CAMLAW: Complementary and Alternative Medicine Law Blog

Can a Medical Spa Hire a Physician As Its Medical Director

With the ever-increasing popularity of medical spas, legal questions surrounding ownership become ever more important to address.

 

Many laypersons want to own a medical spa, but they have to first learn about issues such as the corporate practice of medicine bar, and anti-kickback and fee-splitting laws that may prohibit non-licensed individuals from simply going out and employing a doctor.

In California, the corporate practice of medicine bar is strict.  In one case, Steinsmith v. Medical Board, a physician "in good faith" contracted with two non-medical doctors to perform disability evaluations in their medical clinic.  The physician claimed that he did not know about the corporate practice of medicine prohibition, and once he learned about it, believed the legal rule violated public policy.  He thought medical boards should be more concerned about HMOs destroying medicine than about some arcane legal rule.

As a result, he was charged with aiding and abetting unlicensed medical practice.  While the medical board of California found for him, the Court of Appeals reversed the Board's decision:

The prohibition against practicing medicine without a license extends to any person “who advertises or holds himself or herself out as practicing” medicine, which is defined broadly to include among other things the diagnosis of ailments, diseases, injuries, or the “physical or mental condition of any person.” (§ 2052.)   Medicine may be practiced in a partnership or group of physicians (§ 2416), but “[c]orporations and other artificial legal entities ․ have no professional rights, privileges, or powers” (§ 2400), and a “fictitious-name” permit to operate a facility called a “ ‘medical clinic’ ” can be issued only if the clinic is wholly owned by licensed physicians (§ 2415, subd. (b)).....

Steinsmith said that he had worked with complete “clinical autonomy” at the Clinic since 1993, and that “of the thousands of patients I examined and reported on, not in a single instance did I commit an irregularity or a bad faith act.”   He said that he was unaware before September 1995 of the requirement that medical practices be solely owned by California licensed physicians, and was “shocked to receive that interpretation” at the conference with McCort and Snider.   He said that, until September 1995, the fictitious name permit on the Clinic wall had given him “a certain assurance ․ that I was in the affection and embrace of the state government.”

Steinsmith testified that he continued working at the Clinic after September 1995 because he questioned McCort and Snider's legal opinion and the public policy behind the law.   He “felt that this interpretation on their part was not an accurate one and was poor public policy, and that they were not attorneys, I wasn't an attorney, and that I would-I decided I would weather this out and risk a prosecution because I thought the continuation of my work there had a certain importance, and that, of course, has brought me to the present proceedings.”   He added:  “I was convinced I was doing a good and important work.   I was attempting to go draw a circle around the applicants who were really disabled and to ensure that they did get their benefits and so on.   I didn't want that disrupted because of formalities or because I was cowering to a formal legal opinion which I didn't believe in, in the first place.”

Steinsmith's “public policy” objections to the Board's position were illuminated in questions to McCort concerning correspondence McCort received from Steinsmith during his investigation.   McCort testified that three  or four months before the investigation was concluded, Steinsmith sent him a Board “Action Report” indicating that it was illegal for licensed physicians to work for unlicensed people who owned medical clinics.   On cross-examination, Steinsmith asked McCort if he had received “a mailing from me where I editorialize on a statement in the action report of the Medical Board, which was published on October 1996.”   Steinsmith handed McCort two documents, a Board “Action Report” of October 1996 explaining the Board's position that medical work for unlicensed individuals was illegal, along with a typewritten note on Steinsmith's letterhead, and asked McCort to confirm that he had received them.

The Action Report cited sections 2052 and 2400 previously quoted, and explained that “the ban on corporate practice is intended to prevent interference with the physician-patient relationship by a corporation or other unlicensed person and to ensure that medical decisions are made by a licensed physician.  [¶] ․ [T]he physician should not be forced to choose between the dictates of his or her ‘employer’ and the best interests of the physician's patients .[¶] It is this potential for divided loyalties ․ that the bar against corporate practice is intended to prevent.”

The Action Report continued:  “In the last several years, the board has initiated disciplinary action against physicians who allowed their licenses to be ‘used’ by lay individuals or corporations.   A physician can be disciplined for aiding and abetting unlicensed persons to practice medicine ( ․ Section 2264).   This constitutes unprofessional conduct, which may result in the ultimate sanction:  license revocation.   In one particular case which resulted in discipline against a physician's license, the lay corporation (which was ostensibly a management company) owned and operated clinics.   The physician contracted with the management company and obtained the fictitious name permits for the clinics.   The physician saw patients and performed surgery at one of the clinics about once a week.   The medical records were the property of the management company and not the physician.   The management company paid the physician a set percentage of the patient fees.   In other words, the management company was really practicing medicine without a license and the physician had aided and abetted that unlicensed practice of medicine....

The Court appeared sympathetic to the physician, but ultimately his "good faith" was not enough to prevent the Court finding that he had violated the corporate practice ban:

The trial court apparently reasoned that there was no unlicensed practice of medicine in this case because the Clinic itself was always “licensed.”   However, the principals in question, Yu and Downes, had two “licensing” requirements to fulfill in order to make their activities lawful:  (1) they had to obtain a fictitious name permit to operate a medical clinic (the Clinic's “license”) (§ 2415, subd. (a));  and (2) they had to themselves be licensed to practice medicine (§ 2415, subd. (b)(1)).   The trial court overlooked this second requirement in assessing Steinsmith's culpability as an aider of Yu and Downes.

 Steinsmith contends that Yu and Downes did not practice medicine because they merely owned the Clinic and administered its business affairs.   A similar argument was rejected long ago in Painless Parker v. Board of Dental Exam. (1932) 216 Cal. 285, 14 P.2d 67.   In that case, a licensed dentist was found to have aided and abetted the unlicensed practice of dentistry by a corporation he formed to own and operate dental offices.  (Id. at pp. 289, 298, 14 P.2d 67.)   The dentist argued, as Steinsmith does here, that the licensing requirements for the provision of professional services did not apply to “the purely business side of the practice.”  (Id. at p. 295, 14 P.2d 67.)   Our Supreme Court rejected that argument, holding:  “The law does not assume to divide the practice of dentistry into such departments.   Either one may extend into the domain of the other in respects that would make such a division impractical if not impossible.   The subject is treated as a whole.   If the contention of [the dentist] be sound, then the proprietor of the business may be guilty of gross misconduct in its management and violate all standards which a licensed dentist would be required to respect and stand immune from any regulatory supervision whatsoever.   His employee, the licensed dentist, would also be  immune from discipline upon the ground that he was but a mere employee and was not responsible for his employer's misconduct, whether the employer be a corporation or a natural person.”  (Id. at p. 296, 14 P.2d 67.)   The opinion also referred to the basic rationale of the corporate practice prohibition:  the potential for “a secondary and divided loyalty to the patient.”  (Id. at p. 297, 14 P.2d 67.)

 Although the Painless Parker case involved dentistry rather than medicine, its reasoning and holding apply equally to medical practice.   (See, e.g., People v. Pacific Health Corp. (1938) 12 Cal.2d 156, 158, 82 P.2d 429 [citing Painless Parker ];  Marik v. Superior Court (1987) 191 Cal.App.3d 1136, 1140, 236 Cal.Rptr. 751 [same].)   The unlicensed practitioner in Painless Parker was a corporation, but it has long been “well settled” that “any other unlicensed person or entity” is subject to the same sanctions for unlawful practice as an unlicensed corporation.  (Pacific Employers Ins. Co. v. Carpenter (1935) 10 Cal.App.2d 592, 594-595, 52 P.2d 992.)   Accordingly, the Painless Parker case disposes of Steinsmith's argument that there was no unlicensed practice he could have aided.

There are to be sure some “chinks in the armor of the corporate practice doctrine.   Certain medical and other institutions are allowed to enter into certain contracts for employment of physicians, but only under certain circumstances.”  (Conrad v. Medical Bd. of California (1996) 48 Cal.App.4th 1038, 1044, 55 Cal.Rptr.2d 901;  see, e .g., § 2411 [HMO exception].)   Steinsmith submits that his contract with the Clinic was akin to the one authorized in County of Los Angeles v. Ford (1953) 121 Cal.App.2d 407, 263 P.2d 638, where a county was authorized to contract with medical schools to provide staffing for county general hospitals.   However, the Ford case is distinguishable.   The contracts in Ford enabled the county to fulfill its obligation to care for the indigent sick (id. at pp. 408-409, 263 P.2d 638), and the Clinic owners here had no similar obligation.   Steinsmith identifies no exception to the corporate practice rule which would be applicable in this case.

Steinsmith claims that he cannot be found to have aided Yu and Downes's unlawful activity because he did nothing to secure the Clinic's fictitious name permit.   However, Yu and Downes needed more to operate their medical business than the fictitious name permit Aquino obtained for them.   They also needed someone to do the medical work.   As the sole physician practicing at the Clinic, Steinsmith aided Yu and Downes as much as Aquino did.   We note in this regard that the fictitious name requirement and the corporate practice rule serve distinct public purposes.  (Compare Painless Parker v. Board of Dental Exam., supra, 216 Cal. at p. 297, 14 P.2d 67 [corporate practice rule promotes undivided loyalty to patients] with Garvai v. Board of Chiropractic Exmrs.  (1963) 216 Cal.App.2d 374, 377, 31 Cal.Rptr. 187  [fictitious name requirement informs the public “ ‘with whom it [is] dealing’ ”].)

Insofar as it appears from the record, the Clinic always had a valid fictitious name permit, and Steinsmith contends that he was entitled to rely on that permit.   However, the ALJ had substantial evidence from which to find that Steinsmith knew by 1995 that the Clinic's business was unlawful.   The evidence shows that Steinsmith was apprised of the illegality long before he was cited, and that he nonetheless chose to continue working for the Clinic because he thought that the Board's position was wrong and represented bad policy.   Thus, Steinsmith did not establish actual reliance on a valid permit.

  Steinsmith's position is also untenable insofar as he can be taken to argue that the Board was required to revoke the Clinic's permit before citing him for working there.   Again, running a medical clinic without a valid fictitious name permit and practicing medicine without a license are separate violations.   Steinsmith cites no authority that would require the Board to prosecute these violations in any particular order.   The Board's remedies against other parties for a different violation had no bearing on its ability to discipline Steinsmith.

  Steinsmith contends finally that section 2264's prohibition on the aiding of unlicensed medical practice is unconstitutionally vague as applied in his case.   However, this case is a straightforward application of the well-established doctrine barring the corporate practice of medicine.   Steinsmith cannot plausibly claim that he could not have been expected to know that his conduct was prohibited.

Good faith alone does not save a physician, or the unlicensed people who own or operate a medical clinic or medical spa, from legal issues relating to the corporate practice of medicine doctrine.  Even if a management services agreement is in place, the medical board and/or subsequent courts can find that the arrangement grants too much control to the management services organization (MSO) and thus violates the corporate practice prohibition despite the effort to sidestep the bar.  It is critical to have an experienced attorney who understands the legal contours of corporate practice prohibitions and can provide skilled legal counsel concerning the laws, regulations, attorney general opinions, and cases that interpret the rule in a given state.

***

Seek health law advice at the outset, while designing and developing your business, from a skilled health care law attorney who understands online health businesses and legal questions affecting mental health care and other professionals.

Michael H. Cohen is an experienced business law and health care law attorney.  He has taught health care law and policy at Harvard University and counseled many different kinds of health care practitioners and businesses, including:

  • entrepreneurial start-up ventures in many different industries
  • physicians (MD's and DO's)
  • physician groups, hospitals, and clinical facilities
  • integrative medicine centers
  • professional health care educational institutions and associations
  • dentists
  • registered nurses and advanced practice nurses
  • clinical psychologists
  • chiropractors
  • acupuncturists
  • massage therapists
  • homeopathic physicians and homeopaths
  • naturopathic doctors and naturopaths
  • energy healers, hypnotists, medical intuitives
  • dietary supplement manufacturers and distributors
  • cosmetics manufacturers
  • entrepreneurs and start-ups
  • publishers
  • wellness clinics
  • herbalists
  • bio-energy companies
  • medical device inventors
  • telemedicine enterprises
  • many different businesses

As an attorney  at the cutting edge of health care law and business law, he represents enterprises whose leaders are conscious and committed to a better world.  He provides legal and regulatory expertise to a multitude of businesses and corporations, as well as to attorneys and law firms involved in various health care legal issues including:

  • fee-splitting issues
  • Stark and anti-kickback legal concerns
  • state prohibitions on self-referral, kickbacks, and patient brokering
  • corporate practice of medicine (including New York, California, Massachusetts, D.C.)
  • legal concerns related to structuring a management services organization (MSO)
  • medical board disciplinary issues and medical board proceedings
  • disciplinary proceedings involving psychologists and other allied health professions
  • negligence, the law of informed consent, and medical malpractice liability
  • HIPAA and patient privacy and confidentiality issues
  • Medicare (including opting out vs. participation vs. non-participation)
  • professional liability insurance
  • insurance (billing and coding) issues
  • telemedicine, tele-psychiatry and telehealth
  • litigation (plaintiff's counsel and defense) and negotiation
  • other legal and regulatory compliance issues.

To speak with a lawyer about health care law issues pertaining to complementary and alternative medicine, or to consult a business lawyer about laws and legal issues for entrepreneurs and new enterprises that are seeking legal advice, contact attorney Michael H. Cohen today.

 

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Michael H. Cohen, Esq.; 468 North Camden Dr. | Beverly Hills, California 90210 | 310-844-3173