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American Academy of Emergency Medicine

A Potent Remedy

by Tom Scaletta, MD FAAEM

The corporate practice of medicine is banned or restricted in most states, though enforcement occurs to varying degrees. This legal doctrine is founded upon the principles that lay organizations can neither employ physicians nor share in professional fees. Because commercial interests ought not corrupt professional judgment, the AMA, AAEM, and other professional societies shun the corporate practice of medicine.

Texas has become the battleground state in the fight against the corporate practice of medicine. And, upon this aspect of legal scrutiny, certain employment contracts that currently exist between emergency physicians and contract management groups (CMGs) may actually be invalid. Examining judicial opinions expressed in closed cases helps us to understand the interpretation of law, and determine the validity of this supposition.

In 1986, the Texas Appellate Court heard Flynn Brothers Incorporated v First Medical Associates. This case, specific to Emergency Medicine, affirmed that a professional corporation (PC), where two of the three stakeholders were not physicians, violated the state law prohibiting the unlicensed practice of medicine (see www.aaem.org/CorporatePractice/Flynn). The opinions and discussion remain instrumental in helping define the blurred lines between reasonable and unlawful business arrangements for the delivery of professional medical services.

In 1997, Catholic Healthcare West (CHW) purchased EPMG (a California Emergency Medicine CMG) to form Meriten: A hospital system-owned CMG, that would use a portion of professional fees to payoff the $38 million purchase price and then enjoy a new income stream. The independent groups working in CHW hospitals would relinquish control to the business managers of Meriten. Other Emergency Medicine professional societies refused to assist the involved physicians, citing reluctance to get involved in "private business matters." When contacted, AAEM immediately wrote a letter to the board of CHW and later partnered with the California Medical Association on an amicus curiae brief emphasizing the improper nature of the corporate practice of medicine and fee-splitting regarding this relationship. In 2001, the physicians won their case and maintained their independent practice.

In 2003, a landmark decision by the Dallas Division of the U.S. District Court was announced (Penny v Orthalliance, 3/27/03, #01-CV-01569). The case involved a CMG subsidiary of Orthodontic Centers of America, Inc that bought three practices. The dentists agreed to be managed and employed by the CMG. They also formed a PC and the trilateral (employee-CMG-PC) arrangement allowed the CMG to control bank transactions. The CMG deducted their services fees, salaries, and other business expenses from the revenue and returned the net profit to the PC. Because the dentists felt the CMG failed to live up to the contractual terms while continuing to siphon off thousands of dollars per month from their practices, the dentists sought a declaration that their contract was illegal, therefore invalid. The presiding Judge ruled in favor of the dentists declaring the contracts "illegal in their entirety", as given the interrelationship described above, the CMG was improperly practicing dentistry. Since the CMG controlled the business end of the practice, and despite the existence of the PC, which was stated to control all medical decisions, the courts invalidated this relationship. This decision is critical to Emergency Medicine as this "shadow" PC structure is the ploy currently used by the major CMGs to avoiding scrutiny under the corporate practice doctrine.

It behooves emergency physicians to understand state laws that prohibit the corporate practice of medicine. They exist to prevent the doctor-patient relationship from being cleaved by greed. In Texas, we can appreciate the strange coexistence of three forces in EM: the headquarters of the largest of the EM-CMGs, the headquarters of the largest professional society in EM, and the clearest case law documenting that the former should not be allowed to operate as it does in Texas. This volcanic combination is bound to erupt when physicians unite and protest unfair and invalid CMG arrangements, as was demonstrated in the CHW matter. AAEM is pleased to work with any physicians or groups who may wish to exercise their legal right to challenge in Texas or elsewhere.