasing recognition of Evidence-Based Medicine holds out hope that effective CPGs could be developed with regard to the indication and non-indications for cesarean section procedures.

Another possibility involves reimbursement policy.  This might take several forms.  One might involve financial disincentives for elective cesarean sections, those performed before 39 weeks of gestation without a documented medical indication for the procedure.  Payments for a planned VBAC delivery that nonetheless become a cesarean section might be limited to centers that have a demonstrated adequate staffing and resources for these procedures.

There is a compelling public health need to explore and resolve the issue of cesarean section rates.  Babies born by Cesarean section are more likely to have breathing problems and to develop several chronic diseases, childhood-onset diabetes, allergies with cold-like symptoms and asthma.  The surgery presents risks to the mother, including infection, blood clots, wound healing problems, prolonged recovery, and permanent scarring.  That the New Jersey cesarean section rate of greater than 30% is not a necessary circumstance is manifested by the fact that in a few counties the section rate occurs in one out of four births.  One must wonder why.


State of New Jersey, Department of Health, Safety and Quality in Maternity Care available at

State of New Jersey, Department of Health – Maternal & Child Health Epidemiology: Cesarean Delivery: Comparing New Jersey Hospitals, 2012 available at

Down With the Two-Midnight Rule

On April 14, 2014, the American Hospital Association, New Jersey Hospital Association, and other hospital associations and systems (“Plaintiffs”) filed a federal lawsuit in the United States District Court for the District of Columbia, case 1:14-cv-00609, against Kathleen Sebelius as Secretary of Health and Human Services (“HHS”) challenging three “unlawful” Medicare policies.[1] One of these policies is known as the two-midnight rule and involves Medicare Part A reimbursement.[2]  This involves reimbursement for “inpatient” hospital services.

Neither HHS nor its administrative agency, the Centers for Medicare and Medicaid Services (“CMS”), has ever formally defined “inpatient.” CMS has recognized that the decision to admit a patient is a “complex judgment” call involving various factors including medical history, current medical needs, severity of signs and symptoms, types of facilities available, hospital by-laws and admissions policies, the medical predictability of something adverse happening to the patient, and the relative appropriateness of the treatment.  Medicare Benefit Policy Manual  Ch. 1 §10.  Indeed, hospitals and physicians have been instructed by CMS that “generally, a patient is considered an inpatient if formally admitted as [such] with the expectation that he or she will remain at least overnight, and occupy a bed even though it later develops that the patient can be discharged or transferred to another hospital and not actually use a bed overnight.”  Id. According to CMS, a physician should “use a 24-hour period as a benchmark; i.e., [physicians] should order admission for patients who are expected to need hospital care for 24 hours or more.” Id.

Despite its own guidance, CMS published a final rule in August 2013 that a Medicare beneficiary is not an “inpatient” unless the admitting physician expects the patient to require care in the hospital spanning two midnights (admitted on Day 1 and discharged on Day 3).  Thus, CMS will not pay for an inpatient stay that spans less than two midnights (regardless of level of care, i.e., intensive care unit).  Instead, that patient stay will be converted to an outpatient stay and one reimbursed under Medicare Part B.

The Plaintiffs allege this CMS rule is “arbitrary and capricious” and undoes decades of Medicare Policy.  The Plaintiffs find it “unwise” to supplant physician judgment with a government rule.  It “defies common sense” for “inpatient” to mean “a person who stays in the hospital until Day 3.”

This, allege the Plaintiffs, is contrary to the Administrative Procedures Act (“APA”).  The policy deprives hospitals of reimbursement to which they are entitled and forces them to spend an exorbitant amount of money and time and change their medical records systems, admissions policies and procedures and documentation protocols to comply with the rule.  It further redirects resources that would otherwise be invested in patient care.  Thus, request the Plaintiffs, the policy must be set aside.

As of May 14, 2014 an Answer by the Government has not been filed.


[1] A second federal lawsuit was also filed contending that the 0.2 percent Medicare payment based on CMS’ expectation of more patients being admitted for a two-midnight stay is unlawful.

[2] The other two policies being challenged are (1) requiring rebilling of denied claims within one year of service when many claims are at least a year old when audited and (2) expecting that physicians certify at admission that a Medicare patient is expected to need treatment for a period spanning two midnights.

Corporations Cannot Practice Medicine in New Jersey

In New Jersey, physicians and other practitioners licensed by the Board of Medical Examiners are limited by regulation in how they may structure their professional practices.  N.J.A.C. 13:35-6.16.  Generally, a practitioner may not offer health care services as an employee of a general business corporation in this State.  (There are some exceptions to this general rule.  For example, a physician may render medical services as an employee of a corporation that is not in the healthcare business but provides first aid to employees and customers.  The exceptions are listed in the regulation).  This implements the Corporate Practice of Medicine Doctrine (“CPOM Doctrine”).  The underlying rationale of and theory behind the CPOM Doctrine is that a conflict of interest exists between a patient’s need for medical treatment and a corporate shareholder’s desire to maximize profits and reduce costs.  The point is that licensed professionals must provide medical care without being influenced in their treatment decisions by lay persons and corporations.  The idea is that doctors, not corporate employers, are responsible for the practice of medicine in New Jersey.  How, then, might a physician structure his/her professional practice in this State?

A practitioner may open a solo practice and employ or otherwise remunerate other licensed practitioners and staff to render professional services.  The scope of an employee’s license may not exceed the scope of the solo practitioner’s license.  For example, a nurse (who has a limited license) cannot open a solo practice and hire a medical doctor (who has a plenary license).  In this example, the scope of the employee doctor’s plenary license would exceed the scope of the nurse’s limited license.  This is prohibited.

A partnership, professional association, or limited liability company may be formed, but the entity must be composed solely of health care professionals, each of whom is duly licensed or otherwise authorized to render the same or closely allied professional services within the State.  Closely allied fields include chiropractic, dentistry, nursing, nurse midwifery, optometry, physical therapy, psychology, and social work.  However, in the event that a practitioner with a plenary license (i.e., a medical doctor) forms a partnership with a practitioner with a limited license (i.e., a nurse) the plenary licensed practitioner must have a greater ownership interest in the entity than his or her limited licensed partner.  Similarly, if a medical doctor and two nurses form a limited liability company, the medical doctor must have a greater ownership interest in the practice (i.e., 51%) than the limited licensed members (i.e. 25% and 24%).

A practitioner may form an associational relationship with another practitioner or professional entity.  The practitioner in this instance would be an employee or independent contractor of the other practitioner or professional entity.  As with a solo practice, the employee or independent contractor’s license may not exceed the scope of the hiring practitioner’s license.

In certain circumstances, a practitioner may also have an equity or employment interest in a professional practice (including a professional service corporation or limited liability company) which is a limited partner to a general business corporation which in turn has a contractual agreement with the professional service entity.  The general business corporation may contract to provide the professional practice with services exclusively of a non-professional nature such as routine office management, hiring of non-professional staff, provision of office space and equipment and servicing thereof, and billing services.  The practitioner must, however, assure that an appropriate licensed health care professional determines and carries out all services and medical care policies (subject to certain exceptions), including retention of sole discretion regarding establishment of patient fees and modification or waiver of those fees in an individual case.  As a condition of the contractual arrangement, a practitioner must assure that the general business corporation makes no representations to the public regarding offering health services which require licensure under its own corporate name.

One practical effect of the CPOM Doctrine and available professional practice forms where a general business corporation is involved is the use of the following business structure.  A parent corporation engages as an employee a New Jersey licensed physician.  The physician is the sole shareholder of a professional service entity known as a captive-physician practice entity.  A restricted stock agreement is then entered into among the physician, the captive-physician practice entity and the parent corporation.  The agreement usually prohibits the physician from transferring any or all of the stock in the entity without consent of the parent corporation.  The agreement may further require the physician to transfer his or her stock to any New Jersey licensed physician chosen by the parent corporation.  The relationship may be further defined through other agreements such as a management services agreement.

This structure is often put in place by hospitals and affiliated physician practices.  It allows a physician practice to be structured in such a way so as not to run afoul of the CPOM Doctrine.  In certain cases, it may also allow the captive-physician practice entity to obtain tax exempt status extending from its corporate parent (even though the physician practice itself must be organized as for-profit).  However, this is not an easy goal to achieve and may be a topic for a future blog post.

IRS Premium Tax Credit Final Rule Upheld

On March 23, 2010, Congress enacted the Patient Protection and Affordable Care Act (“ACA”). Pub. L. No. 111 – 148, 124 Stat. 119 (2010). One provision in the voluminous ACA addresses premium tax credits to certain individuals who sign up for health insurance on an internet-based marketplace called an “Exchange.” See 42 U.S.C. §§ 18031, 18041. The provision authorizes a federal tax credit for many low-and middle-income individuals to offset the cost of insurance purchased on an Exchange established by a state. 26 U.S.C. §36B. Thus, the issue arises, what about exchanges established by or with the assistance of the federal government in the 34 states that declined to establish their own Exchange. Individuals interested in this issue may be those that would be wholly exempt from the individual mandate if not for the tax credit. Further, employers have an interest because their tax penalty is, to an extent, dependent upon an employee receiving a tax credit resulting from his or her joining an exchange.

The IRS addressed this issue on May 23, 2012 in a Final Rule implementing the ACA’s premium tax credit provision.   77 Fed. Reg. 30,377.  In its Final Rule, the IRS interpreted the ACA as authorizing the agency to grant tax credits to certain individuals who purchase insurance on either a state-run health insurance Exchange or a federally-facilitated Exchange.  The IRS rejected the limitation of the tax credit to individuals purchasing insurance on a state Exchange only, stating:

The statutory language of section 36B and other provisions of the [ACA] support the interpretation that credits are available to taxpayers who obtain coverage through a State Exchange, regional Exchange, subsidiary Exchange, and the Federally-facilitated Exchange. Moreover, the relevant legislative history does not demonstrate that Congress intended to limit the premium tax credit to State Exchanges. Accordingly, the final regulations maintain the rule in the proposed regulations because it is consistent with the language, purpose, and structure of section 36B and the [ACA] as a whole.

On January 15, 2014, Judge Paul L. Friedman, U.S. District Court for the District of Columbia, upheld the IRS final rule, which had been challenged by a group of individuals and employers residing in states that had declined to create an Exchange. The opinion appears here.  Judge Friedman agreed that “on its face, the plain language of 26 U.S.C. § 36B(b)-(c), viewed in isolation, appears to support” the argument that the tax credits only apply to individuals who purchase health care insurance on a state Exchange.  However, the overall law does not support this limited interpretation, and for the purpose of the ACA’s premium tax credit provision, the federal government may create an Exchange on behalf of a state.  Thus, Judge Friedman held “that the IRS Rule is consistent with the text, structure, and purpose of the [ACA]. Section 36B must be read as authorizing the IRS to deliver tax credits to individuals purchasing health insurance on federally-facilitated Exchanges.”

Within minutes of the decision, it was appealed to the United States Court of Appeals for the District of Columbia Circuit.  Challengers to the IRS Final Rule maintain that it is contrary to the law enacted by Congress and dilutes states’ decisions to refrain from creating an Exchange.  Individual plaintiffs are upset because without the credits they would be exempt from the individual mandate altogether.   The federal government responds that the ruling is appropriate because in this case the federal government may step in the shoes of the states, which have declined to create an Exchange, in order to create one on their behalf.  The D.C. Circuit will review Judge Friedman’s decision and may uphold, reverse, or send the decision back to the lower court with instructions.  At this point, no one can predict what the final determination will be as to whether individuals may receive a tax credit when purchasing health care insurance on a federally-facilitated Exchange.