Category: Corporate Structuring

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.

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.