A Snapshot of California’s Prohibition on the Corporate Practice of Medicine

Under California Business and Professions Code Section 2400, a corporation or other artificial legal entity (e.g., LLC), may not practice medicine (a California professional corporation is exempt from this prohibition).  As a result of this ban on the corporate practice of medicine (“CPM” and the “CPM Ban”), corporate entities in California may not typically employ physicians to treat patients on the corporation’s behalf (subject to certain exceptions).  Similarly, it is also illegal for an individual to practice medicine without a license.[1]

A California Attorney General Opinion reviewed an unlawful arrangement where a management services organization ( “MSO”) selected, scheduled and paid for diagnostic services ordered by the MSO’s physicians for their patients.[2]  The opinion noted that while each of the above tasks could be viewed as purely commercial in nature, they also take into account salient clinical variables, such as the type of equipment needed for the patients.  According to the this opinion, only a physician can do this.[3]

California courts have also stated that the law does not divide the medical profession into business side that may be conducted without a license or by a corporation, and a professional side that requires a license and is subject to the CPM Ban.[4]  MSOs and similar organizations must tread with extreme caution to ensure that services offered to physicians do not cross over into clinical decisions.  While courts have not identified a clear dividing line, actionable conduct by an MSO or similar non-clinical entity has been found when the entity exercised control or made decisions that touched on areas requiring clinic training (e.g., selecting medical equipment).[5]  Nevertheless, there are no reported cases or Attorney General opinions regarding CPM violation by MSOs that provided purely commercial services, such as billing and collections.

As a corollary to the CPM Ban and the licensure requirement, it is also unlawful to aid or abet any unlicensed person, including a corporation, in the practice of medicine.[6]  In Steinsmith v. California Medical Board, the Court held a physician was  guilty under Section 2264 because he was employed by a medical clinic, the ownership of which included in part non-physicians. That the non-physician owners never engaged in any patient care did not prevail in this decision.[7]

In its October 1996 Action Report, the MBC described an enforcement action it took under Section 2264.[8]  A physician obtained fictitious name permits to operate surgery clinics, and contracted with an MSO, ostensibly, to provide management services to the clinics.[9]  The physician then saw patients and conducted surgery at the clinics one day a week.[10]  The MSO paid the physician a set amount based upon physician fees.[11]  The MBC found that the physician was aiding and abetting the MSO in the unlicensed practice of medicine and revoked the physician’s license.[12]

If a physician employs or contracts with nurse practitioners (“NPs”) or physician assistants (“PAs”), the physician must properly supervise these mid-level practitioners to avoid liability under Section 2264.  With respect to NPs, a physician: (1) may only supervise four at any one time, and (2) must develop written standardized protocols and procedures in order to allow the NP to furnish drugs or medical devices to patients.[13]  With respect to PAs, a physician must exercise control by one or more of the following: (1) examination of the patient the same day care is given to the patient by the PA; (2) countersigning and dating all medical records written by PA within 30 days; or (3) review, countersign, and date a minimum 5% sample of medical records written by the PA.[14]

[1] Cal. Bus. & Prof. Code § 2052.

[2] 83 Ops. Cal. Atty. Gen. 170 (2000).

[3] Id; see also Marik v. Superior Ct., 191 Cal. App. 3d 1136, 1140 (1987).

[4] See Garvai v. Bd. of Chiropractic Examiners, 216 Cal. App. 2d 374 (1963); Parker v. Bd. of Dental Examiners of State of Cal., 216 Cal. 285 (1932).

[5] 83 Ops. Cal. Atty. Gen. 170 (2000); Marik v. Superior Ct., 191 Cal. App. 3d 1136, 1140 (1987).

[6] Cal. Bus. & Prof. Code § 2264.

[7] Steinsmith v. Medical Bd. of Ca., 85 Cal. App. 4th 458, 466 (2000).

[8] Medical Board of California, Who is Responsible for Medical Decisions?  The Prohibition Against the Corporate Practice of Medicine, Action Report (Oct. 1996).

[9] Id.

[10] Id.

[11] Id.

[12] Id.

[13] Cal. Bus. & Prof. Code § 2836.1.

[14] 16 C.C.R. § 1399.545.

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