Understanding the Potential Risks of Physician Practice Management Arrangements

By: Dustin T. Wachler, Esq.

While physician practice management companies are common in the healthcare industry, physician groups and management companies must be aware of the regulatory challenges presented by physician practice management arrangements. In Michigan, management agreements with physician practices raise concerns under the corporate practice of medicine doctrine and state fee splitting laws, especially when such arrangements include marketing by the management company and percentage of revenue compensation.

In a typical management company arrangement, a physician group contracts with a management company to manage all non-clinical aspects of the practice. Management companies ease the burden on healthcare providers by handling administrative functions such as finance, scheduling, billing and overall management of the practice. Large management companies may also have relationships with suppliers and other entities that allow physician practices to negotiate more beneficial arrangements.

Management companies may be compensated by physician practices in a variety of ways, including a flat fee or a percentage of a practice’s revenue or profits. In the case of percentage of revenue compensation arrangements, physician groups and management companies must structure the management agreements to comply with Michigan’s prohibition on fee splitting. Under the Michigan Public Health Code, unethical business practices in the medical professions are defined to include dividing fees for referral of patients or accepting kickbacks on medical or surgical services, appliances, or medications purchased by or on behalf of patients. Further, in the event that a management company provides marketing services or otherwise generates business on behalf of a physician practice, the agreement can implicate similar prohibitions under the Michigan Health Care False Claims Act and the Michigan Penal Code.

Physician practice management agreements may also implicate Michigan’s corporate practice of medicine doctrine. In Michigan, the corporate practice of medicine doctrine prohibits a lay person or entity from practicing medicine directly, by employing licensed health care providers or, in some circumstances, entering into independent contractor arrangements for the provision of professional medical services. The prohibition on the corporate practice of medicine is grounded in public policy concerns based on the principle that when a lay corporation holds a financial interest in a physician’s profits, the entity has a direct interest in and ability to control medical decision-making and impact the quality of care provided to patients. In Michigan, the prohibition on the corporate practice of medicine stems from statutes regulating the practice of medicine, business corporation laws, case law, licensing actions, and attorney general opinions. Physician practice management arrangements may violate the corporate practice of medicine doctrine by accepting percentage of revenue compensation, especially if the management company receives greater than 50% of the physician practice’s revenue generated from professional services. Additionally, an arrangement can violate the corporate practice of medicine doctrine due the management company’s level of control over the physician practice.

Agreements between physician groups and management companies in violation of the corporation practice of medicine doctrine and state fee splitting laws can lead to significant consequences for both the physician practice and the management company. For example, in June, the New York Attorney General released a settlement agreement with Aspen Dental Management, Inc. (“Aspen Dental”) based on the Attorney General’s finding that the dental practice management company engaged in the unauthorized practice of dentistry and illegal fee splitting under New York law. Whereas the management company claimed to only provide business support and administrative services to independently owned practices, the Attorney General determined that Aspen Dental held an impermissible level of control over the clinics, which included sharing in the clinics’ profits, marketing the clinics under the Aspen Dental trade name, incentivizing or otherwise pressuring clinic staff to increase sales of dental services or products, implementing revenue-oriented scheduling systems, and the hiring and oversight of clinical staff. As part of the settlement agreement, Aspen Dental was required to pay a $450,000 civil penalty. Further, Aspen Dental must cease exercising control over practices’ professional decision-making, and cannot communicate directly with the clinics’ staff, employ clinical staff, or place any limitations on the practices’ practice of dentistry. Most importantly, Aspen Dental will no longer be permitted to share in the professional fees generated by the practice of dentistry.

In addition to government enforcement of the prohibitions against fee splitting and the corporate practice of medicine, an agreement that violates Michigan law will not be enforced by courts, and physician practices and management companies may raise the illegality of a management agreement as a defense to a suit seeking enforcement of the agreement.

Physicians and management companies should always structure management agreements to comply with state fee splitting laws, the corporate practice of medicine doctrine, and other regulatory requirements. Compensation of management companies should always be set at fair market value for commercially reasonable management and administrative services. In many states, the corporate practice of medicine doctrine and fee splitting laws may also dictate the type of entity formed by a physician group in order to contract with, and share fees with, a management company.. Management companies should refrain from influencing professional decision-making in any way, and agreements with physician practices should reflect that all professional aspects of the practice remain the sole discretion of the practice. A thorough analysis of physician practice management agreements under Michigan law should be performed prior to engaging in any agreement where a non-professional shares in fees generated from professional medical services.

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