Private equity (PE) firms are increasingly investing in physician practices and the broader healthcare industry. While these arrangements can provide capital and operational expertise, they may also inadvertently violate Texas' corporate practice of medicine (CPOM) doctrine.
Understanding CPOM restrictions is crucial for physicians considering PE partnerships to avoid legal complications that could jeopardize their license and practice.
What is the Corporate Practice of Medicine Doctrine?
The CPOM doctrine in Texas prohibits corporations and non-physicians from practicing medicine or employing physicians to provide medical services. This prohibition is designed to prevent corporate entities from influencing a physician's medical judgment based on economic factors rather than patient welfare.
While the CPOM is not a private cause of action (only the Texas Medical Board can enforce the CPOM doctrine in Texas), recent court cases have shown that Texas courts will apply this doctrine to contract disputes, even when sophisticated business arrangements attempt to circumvent it.
The Rise of Management Service Organizations (MSOs)
Private equity firms engage in management service organization (MSO) models as a way to invest in healthcare while technically complying with CPOM restrictions. In this model:
- A physician-owned professional corporation (PC) or professional association (PA) provides all medical services
- The PE-backed MSO provides non-clinical management services (billing, HR, facilities, etc.)
- The MSO and physician practice enter a management services agreement (MSA)
While this structure can be legally compliant, recent litigation shows the devil is in the details. Many MSAs contain provisions that effectively transfer too much control to the PE-backed entity, creating CPOM violations.
Red Flags: When Management Services Agreements Violate CPOM
Courts have identified several factors that may indicate a CPOM violation, including:
1. Fee Structure Issues
- Warning Sign: MSO receives an excessive percentage of practice revenue (typically over 15-20%)
- Case Example: In Flynn Brothers v. First Medical Associates (1986), the court found a CPOM violation when a non-physician entity collected two-thirds of physician profits.
- Compliant Alternative: Compensation to the MSO should be set at fair market value, determined in advance, and not tied to the value or volume of referrals.
2. Control Over Medical Personnel
- Warning Sign: MSO controls hiring, firing, or scheduling of physicians
- Case Example: In Xenon Health LLC v. Baig (2015), a “contractual scheme” allowing non-physicians to recruit, place, and hire anesthesiologists was deemed a "sham arrangement" violating CPOM.
- Compliant Alternative: The MSA should explicitly state that all clinical staffing decisions remain under physician control.
3. Financial Control
- Warning Sign: MSO controls billing and collects fees directly from patients
- Case Example: A Travis County jury recently awarded $10.2 million to a physician group when a management company violated CPOM by ignoring physicians’ coding of their professional services, “using it only to track physician productivity and not for billing”, and concealing monthly billing and collection data.
- Compliant Alternative: While MSOs can provide billing services, physicians should maintain oversight of fee schedules, billing, and collection of fees for professional services rendered.
4. Clinical Decision-Making
- Warning Sign: MSO establishes protocols affecting medical care or imposes productivity quotas
- Case Example: The American Academy of Emergency Medicine Physician Group has challenged MSO practices that allow laypersons to establish best practices or controls for quality of care that interfere with physicians’ medical judgement.
- Compliant Alternative: MSAs must explicitly recognize the physician's complete independence in all clinical matters.
5. Restrictive Clauses
- Warning Sign: MSO agreement includes non-compete, non-solicitation, or non-dealing provisions that restrict the physician's ability to terminate the relationship
- Case Example: We represented a client unreasonably restricted by a non-solicitation clause that left them exposed to litigation. It is normal to include restrictive covenants in an agreement, but when the scope of the restrictions is too broad or critical exceptions are not spelled out, physicians can be locked into deals that compromise their professional judgment.
- Compliant Alternative: Agreements should allow physicians reasonable exit options and avoid restrictions on future practice.
CPOM as Grounds to Breach MSO Agreements
A critical point for physicians to understand: Contracts that violate the CPOM doctrine are likely unenforceable under Texas law. This has significant implications:
- If an MSO agreement transfers too much control to non-physicians, courts may void the entire agreement as illegal
- Physicians may have legal grounds to terminate MSO relationships that violate CPOM without penalty
- Recent Texas cases demonstrate that courts will not enforce contracts that enable CPOM violations, leaving parties pursuing breach of contract claims without remedy
Safeguarding Your Practice: Best Practices
To maintain CPOM compliance while benefiting from management services:
- Consult Legal Counsel: Healthcare attorneys with CPOM expertise should review all agreements collectively, including employment agreements, MSAs, and delegation protocols
- Explicit Clinical Autonomy: Ensure agreements contain clear language that physicians retain complete control over medical decision-making, hiring and supervising clinical staff, and setting clinical standards and protocols
- Fair Compensation Structure: Management fees should be reasonable, fixed, and not percentage-based
- Maintain Control of Medical and Billing Records: Ensure physicians retain ownership and control of medical records, billing and collection data
- Detailed Termination Provisions: Include reasonable exit options
- Regular Compliance Reviews: Periodically assess whether the actual working relationship matches the legal structure
Don’t Let an Overbearing MSA Restrict Your Independent Medical Judgment
While private equity investment can provide valuable resources to physician practices, the corporate practice of medicine doctrine creates a strict boundary between business management and medical care. Physicians considering MSO arrangements should approach them with caution, ensure proper legal review, and maintain vigilance against provisions that inappropriately restrict their professional judgment.
Remember that Texas courts have consistently prioritized physician independence over business arrangements that prioritize the bottom line. If your current MSO agreement oversteps these boundaries, you may have legal grounds to exit the relationship and restructure under a compliant model.
The healthcare landscape continues to evolve, but the fundamental principle remains unchanged: Medical decisions must be made by physicians based on patient needs, not corporate interests.
Questions about MSOs and the corporate practice of medicine doctrine? Request a consultation with a healthcare attorney today.