By KAITLYN DELBENE
Wachler & Associates, PC
The Michigan State Medical Society and various specialty organizations are urging the Michigan Attorney General to investigate the role of private equity in healthcare and to enforce Michigan’s corporate practice of medicine (CPOM) doctrine against apparent violations. In an October 23, 2023 letter, MSMS expressed concern that “a series of deceptive legal loopholes and shell corporations” has allowed private equity groups to effectively circumvent Michigan’s CPOM laws. While physician practice management companies and medical staffing companies are common in the healthcare industry, physician groups and management companies must be aware of the legal and regulatory challenges presented by these arrangements.
CPOM Primer: Michigan’s CPOM laws restrict who can own and control certain healthcare entities and employ certain healthcare providers. Specifically, Michigan law requires entities that provide professional medical services to be organized as professional corporations (PCs) or professional limited liability companies (PLLCs). Michigan PCs and PLLCs engaged in the practice of medicine may only be owned by individuals licensed to provide the professional medical services rendered by the entity, or by entities directly or indirectly solely owned by such licensed individuals. All officers of PCs and managers of PLLCs must be licensed to provide the professional medical services rendered by the entity.
Nuances to the CPOM doctrine vary in each state. For example, Michigan updated its CPOM laws in 2022 to allow multidisciplinary practice amongst MD/DO physicians, podiatrists, and chiropractors; prior to 2022, chiropractors had been prohibited from participating in this type of joint ownership. Michigan law allows physician assistants (PAs) to jointly own a healthcare PC or PLLC in association with physicians or podiatrists performing the same professional services but does not allow PAs to form PA-only corporations. There is also an exception to the CPOM restriction for ownership by a non-profit hospital.
Michigan’s CPOM laws do not permit a physician practice to be owned or controlled by non-physician private equity investors. Relationships with private equity investors must be structured so that the providers retain ownership and control of the professional entity when required by the Michigan CPOM laws. The result is usually a complex organizational structure that involves holding companies and management companies, some of which may include joint-ownership opportunities for the providers.
Concerns from the Medical Community: Detractors of private equity control over healthcare entities, including MSMS, cite broad concerns that the CPOM doctrine has been developed to address. These concerns include the commercialization of the practice of medicine, risk of overutilization, unaligned or imbalanced obligations to shareholders over patients, interference with a physician’s independent medical judgment, the practice of medicine directly or indirectly by laypeople, damage to confidential and professional physician-patient relationships, and inability of corporations to fulfill the licensing and ethical requirements demanded of physicians.
In addition to these broad concerns, MSMS cited various concrete examples of issues that have arisen for its members who are employed by private equity groups in Michigan, many of them centered on potential harm to patients resulting from a lack of physician autonomy. Two examples given by MSMS describe understaffing practices leading to a dangerous lack of physician coverage in the hospital setting. Other examples indicate that physicians who disagree with the management decisions of corporate officials have been subject to coercion or termination of employment. The letter penned by MSMS was co-signed by specialty health professional organizations including the Michigan College of Emergency Physicians, the Michigan Dermatological Society, the Michigan Orthopaedic Society, the Michigan Radiological Society, the Michigan Society of Hematology & Oncology, and the Michigan Society of Anesthesiologists.
Considerations for Private Equity Investment: While private equity investments can offer exciting opportunities for Michigan healthcare providers, these arrangements must be structured properly under federal and state laws. When considering a private equity investment, Michigan healthcare providers may first want to evaluate their current compliance with federal and state law, examine utilization patterns, and otherwise assess their practice in anticipation of the due diligence process and to mitigate compliance concerns that may impact the private equity investment. Once the private equity investor and healthcare provider agree to an investment, the parties must structure the arrangement to comply with complex federal and state laws including, but not limited to, Michigan’s CPOM doctrine, the federal Anti-Kickback Statute and Stark law, and Michigan fraud and abuse laws governing self-referrals, kickbacks, and fee-splitting.
In addition to government enforcement of the prohibitions against fee splitting and the corporate practice of medicine, an agreement that violates Michigan law will not be enforced by courts, and physician practices and management companies may raise the illegality of a management agreement as a defense to a suit seeking enforcement of the agreement. Additionally, while non-compliance may result in business risk to both parties, healthcare providers face additional risks such as false claims liability, licensure sanctions, and termination from participation in Medicare, Medicaid, and commercial payor networks. Accordingly, a comprehensive legal review of private equity investments is necessary to evaluate compliance with federal and state law in light of the lucrative financial opportunities offered to healthcare providers. Other legal issues including corporate, tax, and real estate matters must be considered when evaluating private equity investment in healthcare entities.