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A law in New York Gov. Kathy Hochul’s proposed budget aimed at regulating “large physician practices being managed by entities that are investor-backed” has been dropped from the State Senate and Assembly proposed budgets (S4007B/A3007B).

Subject to final budget negotiations, the proposed law appears unlikely to be enacted in the immediate future. However, the proposal to amend the Public Health Law was potentially transformative, and healthcare stakeholders should be aware that this is on the radar of New York State, as well as the federal government. The proposed bill noted that these transactions – which involve change of control or ownership by virtue of sale, merger, or acquisition – are not subject to any change of ownership or control review by New York State and declared that “this phenomenon may have a negative impact on patient care, health care costs, and ultimately access to services.”

The breadth of Gov. Hochul’s proposed bill was particularly noteworthy for providers, as well as non-clinicians and non-licensed entities such as Management Services Organizations (MSOs), which provide non-clinical administrative services to healthcare facilities, typically under a Management Service Arrangements (MSAs). The proposed bill’s reach specifically included physician practices and MSOs, as well as entities that provide “all or substantially all” administrative or management services to physician practices, health insurance plans, or any other kind of health care facility, organization, or plan providing healthcare services in New York. Gov. Hochul’s bill, as proposed, would require covered healthcare entities to file a notice and application of a “material transaction” to the Department of Health for a detailed review process. This process would help the government assess compliance with the prohibition against the corporate practice of medicine and other applicable regulations.

At its core, the prohibition against the corporate practice of medicine protects a healthcare provider’s autonomy from being adversely impacted by non-clinical factors. At its extreme, violations of the corporate practice of medicine prohibition may be the subject of government investigation and enforcement, as analyzed in the 2015 New York State Attorney General action against Aspen Dental.[1] Typically, jurisdictions following “strict” corporate practice of medicine principles prohibit: (1) non-physicians from employing physicians to practice medicine; (2) non-physicians from splitting fees with physicians; and (3) non-physicians from having an equity interest in a physician’s practice.[2]

Even though Gov. Hochul’s proposed bill appears unlikely to become law in the immediate future, for investors, providers, and other stakeholders, the prohibition against the corporate practice of medicine should be of paramount consideration in any healthcare transaction and compliance program. Indeed, the Aspen Dental case, as well as more recent enforcement actions from the United States Department of Justice involving outside investors in healthcare,[3] indicate that the corporate practice of medicine doctrine will remain on the radar of the government.

In addition, these concerns should not be overlooked as a tool in civil litigation. For example, in 2018 a New York court declined to enforce a promissory note underlying the purchase of equipment, furniture, and lease in a medical practice sale because it was determined that the underlying transaction violated certain statutes prohibiting the corporate practice of medicine. The parties executed an MSA for the purchaser to provide “management and administrative services of a non-clinical nature for the medical practice.”[4] When the purchaser defaulted on the note, the seller sued. On appeal, the court dismissed the action, and in doing so ruled that “a party to an illegal contract cannot ask a court of law to help him or her carry out his or her illegal object.”[5]

Whether or not a bill like Gov. Hochul’s is ever signed into law, the corporate practice of medicine doctrine remains an important consideration for all stakeholders in the healthcare industry. As such, it is critically important that all transactions involving MSOs and provider entities be carefully considered and operationalized so as not to violate the prohibition against the corporate practice of medicine and perhaps to withstand a formal regulatory review.

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[1] In the Matter of Aspen Dental Management, Inc. Assurance No.: 15-103 (substantial restructuring ordered, and $450,000 civil penalty to the New York Attorney General based on findings that the Dental Service Organization engaged in the widespread unauthorized practice of dentistry).

[2] Similar laws impact other healthcare professions such as dentistry, speech language pathology, and nursing. See e.g., N.Y. Educ. Law § 6602 (dentistry), N.Y. Educ. Law § 8202 (speech-language pathology).

[3] See e.g., U.S. ex rel. Martino-Fleming v. South Bay Medical Health Centers, et al. 15-13065 (In 2021, the Massachusetts attorney general reached a $25 million settlement with private equity firm H.I.G. Capital, H.I.G. Growth Partners and two executives for their roles in a false claims case based on health care services provided to patients by unlicensed, unqualified, and improperly supervised staff members; United States ex rel. Medrano and Lopez v. Diabetic Care Rx, LLC dba Patient Care America et al. No. 15-CV-62617 (In 2019, Compounding Pharmacy, Two of Its Executives, and Private Equity Firm Agree to Pay $21.36 Million to Resolve False Claims Act Allegations)Fact Sheet: Protecting Seniors by Improving Safety and Quality of Care in the Nation’s Nursing Homes, released by the White House on Feb. 28, 2022. (reviewing private equity’s role, unfavorably, in nursing homes).

[4] Linchitz Practice Mgt., Inc. v Daat Med. Mgt., LLC, Index No. 602811/13 (Sup. Ct. Nassau County) aff’d Linchitz Practice Mgt., Inc. v Daat Med. Mgt., LLC, 165 AD3d 908, 909 (2d Dept 2018).

[5] Id.