Michael Byrd and Brad Adatto

Can Non-Doctors Own a Medical Practice in Texas? Texas Corporate Practice of Medicine Field Guide – Part 5 of 5

Co-Author | 3.29.21

This article is co-authored by partners Michael Byrd and Brad Adatto.

 

When talking about health care in Texas (particularly elective, non-invasive procedures), an almost visceral reaction is triggered by the question: can non-doctors own a medical practice in Texas?  The law is not only confusing but emotion, opinion, and rhetoric further cloud the issue.  The vision for this field guide is get to the root of the problem to help answer this question.  Taking it a step further, it examines the risk of non-doctors owning a medical practice.

 

This field guide is a five part series and will address the following questions:

Part One – What is the Corporate Practice of Medicine?

Part Two – Does the Corporate Practice of Medicine Exist in Texas?

Part Three – Is the Corporate Practice of Medicine Doctrine Actually Enforced in Texas?

Part Four – Are There Exceptions to the Corporate Practice of Medicine Doctrine in Texas?

Part Five – Can a Non-physician Hire a Texas Medical Doctor via an Independent Contractor Agreement?

 

Part Five – Can a Non-physician Hire a Texas Medical Doctor via an Independent Contractor Agreement?

Yes, if done correctly.  In fact, the management service organization (“MSO”) model itself is a widely accepted independent contractor structure utilized between non-physician owned entities and physician owned medical practices.  The corporate practice of medicine (“CPOM”) doctrine maintains that physicians may not enter into relationships with non-physicians when the physician’s medical decision-making is controlled by the non-physician in any way. The Texas Medical Board (“TMB”) has recognized that the CPOM doctrine does not prohibit a physician from having an independent contractor agreement with non-physicians as long as it stays within the confines of the doctrine. www.texmed.org/CPMwhitepaper.  A vital distinction in the doctrine’s primary prohibitions is that an entity, comprised of laypersons, cannot maintain a level of control over physicians and clinical decisions to such an extent the relationship begins to look more like an employment-type arrangement. Tex. Occ. Code § 164.052.

 

Unacceptable Relationships

Some have attempted to use the independent contractor relationship between physicians and non-physicians as a “loophole” to the CPOM doctrine. However, a fatal mistake made occurs when  the non-physician owned entity receives the medical revenues. It is a violation of CPOM for an entity comprised of lay persons to contract with physicians to practice medicine in which the corporation then receives the fee for medical services  Flynn Bros., Inc. v. First Medical Associates, 715 S.W.2d 782, 785 (Tex. App. – Dallas 1986).

 

Another mistake occurs when a non-physician places too much control over the physician making the independent contractor relationship more in substance like an employment relationship. As an example, a court will likely deem the relationship unacceptable when the non-physician acts with exclusive management and makes decisions relating to the practice of medicine. Id. Stated differently, when a corporation or layperson engages in practices such as collecting fees for medical services, hiring and firing doctors, and making important clinical decisions, it is as if the physician is allowing the corporation to use their medical license, and thus, violating the CPOM. Tex. Occ. Code § 155.0010; Flynn Bros., Inc, 715 S.W.2d 782, 785 (Tex. App. – Dallas 1986).

 

Acceptable Relationships

The key to an acceptable independent contractor relationship occurs when the physician acts are completely independent of the non-physicians as to the “diagnosis, treatment of patients, and operations to be performed, using their own independent judgment in all such matters.” Woodson v. Scott & White Hospital, 186 S.W.2d 720 (Tex. Civ. App. – Austin 1945). As referenced in Part Three of this series, the court in Woodson found no violation of the Texas Medical Practice Act between a specialized physician and a hospital corporation, which shared the physician’s building, referred patients to the physician, and received 25% of profits. The court rationalized that because splitting the gross revenues was merely payment for rent and compensation for the corporation’s referral services, the doctor’s relationship with the corporate entity “was more in nature of an independent contractor and not an agent or employee.” Id. at 725. The court came to this conclusion because the doctors were entirely independent to diagnose, treat patients, and were in control of the operations to be performed. Id. Because the doctors “fixed and collected their own fees from their patients, kept their own books, accepted full responsibility to their patients for the nature and character of their services to them…it was clear [the doctors] did not act as agents or employees of the corporation; that their acts were not the acts of the corporation; and that the corporation as such was not engaged, in so far as said contract concerned, in practicing medicine through [the doctors] as agents.” Id.

 

As discussed in the opening paragraph of this article, the MSO model is a tried and true example of an acceptable (if done correctly) independent contractor relationship between physicians and non-physicians. Under this model, the basics include two entities: a MSO and a professional entity. The MSO can be formed by any individual, including non-doctors, and the MSO will provide non-clinical management and administrative services to the professional entity. Their relationship is formed through a management service agreement (“MSA”), and the MSA defines the rights and responsibilities of each entity. For example, the MSA describes the compensation, the management services to be provided to the professional entity, and other elements that go into the business side of managing the professional entity. The MSA acts as a clear representation of the parties’ relationship to each other. For more information on the MSO model, please listen to these this podcast, A Preventable Death or read the 123’s of Private Equity for DSO and MSOs, 123’s of MSAs , or Fake or Real Medical Director Agreements.

 

Providing support of the MSO model, Texas courts have dissected cases in which they found that the contract between a medical practice and a MSO was a valid independent contractor relationship, and therefore, did not violate CPOM. McCoy v. FemPartners, Inc, 484 S.W.3d at 201. In the case, the court noted that the contract between the parties explicitly expressed their arrangement as independent contractors by implementing a provision outlining the relationship as such. The agreement stated that “MSO and [the medical practice] agree that [the medical practice], is a separate organization that retains the authority to direct the medical, professional, and ethical aspects of its medical practice.” Keep in mind that by simply inserting an independent contractor provision in the contract will not give the parties immunity from a CPOM violation. The court will also look to the actions of the parties and require that non-physicians do not exert control over the practice of medicine. The compensation structure will also come under scrutiny. The court will look to whether the MSO receives funds directly from the patients, or whether it receives a fixed fee from the professional entity, and also, the amount of the fee. These are important factors to take into account when entering into an independent contractor relationship.

 

The TMB has given some guidance on how additional scenarios where a hospital/physician  independent contractor relationship may be permissible.  A hospital can (1) pay the physician a minimum guaranteed amount to ensure the physician’s availability; (2) bill and collect from patients the physician’s fees; and (3) retain collected fees up to the guaranteed amount plus a reasonable collection fee.  www.texmed.org/CPMwhitepaper. Whether the relationship is permissible is a question of law and must be evaluated according to the facts of the case.

 

Staying Compliant

Important considerations to keep in mind when developing an independent contractor relationship between physicians and non-physicians will likely revolve around the flow of funds, fee structure, ownership, and most important, control. Control can be examined from several directions including control over medical decisions, control of the services provided, and even control of advertising. Even though the validity of most independent contractor agreements will be based on a case-by-case analysis, these are a few aspects to the relationship that are likely to be under a magnifying glass.

If you have any questions or would like to learn more about the Corporate Practice of Medicine, email us at info@byrdadatto.com.

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