Investment in the healthcare industry requires careful consideration, as it involves numerous distinct areas of the law. Venable's Private Equity Investment in Healthcare webinar series explores the unique issues and timely developments that shape deals within the industry.
In the sixth webinar in this series, partner Ari Markenson and associate Chris Conn discuss how corporate practice and fee-splitting prohibitions affect business structures and operations, particularly in the practice management space.
Prohibitions on the Corporate Practice of Medicine (CPOM)
Healthcare and life sciences services constitute almost 20% of the U.S. GDP, representing a massive portion of the nation's economy. A large part of that number is represented by professional practice businesses that provide care directly to patients, such as hospitals and nursing homes. However, within that subsector of the industry there are also non-professional entities that support these caregivers, such as management companies that provide administrative services.
Those non-professional entities tend to be small and consequently ripe for investment and consolidation. But investing in those businesses presents unique regulatory challenges. In general, a non-professional (or non-licensed) individual or entity cannot own or control a business that employs professionals. To complicate matters further, CPOM laws and licensing requirements vary considerably from state to state. Accordingly, deals and business arrangements in this space must be structured in precise ways to ensure compliance.
Prohibitions on Fee-Splitting
Some states do not allow money paid to the medical practice to be split with non-licensed professionals. So, even if a physician owns a practice, there are prohibitions on how that professional can split fees with a receptionist, office manager, or other non-licensed employee. In that situation, a professional practice could pay non-professionals a set amount of money over a specified period based on the fair market value for the services provided.
Most states allow medical professionals to hire a marketing agency and pay them a set amount to provide their services. This is not considered fee-splitting if they are regularly scheduled set payments rather than percentage-based arrangements that would reward the company for new business generated via marketing campaigns. Some states do allow percentage-based arrangements in specific circumstances, as long as the price paid for the services provided is fair market value.
Fee-splitting prohibitions can also apply to payments from one professional to another. Most states allow professionals to split fees based on the service provided. For example, if a dentist recommends an oral surgeon to a patient, and the oral surgeon performs the entire procedure independent of the dentist, then the dentist would not receive fees generated by the procedure. However, if the dentist provides services, such as preparatory work, as part of the procedure, then the dentist would be paid for the fair market value of that work.
Overlooking state-specific practice prohibitions can easily backtrack or derail a deal, so it is essential to know the applicable laws before diving too deep into a deal. For example, some states require approval from a professional or state board, which can add lead time to a proposed deal. Some states only have prohibitions on professional-to-professional fee-splitting, while others only regulate professional-to-non-professional fee-splitting. Additionally, some states have criminal penalties associated with fee-splitting violations, while other states treat violations as civil offenses.
Business Models for Navigating CPOM
One of the more commonly used business models for structuring investments in healthcare is the Management Services Organization (MSO) and Professional Corporation (PC) arrangement. The MSO-PC arrangement allows for the two entities to interact in most professional manners, with the MSO providing administrative and non-clinical services to support the PC as it administers care to patients.
In any business arrangement, certain company assets cannot be owned by the MSO or non-PC. Those include items or contracts that are professional in nature, such as medical records, employment agreements with physicians, payer contracts, and medications. Those types of assets must be retained by the PC and cannot be transferred to a non-PC. However, non-professional assets, such as chairs in the waiting room, a printer, or paper clips, can be owned by either entity.
This structuring requires a good deal of paperwork, including a management services agreement (MSA) to lay out the specific fee structure between the PC and the MSO, with all fees for services assessed at the fair market value to avoid fee-splitting violations. The MSO can then pay investors from that fee. An equity transfer agreement or continuity agreement is also essential to keep the equity of the PC where it existed at the time the transaction was done.
In this arrangement, the MSO must be careful about exerting control over clinical decisions, as that can lead to potential malpractice and regulatory violations for the PC.
The Bottom Line
As rules vary greatly from state to state, and scrutiny of management agreements continues to increase, obtaining proper legal advice is essential. Before entering any kind of deal, talk to one of our experienced attorneys. We invite you to learn more about Venable's Healthcare Group,Corporate Practice and Fee-Splitting Prohibitions practice, and Private Equity teams.
If you are a healthcare investment professional and would like to learn about future sessions of our Private Equity Investment in Healthcare webinar series, please email Ari Markenson at ajmarkenson@Venable.com.