Dallas Bar Association

Changes to the Corporate Practice of Medicine Doctrine

by David Heard

In light of ongoing changes in the health care regulatory landscape caused by the implementation of health care reform and the provisions of the Patient Protection and Affordable Care Act, the health care industry is increasingly focused on how to better coordinate and integrate care between physicians and other health care providers, payors, and other health industry participants. The establishment of any formal or informal relationships between physicians and any of these parties is likely to implicate the Texas doctrine prohibiting the corporate practice of medicine.

This doctrine prohibits a wide range of transactions between licensed physicians and general business entities or persons who are not licensed physicians. Among other restrictions, the prohibition generally bans the employment of physicians for the provision of medical care by non-licensed persons and general business entities and may prohibit the direct receipt of any physician professional fees by such persons and entities.

The prohibition against the corporate practice of medicine has been maintained in a number of states on the belief that a physician’s medical judgment and ethical duties may be clouded if non-licensed persons exert too much control over the physician’s medical practice. The practical effect of these restrictions has been eroded in most jurisdictions over the years. Texas, however, is one of several states that continues to maintain a broad prohibition against the corporate practice of medicine with limited statutory exceptions for certain physician employment arrangements.

To date, the most widely used statutory exception in Texas is for the employment of physicians by non-profit health corporations that are certified by the Texas Medical Board under Section 162.001(b) of the Texas Occupations Code. These entities are sometimes identified as a “501(a)” entity, which refers to the former statutory section under which these entities were first established.

Certified non-profit health care corporations allow non-physician member(s) and physicians to jointly participate in the corporate governance of the corporation, provided that the physicians maintain control over medical decisions and preserve independent medical judgment.

During the 2011 Texas legislative session, additional statutory exceptions were enacted that allow physicians to be directly employed by (i) certain rural hospitals, (ii) certain hospital districts and (iii) certain counties for inmate care. To use these new statutory employment exceptions, the employing entity must adopt policies related to credentialing, quality assurance, utilization review, and peer review to ensure that physician employees exercise independent medical judgment when providing care. Certified non-profit physician health corporations must also adopt similar policies to comply with these recent legislative changes by January 1, 2012.

Outside of these statutory exceptions, the prohibition against the corporate practice of medicine potentially affects most billing, collection and management arrangements between licensed physicians and non-licensed individuals or general business entities. Due to potential scrutiny by the courts or the Texas Medical Board, parties to a transaction will want to consider the possible impact of the corporate practice of medicine prohibition on the transaction.

If a court determines that an arrangement violates the doctrine and is illegal, the court may order that such arrangement is void. A second potential result of violating the prohibition is that it may subject an implicated physician to disciplinary action by the Texas Medical Board, which regulates physician licensure in Texas.

A court’s decision to void transactions due to illegality could produce unpredictable and unintended consequences, and depending on the underlying conduct, the physician may place his or her medical license at risk. Yet another issue that frequently arises in litigation involving corporate practice of medicine issues concerns the impermissible splitting of physician professional fees or “fee-splitting” with other parties. This may result in additional liability to the physician and the other parties under state and federal laws.

Before entering into any transaction involving a physician or physician group, the parties should always consider the effect of the corporate practice of medicine doctrine on the transaction. The parties should take a step back and ensure that the structure as a whole will allow physicians to maintain their independent medical judgment and properly account for any physician professional fees that will be received.

David Heard is an associate in the Health Care Practice Group of Locke Lord LLP. He can be reached at dheard@lockelord.com.

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