Corporate Practice Of Medicine Prohibitions

Key takeaways:

• Physician providers and management companies must be mindful of corporate practice of medicine prohibitions.
• Management interactions should be carefully structured.

Many states have corporate practice of medicine prohibitions.

Corporate practice of medicine (CPOM) prohibitions intend to protect the independent medical judgment of physicians from the undue influence of profit-seeking corporations, and it is important that physician providers and their management companies be mindful of applicable CPOM prohibitions to ensure compliance with the law. As a cautionary tale, recently a jury in Travis County, Texas, issued a $9.3 million judgment against a private equity-backed hospitalist staffing company for breach of contract; the breach largely resulted from the company's failure to comply with Texas's CPOM prohibitions. The case was unusual because the court awarded monetary damages (it is more common that such a contract be rescinded).

In February 2015, to cut costs, the Austin-based hospital system St. David's HealthCare entered into an exclusive arrangement to obtain all of its emergency medicine and hospitalist services from Quantum Plus, Inc., a subsidiary of TeamHealth Holdings, Inc., a Blackstone-backed hospital management and staffing services company. Under the exclusive arrangement, Quantum and its "friendly physician" affiliate, Lonestar Hospital Medicine Associates, P.A., agreed to provide independently contracted, qualified physicians to staff St. David's facilities. TeamHealth attempted to acquire Hospital Internists of Austin, P.A. (HIA), a physician-owned practice association that had historically provided hospitalist services to St. David's, to secure the workforce needed to fulfill Quantum's contract with St. David's, but HIA was not amenable to a sale, forcing Quantum to subcontract with HIA to ensure continued hospitalist coverage at St. David's facilities.

HIA's subcontractor relationship with St. David's and TeamHealth affiliates became effective in February 2015, and soon after, HIA sued, alleging that Quantum was exerting unlawful control over the physicians' practice of medicine. Specifically, HIA's complaint stated that Quantum:

• instructed HIA physicians to run emergency codes on overnight shifts at St. David's facilities when HIA physicians did not feel they were trained to provide such services in an optimally proficient manner;
• reinforced a policy that required HIA physicians to accept all transfer patients even if a specialist was needed but not confirmed available;
• pressured HIA physicians to complete certain clinical documentation inquiries in an improper manner by rushing providers to provide diagnoses and pressuring completion of inquiries even where HIA physicians advised that some inquiries by St. David's clinical documentation improvement team suggested or tried to lead the hospitalists to a diagnosis;
• pressured HIA to discharge certain patients and to discharge patients earlier than agreed goals, and controlled physician rounding at St. David's facilities to encourage faster discharges of patients;
• insisted on the removal of certain physicians from HIA's roster when those physicians "cost St. David's too much money" by maintaining patient length-of-stay averages that were higher than their peers';
• exercised control over the hiring and retention of HIA hospitalists and unilaterally dictated medical staffing needs at St. David's facilities; and
• subjected HIA to Quantum's services agreement with Lonestar, through which Lonestar agreed to pay Quantum some portion of any net collections from medical provider professional services fees. Allegedly, Lonestar agreed to pay most, if not all, net collections from medical provider professional services fees to Quantum.

Under Texas CPOM law, unlicensed business owners (like TeamHealth and Quantum) are not permitted to engage in the practice of medicine. This CPOM prohibition is intended to protect the independent medical judgment of physicians from the undue influence of profit-seeking corporations. Although there is no private cause of action for violating a CPOM prohibition, Quantum had agreed in its contract with HIA to comply with all applicable state laws, including, specifically, CPOM restrictions. HIA claimed that when Quantum breached this covenant by engaging in the aforementioned activities, which interfered with the independent medical judgment of HIA's physicians, Quantum breached the contract and thus exposed itself to liability. The court sided with HIA.

This case has been appealed to the Texas Third Court of Appeals in Austin, and physician providers and management companies and their investors should track ongoing developments as the appeal proceeds. It is important to carefully structure management interactions between physician provider groups and management companies, being mindful of the specific points identified above, to avoid any perceived interference in the independent medical judgment of the licensed physician providers in violation of applicable CPOM prohibitions.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.