Aspen Dental, one of the nation’s largest dental service organizations (DSOs), recently settled charges alleging violations of California’s corporate practice of medicine (CPOM) and unfair competition laws. This was not the first time similar charges had been lodged against Aspen Dental; in 2015, it entered into a settlement with the New York Attorney General after being accused of CPOM violations in its control of dental practices. But the recent settlement with the California Attorney General delves deeper into how relationships between MSOs/DSOs and affiliated practices can be structured, as well as the use of so-called “friendly PCs” as a means to address state CPOM laws. While this settlement technically has no binding precedential effect, it provides important insights into how state attorneys general and healthcare agencies may look to enforce CPOM and similar laws.
The key issue addressed in the settlement is what role an MSO or DSO can play in the selection and replacement of the owners of its affiliated professional practices. The California AG’s complaint against Aspen noted that the “friendly” owners of the affiliated dental practices, though licensed in the state, were domiciled elsewhere and presumably played a limited role in the operation of the practices.[i] The California AG also expressed concern that Aspen imposed certain controls and restrictions on practice ownership transfers. The settlement required Aspen to agree not to choose and replace practice owners, not to require forfeiture of practice ownership if the management agreement with Aspen was terminated, and not to restrict any other practice activities by the owner.
The settlement agreement included several other important restrictions, including prohibiting Aspen from owning the practice property; prohibiting it from basing its management fees or employee compensation on revenues or profits; and requiring it to register with the state dental board as a Dental Group Advertising and Referral Service so that its marketing activities can be monitored.
The California settlement provides important guidance on how MSO and DSO arrangements can be structured in states that restrict CPOM, especially the difficult issues of practice ownership and stock transfers. The increasing scrutiny of private equity investments in healthcare businesses on both federal and state levels will keep CPOM restrictions in sharp focus for regulators.
Sign up to receive Rivkin Rounds at www.RivkinRounds.com.
[i] Note that some states, such as New York, require that practice owners actually provide services on behalf of the practice, although it is not clear that this must be clinical services as opposed to administrative services.