New York State law prohibits the Corporate Practice of Medicine (“CPOM”). CPOM is when a non-medical individual or company owns or controls a medical practice. In New York State, a non-medical company can not (1) engage in, or profit from, running a medical business or (2) employ a physician for the purpose of providing medical services.
Non-physician investors can invest in business entities that support the non-medical aspects of a medical practice, but a medical practice located in New York State must be owned and controlled by a NY licensed physician. A nursing practice must be owned by a Registered Nurse or Nurse Practitioner, etc. New York Business Corporation Law (BCL) Section 1507 authorizes a professional service corporation (“PC”) to issue shares “only to individuals who are authorized by law to practice in this state a profession which such corporation is authorized to practice.”
New York Limited Liability Company Law (LLCL) Section 1207(b) requires that each member of a medical professional limited liability company (PLLC) must be licensed pursuant to New York Education Law Article 131 in order to practice medicine in New York. In other words, if you do not hold a medical license in the state of New York, you may not own shares in a PC that is practicing medicine, or be a member of a medical PLLC.
In addition to the BCL and LLCL restrictions, New York has a century-old prohibition on CPOM. This rule prohibits any unlicensed individual or company from employing or contracting with licensed physicians or other medical professionals to provide medical services to patients. Interference with the free exercise of medicine by those professionals and their medical judgments is also not allowed.
Furthermore, New York Education Law Section 6512(1) makes it a Class E felony to practice, offer to practice, or to present oneself as being able to provide a licensed profession when you are not in fact licensed to practice the profession. This also applies to anyone who aids or abets an unlicensed person to practice a profession.
MANAGEMENT SERVICE ORGANIZATIONS
Establishing a management service organization (MSO) is one way to be compliant with the restrictions on CPOM above, while running a company that supports a medical practice.
An MSO is a business corporation that provides a medical practice with a wide range of services. An MSO can be owned by physicians, non-physicians, other corporate entities, or a combination of any of them. However, the MSO’s contractual relationship with the medical practice must be very carefully structured, so that it does not run afoul of the prohibition on CPOM.
If an MSO exercises control over the medical judgments of the physicians, or other licensed professionals in the medical practice, the MSO could find itself accused of the unlicensed practice of a profession. For example, an MSO that sets up a “captive” professional entity, whereby the MSO can remove a physician as the owner of the professional entity and replace him/her with another physician, will likely find that, if challenged, the arrangement will not withstand judicial scrutiny.
In order to comply with a state’s CPOM laws restricting a non‑professional entity from owning or operating a physician practice, lay entities seeking a business relationship with a physician practice often use what is known as the “friendly PC” MSO model. When properly executed, this model allows the MSO to maintain control over the administrative and management side of the medical practice without infringing on the professional judgment of the physicians.
Under the friendly PC model, a PC, PLLC or other state-approved legal entity with 100% physician ownership employs the licensed health care professionals and then contracts with an MSO to provide management services in exchange for a fee. In New York State, Nurse Practitioners can own a nursing PC or PLLC, but they cannot own a medical PC or PLLC. The PC is typically kept “friendly” or aligned with the MSO through the use of a stock transfer restriction agreement between the friendly physician and the MSO. The stock transfer restriction agreement will allow the MSO to designate or approve any future owner of PC stock.
The MSO’s services, and compensation for such services, are set forth in a management services agreement (MSA). MSOs typically incur all costs associated with the medical practice, with the exception of physician (and other clinical provider) compensation, benefits and malpractice costs. MSOs can also bring economies of scale, operational efficiencies, and professional management and compliance experience into physician practices, thereby improving the quality of care and patient experience, while reducing overhead costs.
All physicians, nurses, and other licensed health care professionals providing services to patients in the practice should be employed or contracted by the professional entity, not the MSO.
MSOs typically provide the following services:
- Financial management, budgeting, and accounting
- Human resources and non-clinical personnel management
- Staff training and education
- Billing services
- Providing and managing office space
- Equipment leasing and purchasing
- Regulatory compliance oversight and management
- Credentialing and contract management
- Vendor management and group purchasing
- Marketing and advertising
MSOs can be compensated for their services in a number of ways. Common MSO fee arrangements include (1) fixed fee arrangements, (2) cost plus a reasonable profit margin formulas, or (3) formulas based on practice group revenues.
Because fee structures may implicate state fee-splitting and other laws, the fee structure should be examined by an attorney for regulatory risk. Fee-splitting laws may prohibit or disfavor compensation based on a percentage of patient revenue. For example, compensation based on a percentage of physician revenue generally constitutes prohibited fee-splitting under New York law. Compensation should bear a reasonable relationship to the cost of the management services provided and be consistent with fair market value. Otherwise, the compensation could be viewed as an unlawful payment for a patient referral in violation of federal or state anti-kickback statutes.
Because of complex and state‑specific CPOM regulations, the MSA needs to be carefully drafted. Make sure to have an attorney experienced in this area prepare the MSA for your business.