Prohibitions by Legislation
California and South Dakota are examples of states where specific legislation makes it clear (or mostly clear) that a corporate practice prohibition exists in state law.
California’s prohibition of corporate practice is based on explicit restrictions placed on corporations, combined with licensure requirements. California’s Business and Professions Code explicitly states that “[c]orporations and other artificial legal entities shall have no professional rights, privileges, or powers.” This prohibition makes it impossible for a corporation to comply with California’s professional licensing law, which states that “any person who practices or attempts to practice, or who holds himself or herself out as practicing . . . [medicine] without having at the time of so doing a valid, unrevoked, or unsuspended certificate . . . is guilty of a public offense.” California thus prohibited the corporate practice of medicine by first explicitly denying “professional rights, privileges, or powers” to corporations and “other artificial legal entities,” and then, in its licensing law, by requiring such a professional right (in the form of a certificate) to practice medicine.
The underlying policy of California’s approach is to prevent unlicensed persons from interfering with, or improperly influencing, a physician’s professional judgment. Certain healthcare decisions must be made by a licensed physician; an unlicensed person making those decisions would be engaging in the unlicensed practice of medicine. Furthermore, certain business decisions by an individual or entity could result in the unlicensed individual or entity having control over a physician’s practice of medicine. The aim of California’s laws is to avoid this entanglement. For example, the law states that decisions on the need for referrals or diagnostic tests are healthcare decisions that should be made by a licensed physician. Similarly, business decisions such as approving the selection of medical equipment and supplies for a medical practice must also be made by a licensed professional because such decisions result in control over a physician’s practice of medicine.
South Dakota is even more explicit in its statutory ban on the corporate practice of medicine. The relevant law states that “it is the public policy of this state that a corporation may not practice medicine or osteopathy”. While this law is part of a larger section stating that anyone who practices medicine “without a license, certificate, or permit . . . is guilty of a Class 1 misdemeanor,” the absolute nature of the prohibition makes the licensing requirement irrelevant for establishing the prohibition of the corporate practice of medicine. Indeed, South Dakota’s corporate practice of medicine prohibition does not derive from its professional licensing law at all, as can be seen in a 1942 South Dakota Supreme Court case.
In Bartron v. Codington County the court analyzed the relationship of a physician employed by a for-profit corporation. The court concluded that the arrangement was not illegal per se under South Dakota’s professional licensing law, but it was illegal because “the practice of the learned professions by a profit corporation tends to the commercialization and debasement of those professions” and is thus against public policy.
The Bartron rationale is further evidenced by the fact that the law governing the corporate practice of medicine allows a corporation to enter into an employment agreement with physicians as long as the employment relationship with the corporation does not: “(1) . . . directly or indirectly, supplant, diminish, or regulate the physician’s independent judgment concerning the practice of medicine or the diagnosis and treatment of any patient; (2) [r]esult in profit to the corporation from the practice of medicine itself, such as by the corporation charging a greater fee for the physician’s services than that which he would otherwise reasonably charge as an independent practitioner, except that the corporation may make additional charges reasonably associated with the services rendered, such as facility, equipment, or administrative charges; and (3) [r]emain effective for a period of more than three years, after which it may be renewed by both parties annually.”
Prohibitions Expressed in Common Law Judicial Decisions
Many states have “common law” prohibitions that are either expressed generally with respect to all licensed or “learned” professions, including medicine, or have specific case law relating to medicine. This case law can be 80 plus years old in some situations, and the extent to which it can be regarded as good law may be unclear. However, in a number of states, even old case law is continuously cited as the source of a state’s corporate practice prohibition. This is true in many states where corporate practice prohibitions with respect to optometry were litigated in different states over a period spanning from the early 1900s to the middle of the 20th century. Those optometry cases often express a prohibition with respect to all licensed professions or are cited in later case law as applying to the practice of medicine as well. States such as Mississippi, South Carolina, and Texas provide good examples of “common law” expression of the prohibition.
Unlike California and South Dakota, Mississippi does not directly address the corporate practice of medicine prohibition in its statutes or regulations. Further, while the Mississippi State Board of Medical Licensure (BOML) has the authority to prohibit the unlicensed practice of medicine — and like all states, requires individuals wishing to practice medicine to obtain a license to do so — it has adopted a policy that it will not concern itself with the form or type of business arrangements entered into by a licensee as long as certain prerequisites are met.
Mississippi’s corporate practice of medicine prohibition is rooted in its state Supreme Court cases rather than statute or regulation. These cases, while not directly involving physicians, express a prohibition on the corporate practice of licensed professions, which has been recognized over the years in the state as applicable to physicians. In Sears Roebuck & Co. v. State Bd. of Optometry, the court concluded that under Mississippi law, a corporation cannot practice optometry through a licensed employee–optometrist. In Busch Jewelry Co. v. State Bd. of Optometry, the court concurred with Sears Roebuck’s finding that because a corporation cannot be licensed, it cannot practice optometry indirectly through a licensed employee.
Like other states that have imposed some form of prohibition on the corporate practice of medicine, Mississippi’s policy aim is to protect patients from corporations whose primary interest may be profit rather than the patient’s health. So, while the BOML allows licensees to enter into corporate business arrangements, it preserves physician autonomy through the prerequisites that those arrangements must meet. Some examples of the prerequisites are as follows:
· The method and manner of patient treatment and the means by which patients are treated are left to the sole and absolute discretion of the licensed physician. The provision of medical services and the exercise of sound medical judgment at all times shall be exercised solely in the discretion of the licensed physician, and he or she shall not be subject to any influence, direct or indirect, to the contrary.
· The manner of billing and the amount of fees and expenses charged to a patient for medical services rendered shall be left solely to the discretion of the licensed physician.
South Carolina also has established a prohibition through common law. Similar to Mississippi, South Carolina’s Board of Medical Examiners has the authority to prohibit the unlicensed practice of medicine. However, it maintains that a physician’s economic relationships are generally beyond the scope of its jurisdiction. Instead, the state’s corporate practice of medicine prohibition was established in a case brought before the South Carolina Supreme Court in 1938.
The case involved a defendant–business corporation that employed optometrists for the practice of optometry and plaintiffs who were seeking an injunction on the arrangement. The court granted the injunction on the reasoning that a licensed professional is responsible directly to his patient. Therefore, he “cannot properly act in the practice of his vocation as an agent of a corporation . . . whose interests in the very nature of the case are commercial in character.”
This common law prohibition was reaffirmed in a 1999 South Carolina Supreme Court case, which added that a licensed physician could sue to enjoin someone from aiding and abetting another in the unlawful practice of medicine.
The Texas prohibition is similar. In Gupta v. Eastern Idaho Tumor Institute, Inc., a Texas court, making clear that Texas upholds a prohibition with respect to medicine and citing previous precedent, stated that “[u]nder the Medical Practice Act, when a corporation comprised of laypersons employs licensed physicians to treat patients and the corporation receives the fee, the corporation is unlawfully engaged in the practice of medicine. . . . The purpose of this act is to preserve the vitally important doctor–patient relationship and prevent possible abuses resulting from lay control of corporations employing licensed physicians to practice medicine.”
Prohibitions Affirmed by State Attorneys General and Regulatory Agencies
In a number of states, a corporate practice prohibition may not be explicit in the text of either its statutes or its case law. However, an attorney general or other responsible agency has made it clear that a prohibition usually exists through a formal published legal opinion, policy statement, or similarly binding legal guidance. Examples of states where one can find such expressions of the prohibition include Nevada, North Dakota, and Arkansas.
Nevada has statutory law that governs professional entities and associations. However, neither the legislature nor judiciary has addressed the corporate practice of medicine doctrine directly. Instead, the best expression of the prohibition in Nevada exists in opinions issued by its attorney general. A 1977 opinion first addressed the issue using the argument that corporations are incapable of fulfilling professional requirements of certain fields of occupation that are “universally recognized as learned professions,” which require years of study, training, examinations, and ownership of a license. These are requirements that a corporation cannot meet. Thus, the 1977 opinion concludes that the practice of medicine by a general corporation is illegal and that any licensed physician who aids or abets a corporation to illegally practice medicine can be charged with unprofessional conduct.
A 2010 attorney general opinion lists the three public policy concerns that underlie the state’s prohibition: “(1) the possibility of lay [i.e., unlicensed] control over the physician’s judgment; (2) the division of the physician’s loyalties between his patient and his employer; and (3) the commercialization of the medical profession.”
North Dakota has also expressed its corporate practice of medicine prohibition through the attorney general’s office, although with more limited guidance. The state’s ban on the corporate practice of medicine was first articulated in a 1990 attorney general advisory letter, which stated that North Dakota’s public policy prohibits a corporation (other than a professional corporation) from employing physicians to provide medical care.
Like Nevada, the North Dakota advisory letter points out that a corporation cannot possess the personal, human qualifications required for the practice of medicine in licensure requirements. As a result of the broad reach of the language of the advisory letter concerning the prohibition, subsequent law was enacted to provide additional clarity. As an example, one regulation enacted after the advisory letter expressly allowed for the employment of physicians by hospitals.
In a 1994 opinion, Arkansas’s attorney general responded to an inquiry regarding whether or not it is legal for a nonphysician-owned corporation to employ physicians for profit with a resounding “No.” The opinion states: “There are three types of authorized corporate entities under Arkansas law which may provide medical services. They are medical corporations, each of the shareholders and directors of which must be licensed physicians, hospital and medical service corporations, and health maintenance organizations or ‘HMOs.’ Unless the entity to which you refer falls into one of these categories and complies with the statutory requirements for existence thereunder, it is my opinion that the answer to your question is ‘no.’” The opinion further provides that “. . . at common law, the corporate practice of medicine was generally prohibited. The reason for this rule was stated in Marik v. Friedman, 236 Cal. Rptr. 751, 191 Cal. App. 3d 1136 (1987), as being that layman [sic], who are not bound by the ethical standards governing the profession, might seek to enhance the corporation’s ‘commercial advantage’ rather than conform to professional strictures.”
Prohibitions Implied in State Medical Practice Acts
In states where neither legislation, case law, nor attorney general opinions directly express the prohibition in black and white terms, the prohibition may nevertheless be implied within the states’ medical practice acts themselves. Louisiana’s Medical Practice Act (LMPA), for example, defines “physician” as a natural person who holds a license, permit, certification, or registration to practice medicine, and declares that no person shall practice medicine until he or she possesses a duly recorded license, permit, or registration. Further, the LMPA states that the grounds for discipline related to the practice of medicine include: (1) “knowingly performing any act which, in any way, assists an unlicensed person to practice medicine, or having professional connection with or lending one’s name to an illegal practitioner,” and (2) “soliciting, accepting, or receiving anything of economic value in return for and based on the referral of patients to another person, firm, or corporation.” This rule, in conjunction with the LMPA’s definition of “physician,” implies a prohibition on the corporate practice of medicine.
This interpretation of an implied prohibition is supported by a 1992 Statement of Position of the Louisiana State Board of Medical Examiners, which provides that if a corporate employer seeks to impose or substitute its judgment for that of the physician in the “diagnosing, treating, curing or relieving of any bodily or mental disease,” or if the employment is structured in a way that undermines the physician–patient relationship, then the LMPA will have been violated.
New York’s corporate practice of medicine doctrine is firmly pieced together from various statutes, regulations, case law, and agency publications that rely on the notion that the prohibition is implied in the medical practice act. The New York prohibition was initially derived by implication from the state’s medical practice act (NY Educ. L. § 6522). Section 6522 states that “[o]nly a person licensed or otherwise authorized under this article shall practice medicine or use the title ‘physician.’” In order to qualify for a license as a physician, the applicant must meet requirements regarding education, experience, examination, age, citizenship, and character. Anyone who practices without being licensed or authorized to do so is guilty of a class E felony. By their nature, the requirements to be licensed can only be met by an individual person, not an entity. Combined with section 6522, the rules imply a corporate practice of medicine prohibition.
The implication derived from New York’s medical practice act is further supported by a 1998 report from the New York State Education Department (NYSED). The NYSED report makes the connection described above, stating that “it is clear that business corporations cannot hire a licensee to provide professional services because the law neither authorizes such action nor provides an exemption.” The report also articulates the policy behind reading a corporate practice ban into the medical practice act. The goal is to protect the public from a business relationship that could limit or restrict a physician’s professional judgment or practice, harm the physician’s professional integrity, or permit a business corporation to make professional decisions.
As seen in the examples provided above, whether expressed in statute, case law, or administrative legal opinion or guidance, many states that continue to have a corporate practice of medicine prohibition either apply or interpret the prohibition in a similar manner. In addition, some states have adopted some common exceptions. Most of these exceptions allow for the orderly provision of healthcare services in situations in which a corporate prohibition may be an impediment. Some of those exceptions and related examples are discussed next.
As is true of most legal prohibitions, the corporate practice of medicine prohibition has exceptions. Practically every state has an exception for professional business organizations, such as professional corporations or similar professional entities, and many states provide additional exceptions for employment of physicians by certain entities, such as health insurers, hospitals, nursing homes, or home health agencies. As with the establishment of the prohibition, different states rely on different governmental mechanisms to establish the exceptions. However, it is important to note that a state that establishes the prohibition through one arm of government may use a different arm, or a combination of them, to establish the exceptions.
Exceptions Established by Legislation
In line with its statutory approach to the corporate practice of medicine, California has adopted statutory exceptions to the prohibition. Beginning in 1968, the California Legislature introduced various exceptions in response to certain policy needs, court decisions, and federal requirements. The most important of these exceptions is the 1968 Moscone-Knox Professional Corporations Act. Under the Act, physicians are allowed to create professional, for-profit medical corporations in which licensed professionals can serve as shareholders, officers, directors, or professional employees.
Generally, professional corporations must be engaged in rendering professional services in a single profession (for example, physicians and attorneys cannot serve as shareholders, officers, directors, or professional employees of the same professional corporation). The Act has added a variety of license holders in other health professions to the list of licensees that can serve as shareholders, officers, directors, or professional employees. This list includes, but is not limited to, podiatrists, nurses, optometrists, clinical social workers, physician assistants, chiropractors, and naturopathic doctors.
California’s Business and Professions Code, as well as its Health and Safety Code, identify certain entities that are not subject to the corporate practice of medicine prohibition, including clinics and hospitals operated primarily for purposes of medical education, community clinics, nonprofit research clinics, narcotic treatment programs, specialty pediatric hospitals, HMOs, and certain charitable institutions, foundations, or clinics.
Similarly, Colorado’s statutory exception states that physicians may be employed by a “health care facility,” which is defined as a hospital, hospice, community mental health center, federally qualified health center, school-based health center, rural health clinic, or long-term care facility. In Indiana, an employment or contractual relationship between a hospital and a licensed physician does not violate the corporate practice of medicine prohibition “if the entity does not direct or control the independent medical acts, decisions, or judgments of the licensed physician.”
Many of the states that have established the prohibition through judicial decision nonetheless resort to legislation to create exceptions. Mississippi, which relies on case law for its prohibition, enacted the Mississippi Professional Corporation Act of 1995, authorizing the establishment of professional corporations for the rendering of professional services typically rendered by a licensed person.
Indiana’s Professions and Occupations Code provides that an employment or other contractual relationship between a physician and entities such as a hospital, healthcare facility, and certain other enumerated entities and individuals in the statute, does not constitute the unlawful practice of medicine “if the entity does not direct or control independent medical acts, decisions, or judgment of the licensed physician.” Even when granted an exemption, entities are often still prohibited from interfering with, controlling, or otherwise directing a physician’s professional judgment. Thus, even with the context of explicit exceptions, the safeguards preventing interference with a physician’s independent medical judgment remain.
Exceptions Established by Judicial Decsision
In some cases, exemptions are created through case law. For example, Illinois established its prohibition through the state’s Medical Practice Act of 1987, which says that no one may practice medicine without a license. However, in a 1997 Illinois Supreme Court case, Berlin v. Sarah Bush Lincoln Health Center, the court concluded that the corporate practice prohibition does not apply to hospitals. Its reasoning was that the prohibition is inapplicable “when a corporation has been sanctioned by the laws of [the] State to operate a hospital.” This exception was later upheld in another Illinois Supreme Court case in which the court concluded that certain statutes (e.g., the Hospital Licensing Act and other hospital-related statutes) enacted by the General Assembly “clearly authorize, and at times mandate, licensed hospital corporations to provide medical services” and that the “authority to employ duly-licensed physicians for that purpose is reasonably implied from these legislative enactments.”
Kansas also created an exemption through case law. In St. Francis Regional Med. Center, Inc. v. Weiss, the court concluded that licensed physicians may be employed by licensed hospitals because such contracts do not violate the public health, safety, or welfare. Hospitals are licensed healthcare facilities and as such are subject to regulation and oversight. The court specifically stated that “[b]y definition, to be licensed in Kansas, a hospital must provide ‘physician services’ and ‘diagnosis and treatment for patients who have a variety of medical conditions’ or ‘specified medical conditions.’ This is true for hospitals organized for profit or not-for-profit. It would be incongruous to conclude that the legislature intended a hospital to accomplish what it is licensed to do without utilizing physicians as independent contractors or employees.”
Exceptions Established by State Attorneys General and State Regulatory Agencies
North Carolina’s corporate practice of medicine prohibition has historically been established through common law and the position of its medical licensure board. An exception to the prohibition, however, was established by a 1995 state attorney general opinion. The opinion provides that “[n]on-profit and public hospitals may promulgate reasonable rules fixing the standards of those who may practice therein and limiting or fixing reasonable fees for services to be rendered, including medical or surgical, and may arrange with duly licensed physicians and surgeons to provide these services in the hospital. Such services so rendered do not constitute the practice of medicine.”
The North Carolina Medical Board expanded on the underlying policy of the exception established by the attorney general opinion. The Board explained that the exceptions extend from the notion that the described entities are statutory creations intended for public welfare and regulated by the government. This attribute “[ameliorates] the inherent conflict between profit-making and good medical care.” Other exceptions have since developed over time, with some being reflected in state statutes.
Similarly, the Michigan attorney general issued an opinion indicating that nonprofit corporations incorporated under the state’s Nonprofit Corporation Act may provide medical care services through employed physicians. In another example, the West Virginia Board of Medicine stated in a position statement that nonprofit hospitals are exempt from the corporate practice of medicine prohibition.
Oregon restricts the practice of medicine through statutory prohibitions on unlicensed practice, and its Professional Corporation Act provides a corporate practice of medicine exception for professional corporations. However, an exception has also been implied in a 1975 state attorney general opinion. The opinion states that hospitals and other healthcare facilities are themselves licensed to perform medical services, and thus, by definition a hospital is a facility that provides medical services; i.e., “practices medicine.” Although the opinion is in reference to a hospital employing physical therapists, the reasoning in the opinion has been taken to imply that hospitals may also employ nurses and physicians.
Some regulatory agencies or state attorney general opinions may indicate that corporate practice of medicine issues will be evaluated on a case-by-case basis. Often they will list factors that are considered when evaluating whether an arrangement poses a problem. Generally, those factors will be whether either the physician’s independent professional judgment or the physician–patient relationship has been violated. Therefore, it is important that any corporate formation documents or documents related to the management of the entity clearly restrict all medical decisions solely to the physician’s independent medical judgment and that the sanctity of the physician–patient relationship be preserved.
For example, the Louisiana State Board of Medical Examiners issued a statement of position indicating that a physician’s employment by a corporation is not unlawful per se under the Louisiana Medical Practice Act. However, “[i]f a corporate employer seeks to impose or substitute its judgment for that of the physician . . . or if the employment is otherwise structured so as to undermine the essential incidents of the physician patient relationship, the Medical Practice Act will have been violated.”
Another example comes from an Iowa attorney general opinion. The opinion indicates that “not all relationships between a corporation and a licensed professional are prohibited.” However, the type of relationship that is prohibited involves a corporation that exercises “improper dominion and control” over the practice of a profession or over the licensed professional.
As can be seen in the examples provided, the most common exceptions, irrespective of where they are expressed in law, often relate to employment or independent contractor relationships with licensed healthcare facilities, or where the employer does not “control” the physician’s professional judgment. The rationale for the exception for healthcare facilities is firmly based on the notion that since licensed healthcare facilities are otherwise licensed to provide medical services, they should in turn be allowed to employ or engage physicians to provide those services. The rationale for allowing employment arrangements in situations in which the employer does not control the physician’s professional judgment relates specifically to the rationale for a prohibition in the first place. If a prohibition exists to prevent nonlicensed individuals or entities from controlling the professional judgment of a physician, then if the nonlicensed individual or entity is not engaged in such an activity, the employment or independent contractor relationship should not be prohibited. However, some states specifically reject that rationale on the grounds that it may not always be possible to clearly parse the relationship between a licensed physician and a nonlicensed individual or entity.
The corporate practice of medicine prohibition and any exceptions to it vary widely by state. Providers and their counsel should carefully review the applicable legislation, regulations, case law, and other guidance when addressing this issue.