PA’s Corporate Practice of Medicine Doctrine: Challenges and Compliance Surrounding Management Services Agreements

Pennsylvania’s corporate practice of medicine doctrine can be challenging to navigate, especially when setting up arrangements between a management services company and a professional entity, such as a medical practice. The corporate practice of medicine doctrine limits ownership of a medical practice to certain licensed health care professionals. Management services organizations (MSO) are typically owned by non-health care professionals and provide certain administrative and operational services to a professional medical practice via a management services agreement (MSA) in exchange for an agreed upon administrative or management fee. For MSA arrangements between MSOs and medical practices to survive regulatory scrutiny, compliance is key.

Here we highlight key cases that provide insight into acceptable and unacceptable MSO arrangements under Pennsylvania law.

Apollon and OCA, Inc.

In both Warren J. Apollon, D.M.D., PC v. OCA, Inc. and OCA, Inc. et al. v. Kellyn W. Hodges, D.M.D, M.S. et al., two different orthodontic practices entered into MSAs with Orthodontic Centers of America, Inc. (OCA), a MSO, to provide certain operational, financial and management services. In both cases, the MSA between OCA and the orthodontic practice provided OCA exclusive control over the revenues of each practice and the ability to disburse funds from the practices’ respective bank accounts. OCA also owned office equipment and furnishings and leased them back to the orthodontic practices and had the power, with the orthodontic practices’ consent, to negotiate managed care agreements. Both MSAs also included mutual noncompetes and had terms of 25 years. Additionally, the Apollon MSA required the orthodontic practice remain open for 150 hours per month. In exchange for its services, OCA was paid a monthly fee based on a set formula in the MSAs equal to patient revenue less 60% of the net operating margin.

Both orthodontic practices filed lawsuits after OCA filed for bankruptcy. The courts in both cases examined the respective MSAs and found they ran afoul of Pennsylvania’s corporate practice of medicine doctrine because they created de facto partnerships between OCA and the orthodontic practices. The court acknowledged that the sharing of gross returns alone does not establish a partnership, but sharing profits is prima facie evidence of a partnership, with some limited exceptions that did not apply to either arrangement. The court cited the management fee paid to OCA as an indicator that the orthodontic practices and OCA created a partnership in contravention of the prohibition on the corporate practice of medicine, and also took issue with other aspects of the MSAs between the orthodontic practices and OCA, such as the lengthy term (25 years), OCA’s power to negotiate managed care contracts and, in Apollon, OCA’s requirement that the orthodontic practice remain open for at least 150 hours per month. As a result, the court found that the MSAs were invalid and unenforceable.

Compliant Management Services Agreements

MSAs are designed to allow MSOs to provide administrative services to professional medical practices and allow health care providers within the practice to focus on treating patients without the burden of “back office” concerns. MSAs are common in the medical industry and can be structured in a manner that complies with the corporate practice of medicine doctrine.

It is important to draft MSAs as to not grant the MSO significant control over the medical practice’s treatment of patients or lend itself to the idea that the parties formed an illegal de facto partnership in violation of the corporate practice of medicine doctrine. Accordingly, parties can include certain safeguards in the MSA.

For example, the term of the MSA should be carefully considered. The courts in Apollon and Hodges both found the term of 25 years to be excessive. If the term is overly lengthy, the two business entities will struggle to combat assertions that they are partners. In other words, it implies that the parties are “locked in,” despite any sort of termination rights they may have. As an alternative to a longer term (which parties may desire in tandem with significant financial and operational commitments commonly included in MSAs), parties may implement a much shorter term with a mechanism for the MSA to renew.

While MSOs commonly negotiate non-clinical contracts on behalf of a professional medical practice, giving the MSO the unilateral authority to negotiate managed care contracts can be problematic since they are clinical in nature. Instead, the MSO can receive rights to participate in, or make recommendations concerning the negotiations, to demonstrate that the parties understand that clinical decisions must remain the ultimate responsibility of the licensed professionals per the corporate practice of medicine doctrine.

Navigating the corporate practice of medicine doctrine can be difficult. Drafting compliant MSAs requires careful attention to the amount of responsibility provided to an MSO and how the MSA may be interpreted as a whole. Failing to structure such arrangements in a compliant manner can be a costly mistake.