Regulatory Considerations for the Structure of Practice Entities

Healthcare providers have additional regulatory restrictions related to the structure of their practice entities (“Practice Entities”), which are not applicable to those operating in other industries.  Such restrictions include but are not limited to ownership and control by licensed professionals and limitations on the number of Practice Entities that a licensed professional may own or become employed by.  The purpose of this article is to summarize certain regulatory restrictions placed on Practice Entities, which, if violated, could result in significant monetary penalties.

Many state laws prohibit the ownership or control of a Practice Entity by non-licensed individuals.  This rule is referred to as the “Corporate Practice of Medicine” rule (the “CPOM Rule”).  Michigan law requires that for-profit Practice Entities form as “professional” entities, such as a professional corporations or professional limited liability companies.[1]  Michigan law prohibits the ownership of such a Practice Entity by anyone other than someone licensed in the service provided by the Practice Entity.  This applies to physicians, physical therapists, chiropractors, dentists, among others.

Additionally, the CPOM Rule prohibits a non-licensed person from “controlling” the Practice Entity.  For example, if the Practice Entity enters into a management services arrangement with a third party who is unlicensed, such an arrangement would need to close review under CPOM Rule considerations.  The third party may not have control or influence over the practice of medicine.

Areas of potential exposure under the CPOM Rule include but are not limited to (1) employment of the clinical providers by an unlicensed person; (2) paying a fee to an unlicensed person based on the collections of the Practice Entity; and (3) authorizing a third party to decide which clinical equipment and supplies would be used by the Practice Entity.  CPOM Rule reviews are facts and circumstances based in every state, and the extent of the restrictions vary state by state.  Nevertheless, healthcare providers must review the CPOM Rule whenever an unlicensed person is involved in ownership or control (including management) of a Practice Entity.

Healthcare Providers must also be cognizant of the structural requirements set forth in the Federal Stark Law, at 42 U.S.C. 1395nn, and regulations promulgated thereunder, along with state law counterparts (the “Stark Law”).  If a Practice Entity submits claims for designated health services (“DHS”), including for example imaging services, laboratory services and radiology services, among others, these claims and related arrangements are covered by the Stark Law.

Where the Practice Entity’s employed or contracted licensed professionals refer DHS to the Practice Entity, the Stark Law would typically require that the Practice Entity’s structure complies with its definition of a “Group Practice”. Specifically, the Stark Law would require that the Practice be formed as a single legal entity where (1) individually its employees and owners perform substantially all of their services for the single legal entity, and (2) in the aggregate all employees and owners perform at least 75% of their services for the single legal entity.  This requirement oftentimes makes it difficult for healthcare providers to form separate Practice Entities, such as a Practice Entity for each office location.

Notably, the Stark Law also requires that Practice Entities have at least 2 employees and/or owners (who are not independent contractors).  Furthermore, such employees and owners may be required to perform a substantial amount of their patient care services for the Practice Entity, in addition to other detailed compensation requirements, all of which must be taken into account in the overall structure of the Practice Entity.   For example, if a Practice Entity engages independent contractors to perform services on its behalf, it may inadvertently fall out of compliance with the level of services which must be provided by its employees and owners.

A Practice Entity whose structure falls outside of regulatory compliance could face severe penalties and fines in the event of an audit or other investigation by a governmental agency or payor.  Such penalties and fines include, for example, exclusion from participation in Federal healthcare programs and/or third party commercial payors, and False Claims Act penalties of greater than $10,000 per claim filed during the period of non-compliance.  As a result, healthcare providers should ensure that legal counsel experienced in healthcare regulations reviews the overall structure of their Practice Entity.

Originally published in Healthcare Michigan, October 2020.

About the Author:

Rose Willis is Chair of Dickinson Wright’s Health Care Practice Group. She focuses her practice on health care regulatory, transaction, and corporate law in her representation of health care providers and suppliers and other participants in the health care industry. She regularly counsels health care industry clients on matters involving the privacy and security of health information, corporate documents, and compliance program elements, as well as software agreements, physician referral rules, and certificates of need. Rose can be reached at 248-433-7584 or and you can visit her bio here.

[1] Given recent tax law changes, it is also important to coordinate with your accountant and your legal counsel on the proper tax structure of the Practice Entity (e.g., partnership, s-corporation, etc.).