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Private Investors in Health Care: The Consolidation of Physician Practices and Health Systems

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The consolidation of health care practices and health systems continues to be a paramount theme underlying the industry. Spurred by hyper-regulation, overbearing pressure by commercial and government payors and the trend towards value-based reimbursement schemes, practitioners found that affiliating with larger entities able to coordinate care more efficiently provided them the stability required to optimally treat patients.

At the same time, it decreased their administrative responsibilities. There is a benefit to scale, these entities also provided practitioners access to additional ancillary services, improved infrastructure, and increased reimbursements from payors.

As a result, health care practices have become much more attractive to private investors. Approaching almost 20% of the national GDP, private investors are seeking to capitalize on these trends by entering into financial relationships with these health care practices and health systems. Of course, that is not without its own legal implications. In New York state, non-physician ownership in a medical practice remains strictly prohibited. Colloquially known as the Corporate Practice of Medicine (“CPOM”) doctrine, the law in New York generally provides that medical licenses are provided to individual practitioners whose practice and judgment must be free from the intrusion of outside business interests.

Other Relevant Law

  • Business Corporation Law authorizes the issuance of shares in a professional corporation only to those authorized to practice the profession. Therefore, interest in a medical professional corporation could be issued only to licensed physicians, and shares issued in violation of this rule would actually be considered void;
  • Likewise, Limited Liability Law provides that members be licensed and actively practicing.

In light of these prohibitions, private investors have acquired, or otherwise invested in, what is known as Management Service Organizations (“MSO”). For a fee, MSO’s generally perform some or all of the administrative functions of medical practice, allowing practitioners to focus their attention on patient care. These services are memorialized in a management service agreement that emphasizes the role of the MSO as being non-clinical and distinct from those judgments required for the actual treatment of patients. Leaving these “back-office” and business functions to the MSO results in a more efficient and productive practice. Since the management services performed by the MSO are not considered the actual provision of medicine, these arrangements do not run afoul of the CPOM doctrine or related regulations.

These arrangements are not without legal jeopardy, however. Physicians must consult with health care counsel to ensure the management services agreement and the actions of the parties remain compliant with the applicable law.

Necessary Considerations

  • The physician-owners/members of the professional corporation or professional limited liability company must be allowed to practice medicine and assert their own independent judgment in furtherance thereof, without any interference by the MSO;
  • The management fee must be a flat amount and set at fair market value for the services rendered. To that end, practices are encouraged to, via their health care counsel, retain accountants who specialize in appraising the fair market value of these services. Moreover, the management fee must not be based on a percentage of the revenue of the practice;
  • While the MSO may have some standing to consult with the physicians regarding certain business aspects of the practice, the MSO must not exert control or be deemed to supervise the physicians. Likewise, the practice’s accounts receivable and medical records must remain in the possession and control of the practice;
  • When entering into these arrangements, it is strongly encouraged that a practice evaluates its relationships with third parties who may refer patients, to ensure compliance with both federal and state Stark and Anti-kickback law regulations.

If you have any questions about or any other matter, please contact me at or (917) 369-8867.