A friendly reminder: Friendly PC arrangements are subject to scrutiny

As health care becomes increasingly complex, delivery structures continue to evolve. A popular arrangement is the “Friendly PC” model, where large medical groups are backed by private capital or healthcare system investment and administrative support. But courts and lawmakers have become concerned that some Friendly PC agreements encroach on physician autonomy and violate the century-old ban on practicing medicine in the workplace (“CPOM”). A recent lawsuit—American Academy of Emergency Medicine Physician Group, Inc. v. Envision Healthcare Corporation, et al.ND Cal., No. 22-cv-00421 (the “AAEMPG” case) – reminds that profane entities must be careful when setting up friendly PC arrangements, lest they risk jeopardizing their activities.

The debate on the practice of medicine in business

The CPOM bar is a broad and inconsistent patchwork of state laws designed to insulate physicians from the pursuit of corporate profit. The idea behind the CPOM laws is that a physician’s medical judgment should not be fettered by commercial influence. This approach echoes a secular vision of medicine where the individual relationship between doctor and patient is essential.

But modern commentators have criticized the CPOM laws as “archaic”, “obsolete” and “obsolete”. These critics argue that the CPOM’s century-old bar is out of step with our modern health economics. Worst of all, they argue, CPOM doctrine is not just a dusty relic of a bygone era, it’s an anchor weighing down American health care and stifling innovation.

Regardless of the pros and cons of the doctrine, CPOM laws remain in effect in the majority of states. And California’s CPOM laws are among the strictest in the nation, limiting the practice of medicine to authorized individuals and prohibiting lay entities (businesses not owned and run by physicians) from directly or indirectly controlling medical practices or interfering. another way with medical decision-making.

The user-friendly PC model: the CPOM solution?

In order to access capital and ease administrative burdens on physicians, many medical groups have adopted the Friendly PC model. Under this arrangement, a professional corporation employs physicians to treat patients and simultaneously contracts with a non-professional entity that provides management services to the practice. The professional corporation is either owned by a group of shareholder physicians who have adopted this model, or, as is increasingly apparent with this model, is owned by a single shareholder physician who has been selected by the private equity firm, or the health system. This model has been championed by private equity firms looking to invest and innovate in the medical practice sector of the patient care market.

While much has been written about the Friendly PC model and its popularity has exploded over the past decade, California law has been slow to catch up. No law or regulation prohibits the Friendly PC model, and case law is sparse. That said, there have been rumors from the California legislature about the reduction of Friendly PC agreements, echoing concerns that the CPOM bar will be honored more in breach than in compliance.

The AAEMPG Case: Testing the user-friendly PC model in court

It is in this context that the recent decision of AAEMPG, the latest case to test California’s CPOM bar pressure. According to the complaint, AAEMPG and Envision are competitors. Both provide management services for professional medical groups. But the AAEMPG lost its contract with a group of emergency physicians when a hospital awarded the contract to an Envision-affiliated medical group.

AAEMPG sued Envision, and the core of the plaintiff’s claim is Envision’s version of the “Friendly PC” model. The AAEMPG argued that the defendant’s Friendly PC arrangement violates the California CPOM bar because the ultimate control of physicians resides with secular societies and unlicensed executives.

Envision decided to dismiss the lawsuit, arguing that enforcement of CPOM laws is within the exclusive jurisdiction of the Medical Board of California and that courts should refrain from dipping their toes into uncharted regulatory waters. The thrust of their argument was that applying California CPOM laws to a complex corporate structure requires a delicate balancing of competing public policy concerns in a multi-billion dollar industry with many stakeholders – a task more appropriate for administrative agencies than for courts.

But last month, the court denied the motion to dismiss. In cataloging the long history of CPOM laws in California, the Court rejected the idea that the Medical Council had sole jurisdiction to enforce the CPOM bar, even questioning whether the Medical Council could investigate and prosecute a case like this. And when considering the merits of the AAEMPG’s allegations, the Court found that, if proven, they demonstrated “classic breaches of the CPOM”.

It remains to be seen whether the plaintiff will ultimately prevail, but the AAEMPG litigation is a good reminder that California’s CPOM doctrine is alive and well.

So what should stakeholders do?

Although the Friendly PC agreements have come under intense scrutiny, even the most ardent defenders of CPOM laws admit that well-designed integration of medical groups and secular entities can comply with CPOM doctrine. But in practice, predicting which arrangements will trigger regulatory or judicial scrutiny can be more art than science, causing understandable consternation for parties seeking to exploit the efficiencies of large medical groups without stepping on CPOM landmines. .

Medical groups, healthcare systems and investors would be well served to review their Friendly PC arrangements to mitigate regulatory and litigation risks. Particular attention should be paid to:

  • the composition of the management and management positions of the medical group,
  • the distribution of clinical and non-clinical responsibilities,
  • responsibility for the supervision, hiring, firing and discipline of licensed medical group professionals,
  • the allocation of income from the practice,
  • the extent of any restrictive covenants or share transfer agreements,
  • the design and operation of the corporate compliance program, and
  • the process for unwinding the arrangement if new legislation restricts the use of the Friendly PC model.

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