Investing in a Medical Practice? Be Aware of the Legal Risks

*Updated 8/14/20

If you are considering collaborating with a licensed physician or starting your own medical practice – whether in the fields of general medicine, clinical testing, ophthalmology, dermatology, etc. – compliance with varied health care laws should be your top priority. There are numerous challenges and legal risks to consider, including the Corporate Practice of Medicine (CPOM or CPM) prohibition and health care fraud laws enforced by the state of Texas and the federal government.

What Is the Corporate Practice of Medicine Prohibition?

Many states in the U.S. have some type of law prohibiting the “corporate practice of medicine,” which may bar corporations, entities, and non-licensed individuals from practicing medicine, or from employing physicians to provide professional medical services.

“The CPOM prohibition is the states’ way of ensuring public health is prioritized over personal profit,” says Thomas Bonura. “It is designed to prevent nonphysicians and other corporate entities from interfering with professional medical judgment through the use of financial or other pressures that could take precedent over a patient’s health care needs.”

“In properly structured and managed situations, nonphysicians and corporate entities can be involved in the numerous non-medical aspects of a medical practice.”
– Thomas Bonura, Attorney, Hendershot Cowart P.C.

Governments want to preserve the foundational bedrock of trust and ethics between patients and physicians, which is why many states have taken legislative steps to ensure a physician’s medical judgment is not clouded or inhibited by a non-licensed entity or individual.

While the concept behind the doctrine is simple enough in theory, its implications are far-reaching and restrictive, and something that must be addressed by any medical start-up as a best practice for ensuring regulatory compliance.

What Constitutes the Practice of Medicine?

Under Section 151.001 of the Texas Occupations Code, the State of Texas defines “practicing medicine” as the diagnosis, treatment, or offer to treat a mental or physical disease or disorder or a physical deformity or injury by any system or method, or the attempt to effect cures of those conditions, by a person who either:

1. Claims to be a physician; or
2. Charges money, directly or indirectly, or other compensation for those services.

In Texas, a person may not legally practice medicine unless she or he holds a license issued by the Texas Medical Board, and business entities cannot be licensed to practice medicine, only individuals.

Texas’ Corporate Practice of Medicine Doctrine

Texas health care laws have been refined over the years to better address the complex relationships, coordination, and integration of care between physicians and various other providers, payers, or industry professionals in the modern medical industry. As such, many of the relationships established between physicians and these parties will likely implicate the Texas corporate practice of medicine doctrine, or related Texas health care laws.

The CPOM doctrine imposes far-reaching restrictions and prohibitions. Generally, the CPOM:

• Prohibits non-licensed individuals and businesses from employing physicians who will provide medical care.
• Places certain restrictions on transactions and agreements between licensed physicians and general business entities or any individual who is not licensed to practice medicine, including most management, collection, and billing arrangements.
• Restricts general business entities and non-licensed individuals from directly receiving any physician professional fees.
• Prohibits partnerships, employee relationships, fee splitting, and other arrangements between physicians and businesses or non-physicians where the physician’s fees or practice is in any way directed or controlled by non-licensed parties.

Texas’ CPOM doctrine applies broadly to any arrangement between physicians and non-physicians. In order for arrangements under the doctrine’s scope to be compliant, physicians must either:

• Function as independent contractors; or
• Meet statutory exceptions.

It is important to note that simply classifying a physician as an independent contractor does not automatically mean that is the case in the eye of the law. As such, any medical contract involving independent contractors in a new or existing medical practice needs to be meticulously evaluated in accordance to the law, and constructed in a compliant manner.

Does the CPOM Doctrine Make It Impossible for a Non-physician to Participate in a Medical Practice?

Not necessarily, says Hendershot Cowart health law expert Thomas Bonura. “In properly structured and managed situations, nonphysicians and corporate entities can be involved in the numerous non-medical aspects of a medical practice.”

These aspects may include, among other things:

• Administrative services
• Billing
• Nonphysician staffing
• Compliance
• Credentialing
• Marketing
• Finance.

“However, no matter what aspects you are involved in as a nonphysician,” Bonura advises, “you want to ensure you are never crossing the line into influencing or making decisions that only a physician should make, like what is in the patient’s best interest or which items or services should be ordered for the patient.”

What Are Common Mistakes Physicians or Non-physicians Make when Buying a Practice?

There are many factors and due diligence items that one should consider when contemplating the purchase of a medical practice. “One of the first things that sometimes gets overlooked is what you are actually interested in purchasing: owning the equity interest in the practice itself is quite different than just purchasing the assets of the practice,” says Bonura. “There are pros and cons to both equity and asset purchases, and it can save you time and money understanding from the onset which of these arrangements best align with the goals of the transaction.”

It is also important to know how the legal organization of your target acquisition can impact who can legally buy and own the practice. Ownership of a professional association (PA) can only be held by another professional individual, whereas ownership of a professional limited liability company (PLLC) can be held in the name of another PLLC or PA or another professional individual.

“These facts have bearing on the legal structure of the deal as well as potential personal liability exposure,” Bonura adds.

The Importance of Evaluating Transactions and Agreements

Given the many restrictions created by the Texas CPOM doctrine, and the potential repercussions of violations, evaluating the nature of individual transactions with the help of experienced attorneys is critical for health care entrepreneurs and providers. When scrutinizing any transaction or agreement, our team focuses on ensuring they reflect the general premise of the CPOM doctrine: that medical judgement should not be controlled, made, or influenced by a non-physician. For example:

• Because fee splitting between physicians and non-physicians is prohibited under the CPOM, any transaction or arrangement should ensure fees are obtained only for actual expenses, and not for profit or under the control of non-physician management.
• Any management fees outlined in management services agreements must be set at Fair Market Value (FMV). This eliminates or reduces the potential for sub-FMV fees that are less than the agreed-upon services, provide an inequitable surplus of income to a physician practice, and which may allow management companies to improperly influence the way physicians provide medical care – clear violations of the doctrine.

When structuring relationships between physicians and non-physicians, consulting with experienced lawyers can help ensure the arrangements are compliant. Investing in these evaluations from the very beginning can help eliminate larger problems in the future.

Ensuring Compliance with the Texas CPOM Doctrine

If you are looking to collaborate with a physician on a medical practice, Texas’ Corporate Practice of Medicine doctrine is one of many considerations that can have far-reaching implications. Given what is, in effect, a minefield of regulatory legislation, our team at Hendershot Cowart P.C. provides clients with the comprehensive counsel they need, reducing their risks, and paving the foundation for a compliant health care venture.

From entity selection, licensing requirements, and medical contracts to credentialing and compliance, our firm delivers the comprehensive counsel and representation clients need to reduce their liabilities and structure themselves for future liability. Call (855) 908-1331 or contact us onlineto speak with an attorney.