Corporations Cannot Practice Medicine in New Jersey

by Cecylia K. Hahn

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.