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Corporate medicine in 21st century health care

By John W. Jones, Esq.

The corporate practice of medicine doctrine was created by the American Medical Association (AMA) to protect the public as well as the profession of medical doctors. The doctrine essentially bans unlicensed individuals and entities from engaging in the practice of medicine by restricting them from employing licensed physicians. The intent of the doctrine was to ensure that only licensed professionals delivered medical care and that lay persons and entities not influence treatment decisions. The premise underlying the doctrine was that it would protect patients from potential abuses because commercialized medicine would ultimately divide a physician’s loyalty between profits and the delivery of quality patient care.

Lobbying by the AMA, together with its pronouncements concerning corporate medicine had a profound effect on state legislation. States began licensing medical doctors in order to regulate the sources of medical care for patients, as well as to establish them as the sole professionals for rendering such care. This resulted in limiting the practice of medicine to licensed medical doctors.

Under state law, the corporate practice of medicine typically manifests itself through the prohibition on non-licensed persons or corporations from employing physicians to practice medicine, restricting the delivery of medical services to those entities owned and controlled only by licensed professionals, and prohibiting the division or splitting of professional fees between licensed medical doctors and non-licensed individuals or entities.

Similar to many jurisdictions, there is no single source of law in the Commonwealth of Pennsylvania which prohibits corporate entities from employing physicians or rendering professional medical services. The doctrine has, however, come to be regarded as having legal force and is derived from several sources of law, including the Medical Practice Act of 1985, the Business Corporation Law of 1988, the partnership laws, the Limited Liability Company Law of 1994, and the Health Care Facilities Act.

The unauthorized practice of medicine is codified under the Medical Practice Act of 1985. The Medical Practice Act provides: “no person other than a medical doctor shall engage in the practice of medicine or surgery, purport to practice medicine or surgery, hold forth as authorized to practice medicine and surgery through use of a title, including, but not necessarily limited to, medical doctor, doctor of medicine, doctor of medicine and surgery, doctor of a designated disease, physician, physician of a designated disease, or any abbreviation of the foregoing, or otherwise hold forth as authorized to practice medicine and surgery.”

Violation of the Medical Practice Act can result in fines and penalties, including imprisonment.

The seminal case in Pennsylvania supporting the prohibition on the corporate practice of medicine is Neill v. Gimbel Brothers, Inc. (1938). In Neill, the Pennsylvania Supreme Court ruled that a corporation is prohibited from engaging in the practice of optometry and may not employ optometrists for the rendering of such services to the public. Consistent with the premise underlying the doctrine, the Court reasoned: “A corporation as such cannot possess the personal qualities required of a practitioner of a profession. Its servants, though professionally trained and duly licensed to practice, owe their primary allegiance and obedience to their employer rather than to the clients or patients of their employer. The rule stated recognizes the necessity of immediate and unbroken relationship between a professional man and those who engage his services.”

There are a few exceptions to the doctrine in Pennsylvania, including practicing medicine through a professional corporation, limited liability partnership, or restricted professional company. Specifically, under Pennsylvania law, only licensed physicians may be shareholders of or partners or members in, as the case may be, professional corporations, limited liability partnerships or restricted professional companies which have been formed to provide medical services. The statutes require that all of the ultimate beneficial owners of these entities be licensed persons. In fact, the legislative intent of each of these laws is to authorize only licensed persons to render professional services through these types of entities. Pennsylvania also permits health maintenance organizations and licensed hospitals and health care facilities to employ physicians and provide health care services.

Although enforced in several jurisdictions, at issue is whether the doctrine is relevant in today’s health care environment, given the advancements in technology, the advent of complex health care networks and current reimbursement structures. Specifically, the delivery of health care has shifted from a fee-for-service system, where a physicians’ clinical judgment remained unquestioned and patients retained freedom of choice, to a system focused on care management, cost-containment, physician accountability and minimal patient choice. As long as managed care organizations and other commercial payors continue to dominate the marketplace, commercial entities will influence health care delivery. In some cases, the doctrine has simply become obstructive to an efficient and quality driven health care system with little or no benefit.

Over 30 years ago, the Federal Trade Commission (FTC) acknowledged the doctrine’s restriction on competition. The FTC has taken the position that the doctrine can hinder development of innovative health care delivery systems that may be more cost-effective and quality-driven. In fact, in its studies, the FTC has found that the doctrine creates higher prices without necessarily a corresponding increase in quality. Accordingly, the FTC has encouraged legislatures and state regulators to repeal or modify corporate practice restrictions. Florida represents a jurisdiction that permits such practice, provided certain safeguards are implemented.

In an age that has seen the demise of indemnity plans and the rise of for-profit health care systems, risk-sharing arrangements and managed care utilization review organizations, the question is whether the corporate practice of medicine doctrine has become unworkable. Too often, physicians who desire needed capital are prevented from partnering with non-licensed individuals or entities. Individuals and entities that may be better positioned to finance costly technology, which could ultimately improve patient care, may be locked-out of the market. Today, physicians are quite conscious of the amount of time they spend with patients and are certainly influenced by financial outcomes. The passage of Stark underscores this fact.

Accordingly, states need to reevaluate the applicability and benefits (if any) of the prohibition on the corporate practice of medicine and recognize that in order to truly move toward a health care system that encourages technological advancement, improved patient care, and cost-efficiencies, corporate medicine not only has a place in the system, but could ultimately benefit such a system.

John W. Jones, Esq. is a partner in the Health Care Services Group at Pepper Hamilton LLP in Philadelphia, Pennsylvania.

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