On January 21, 2025, members of the Washington Senate introduced Senate Bill 5387, which seeks to codify the prohibition of the Corporate Practice of Medicine (CPOM). Investors in healthcare service businesses have traditionally circumvented CPOM prohibitions with an investment structure known as the “PC/MSO” or “friendly doctor” model. This structure features a business services arrangement between a physician-owned professional entity (the PC) and an investor-backed management services organization (the MSO), whereby the PC pays the MSO a management fee in exchange for the MSO’s provision of nonclinical management services to the PC. An integral feature of these arrangements is an equity transfer agreement that confines the PC’s equity to the “friendly doctor” and authorizes the MSO to swap in a substitute should the initial doctor lose his or her license, commit a crime, or otherwise engage in conduct detrimental to the business.
Proposed Bill in Washington State Codifies Restrictive Corporate Practice of Medicine Prohibition
If enacted, SB 5387 would curtail investors’ ability to utilize this familiar structure in two important ways. First, SB 5387 prohibits physicians who serve as equityholders, directors, and officers of a PC from serving in similar capacities or receiving ownership or compensation for services provided to the MSO. Because the typical PC/MSO arrangement bans distributions from the PC to its owner(s), physicians often receive equity in the MSO to incentivize business growth. Additionally, PCs would be prohibited from ceding control over equity transfers to MSOs, creating a de facto prohibition on equity transfer agreements like those referenced above.
If enacted, SB 5387 would not take effect until January 1, 2027, but it would nonetheless codify a highly restrictive CPOM doctrine, and, even in these early stages, this legislation, which continues to progress through the legislature, merits attention from owners and prospective investors of healthcare service businesses in the Evergreen State.