With the recent and continuing proliferation of ambulatory care facilities, drug treatment facilities, and diagnostic, therapeutic, and ancillary care services frequently under the same roof as medical practices, it is essential that physicians and other licensed practitioners ensure that the structure of their practice complies with the Corporate Practice of Medicine (CPOM) doctrine and associated regulations.

While some states have done away with the CPOM doctrine, the doctrine is alive and well in both Pennsylvania[1] and New Jersey.[2]  In essence, the CPOM doctrine prohibits a practitioner from providing health care services as an employee of a general business corporation or a business entity in which the shareholders are not all licensed practitioners (however, there are several exceptions to this rule found in the regulations).[3]  The rationale behind the CPOM doctrine is to create a barrier between the practitioner, who must act in patient’s best interests, and corporate shareholders, who seek to maximize profits, thereby eliminating any influence in the provision of medical care from a corporate shareholder.

In light of the CPOM doctrine, a practitioner must be careful in how his/her practice is structured and the shareholders thereof. The following are several common structures which are generally permissible.

Solo Practice.  A practitioner may practice solo and/or may employ or otherwise remunerate other licensed practitioners to render professional services within the scope of practice of the employee’s license.   However, it is important to ensure that the scope of the employee’s license does not exceed that of the employer’s license.  For example, a nurse, chiropractor, optometrist, psychologist, or other professional holding a limited licensed may not employ a physician who holds a plenary license to practice medicine.

Limited Liability Company, Professional Association, Partnership.  While the CPOM doctrine generally prohibits the practice of medicine through a general business corporation, a limited liability company, partnership, and professional association are expressly allowed under the regulations, so long as such entity is composed solely of health care professional shareholders, each of whom is duly licensed or otherwise authorized to render the same or closely allied professional services.  Closely allied fields include chiropractic, dentistry, nursing, nurse midwifery, optometry, physical therapy, podiatry, psychology, and social work.

Associational Relationship with Other Practitioner or Professional Entity. In this scenario, a practitioner would be an employee or independent contractor, for any form of remuneration, of the other practitioner or professional entity; however, the scope of the employer’s license must be equal to or exceed that of the employee/contractor.

Shareholder or Employee of a General Business Corporation.  Such a form is permissible, but is limited to the following circumstances, in which the corporation is:

• Licensed by the New Jersey Department of Health and Senior Services as a health maintenance organization, hospital, long- or short-term care facility, ambulatory care facility or other type of health care facility or health care provider, such as a diagnostic imaging facility;
• Not in the business of offering treatment services but maintains a medical clinic for the purpose of providing first aid to customers or employees and/or for monitoring the health environment of employees;
• A non-profit corporation sponsored by a union, social or religious or fraternal-type organization providing health care services to members only;
• An accredited educational institution which maintains a medical clinic for health care service to students and faculty; or
• Licensed by the State Department of Insurance as an insurance carrier offering coverage for medical treatment and the licensee is employed to perform quality assurance services for the insurance carrier.

In less common circumstances, a licensed health care professional may also have an equity interest or be employed by a professional practice (including a professional service corporation or limited liability company) which is a limited partner to a general business corporation which, in turn, has a contractual agreement with the professional service entity.  The general business corporation may contract to provide the professional practice with services exclusively of a non-professional nature, including routine office management, hiring of non-professional staff, provision of office space and/or equipment and servicing thereof, and billing services. The practitioner, however, remains responsible to assure that an appropriate licensed health care professional determines and carries out all services and medical care including retention of sole discretion regarding establishment of patient fees and modification or waiver thereof in an individual case. As a condition of such contractual arrangement, the general business corporation may make no representations to the public of offering, under its own corporate name, health care services which require licensure.

In all, there are a variety of business structures which allow practitioners to provide professional services while being employed, partnering with, and/or engaging the services of other licensed professionals.  However, given the structural complexity of many modern medical entities (i.e. captive practices, MSOs, etc.), it is vital to ensure that any corporate arrangements comply with the statutory and regulatory requirements of the CPOM doctrine.

[1] See Neill v. Gimbel Bros., Inc., 199 A. 178, 182 (Pa. 1938).  Please note that while the PA CPOM doctrine remains, this blog focuses on New Jersey’s regulations thereof.

[2]See N.J.A.C. 13:35-6.16; see generally Michal et al., CORPORATE PRACTICE OF MEDICINE DOCTRINE 50 STATE SURVEY SUMMARY, available at http://www.nhpco.org/sites/default/files/public/palliativecare/corporate-practice-of-medicine-50-state-summary.pdf.

[3] See N.J.A.C. 13:35-6.16(f)(4); Selective Ins. Co. of America v. Medical Alliances, LLC, 362 N.J. Super. 392, 395, fn.1 (Law Div. 2003) (“the Legislature has carved several statutory exceptions from this common law ban against the corporate practice of professional services to permit hospitals, nursing homes and certain other “ambulatory care” facilities to operate as general business corporations. The rationale for this exception is that the adverse influences and countervailing interests peculiar to a business corporation are minimized and overshadowed by their public necessity, by a public need to assure institutional continuity, and by the fact that such entities are regulated and inspected by the State Department of Health and Senior Services, thus providing similar protections otherwise provided by the regulations of the State Board of Medical Examiners, N.J.A.C. 13:35-6.16(f)(4), which limit the ability of its licensees to be shareholders or employees of a general business corporation to five settings.”)

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In a recent decision, Druding v. Care Alternatives, Inc.[1], the United States District Court for the District of New Jersey held that Medicare hospice certification provisions are conditions of payment, thereby effectively expanding the reach of the False Claims Act (“FCA”).

The Defendant in the matter is a for-profit provider of end-of-life hospice care in New Jersey. The Plaintiffs, former employees of the Defendant, allege the Defendant fraudulently billed Medicare for patients admitted into its facilities, who were not eligible under the Medicare regulations for hospice care. Per its regulations, Medicare will pay for hospice services if a patient’s life expectancy is six months or less. The Plaintiffs’ complaint identified fifteen patients whose conditions allegedly did not meet Medicare’s life expectancy criteria for hospice care. The Plaintiffs further allege that the Defendant engaged in aggressive marketing tactics to bring in more patients, by providing gifts and meals to physicians, administrators, directors, and social workers to induce referrals.

The Plaintiffs initially filed the lawsuit in 2008, but after nearly seven years of investigating the Plaintiffs’ claims, the United States Department of Justice elected not to intervene. Nonetheless, the Plaintiffs served their complaint on the Defendant in July of 2015. The Defendant subsequently moved to dismiss the Plaintiffs’ complaint, arguing that the applicable Medicare regulations are not conditions of payment. Conditions of payment are requirements that must be met prior to payment by Medicare. On the other hand, conditions of participation are prerequisites to participation in a federal program such as Medicare. Noncompliance with conditions of payment result in nonpayment and are actionable under the FCA; whereas, noncompliance with conditions of participation result in administrative sanctions.

The District Court rejected the Defendant’s argument and held that hospice certification provisions of the Medicare regulations are conditions of payment because Medicare explicitly conditions payment for hospice care on a written certification from a physician with supporting documentation concerning the patient’s condition. In April of 2016 the United States Supreme Court will hear oral arguments in Universal Health Services, Inc. v. United States ex rel. Escobar, and the Court will likely decide whether compliance with Medicare requirements must be expressly delineated as conditions of payment in order to trigger FCA liability. The Supreme Court’s decision will be significant for health care organizations, because it will impact the scope of cases that are actionable under the False Claims Act.

[1] Druding v. Care Alternatives, Inc., 2016 U.S. Dist. LEXIS 21488 (Feb. 22, 2016).

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In a series of recent Pennsylvania cases, the state appellate courts have squarely addressed the oft-asked question of who, or what, is the general counsel’s client, particularly in the scenario of legal proceedings wherein the general counsel has interacted closely with corporate executives.  As the U.S. Department of Justice (“DOJ”) has ramped up its enforcement of individuals for corporate wrongdoing, these decisions provide a reminder to general counsel to advise agents of institutions that counsel represents the institutions, rather than the agents in their individual capacities.

The factual background of the cases[1] revolve around criminal investigations of executives of a higher educational institution in the aftermath of sexual abuse scandals regarding coaches of a certain university football team.  In each of the cases, the general counsel appeared on behalf of the university and the executives in a grand jury proceeding.  Subsequently, the executives were charged with perjury in connection with their grand jury testimony. The charges, in turn, were significantly based on the grand jury testimony of the general counsel.  Each of the executives thereafter brought actions to quash the grand jury presentment, claiming they had been denied effective counsel, as they each alleged they believed the general counsel had represented them individually.

After the Pennsylvania trial court rejected their requests for relief, the state appellate courts reversed and dismissed the criminal charges against the executives, finding that the general counsel had an attorney-client relationship with the executives and that such a privilege was violated through her testimony against the executives in the grand jury proceeding.  The appellate courts found that the general counsel communicated with the executives regarding the grand jury proceedings and appeared at the proceedings on their behalves, while failing to explain to the executives, or to the grand jury, any limitations on the scope of her representation, and that as such, the executives could reasonably believe that the general counsel was their personal attorney.

While the prosecutor argued that the general counsel only represented the university, and the executives solely as agents of the university, the appellate court determined that the general counsel did not appropriately explain to the executives the difference between representing the executives as corporate agents versus representing the executives in their individual capacities.

The appellate courts stated that the right to counsel is personal and designed to ensure that the party offering testimony does not provide incriminating testimony and, thus, counsel must properly explain the limitations of any representation.  Since said limitations were not adequately communicated to the executives, the courts found that the executives were deprived of their personal counsel during their grand jury testimony.

Importantly, although the executives were aware that the general counsel represented the university, the court found that such knowledge does not automatically establish the conclusion that the general counsel is only representing the executives in their capacities as agents for the university.

The courts also noted that since certain communications between a corporate attorney and a corporate employee may be personally privileged, the prosecutor’s argument, that none of the communications between general counsel and an executive are privileged, did not logically follow.  Rather, the courts distinguished discussions between general counsel and executives for the purposes of 1) business operations and internal investigations and 2) the executive’s personal legal issues, in these cases, the individual subpoenas to the executives.

The instant cases confirm the importance of the “Upjohn”[2] warnings, or the obligation to advise members of an institution that corporate/general counsel represents the institution and is not the personal attorney of the members/executives/directors of the institution.  Such an obligation arose from the United States Supreme Court opinion in Upjohn Co. v. United States, 449 U.S. 383 (1981), wherein the Supreme Court held that communications between corporate counsel and certain lower-level employees are privileged and, that in order to avoid such a misunderstanding, warnings should be given to advise the corporate employee that the attorney-client privilege belongs to the corporation, that said privilege cannot be invoked by the employee, and that the corporation may disclose such communications in its discretion.

Although the instant cases do not raise many new issues of law, they reflect the uptick in cases wherein liability of individuals has been sought, in both criminal and civil investigations, for what was arguably corporate wrongdoing, as well as the pressure on corporations to cooperate in governmental investigations.  On September 9, 2015, the DOJ issued guidelines, the so-called Yates Memo[3], on corporate conduct which allow corporations to receive credit for cooperating with DOJ investigations, including the requirement that the corporation “completely disclose” all facts regarding “individual misconduct” and identify all individuals involved with or responsible for the misconduct under investigation.  Moreover, the Yates Memo instructs prosecutors to concentrate on the wrongdoing of individuals from the beginning of the investigation through its resolution.

Given the increased focus on individual culpability by the DOJ, general counsel must be vigilant to provide an accurate and timely Upjohn warning and ensure that any dual representation issues are resolved.  Moreover, general counsel must be aware that participating in legal proceedings or investigations raises ethical hazards when the general counsel knows, or has reason to know, that an agent of the corporation may face individual legal liability.

Conversely, while many healthcare executives have been made aware of the Yates Memo, particularly given the breadth of health care laws and regulations which provide for individual penalties, executives down to lower-level employees must be aware of the limitations on the representation of the general counsel, whether an Upjohn warning is issued or not and, that most importantly, the general counsel is not personal counsel, from the early stages of an investigation, during grand jury proceedings, or through trial.

[1] Commonwealth v. Curley, 2016 PA Super 13 (Pa. Super. Ct. 2016); Commonwealth v. Schultz, 2016 PA Super 12 (Pa. Super. Ct. 2016); Commonwealth v. Spanier, 2016 PA Super 14 (Pa. Super. Ct. 2016)

[2] Upjohn Co. v. United States, 449 U.S. 383, 101 S. Ct. 677, 66 L. Ed. 2d 584 (1981)

[3] http://www.justice.gov/dag/file/769036/download

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On December 18, 2015, President Obama signed the Consolidated Appropriations Act of 2016 (H.R. 2029) into law. The legislation affects several taxes implemented by the Affordable Care Act (“ACA”), however, the ACA’s substantive provisions will remain intact.

Notably, the legislation delays the effective date of the excise tax imposed on high cost employer-sponsored health coverage, colloquially referred to as “Cadillac plans.” Initially non-deductible and set to go into effect in 2018, the Cadillac tax will now be delayed until January 1, 2020 and will be tax deductible for employers. The Cadillac tax is intended as a tool to finance the ACA and curb the rate of healthcare costs by discouraging overuse of healthcare services. In 2020 a 40% tax will be assessed on annual plan premiums that exceed threshold amounts. The 2018 threshold amount was set to $10,200 for individuals and $27,500 for families and will adjust prior to the 2020 implementation. The threshold amount can also increase for certain employers based on the group’s age, gender, and the risk of the profession.

The recent legislation also imposes moratoriums on the health insurance providers fee (HIP) and the medical device excise tax. The HIP fee or tax is an assessment on covered entities engaged in the business of providing health insurance for United States health risks, and whose annual premium revenue exceeds $25 million. Health insurers share in the payment of this industry-wide annual tax in an amount proportionate to the insurer’s market share. The federal government will forgo collection of the $13.9 billion HIP tax for 2017. The HIP tax, which will resume in 2018, is meant to fund subsidies for low-income individuals and families when purchasing insurance on exchanges established by the ACA. Additionally, the 2.3% medical device excise tax will be in moratorium for 2016 and 2017. This tax has been in effect since 2013 and is imposed on the sale of certain medical devices by the manufacturer or importer of the devices.

ACA opponents tout these tax adjustments as the beginning of the ACA’s unraveling. However, the Cadillac tax delay and moratoriums on the HIP and medical device taxes do not alter the substantive provisions of the ACA.

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On September 29, 2015, the New Jersey Supreme Court, in Jarrell v. Kaul,[1] clarified what is actionable under the statutory medical malpractice insurance mandate imposed on physicians practicing medicine in the State of New Jersey.

Notably, under the Court’s decision in Jarrell, healthcare facilities which grant privileges to physicians, both employees and contractors, have a continuous responsibility to ensure that the physicians comply with licensure requirements, including the maintenance of proper malpractice insurance. However, the Court ruled that patients have neither a private cause of action against a physician who violates the malpractice insurance mandate nor the ability to bring an informed consent claim against the physician premised upon said physician’s uninsured status.

According to the Court’s opinion, Dr. Richard Kaul performed a spinal fusion procedure on his patient, James Jarrell, at the Market Street Surgical Center, however, his insurance policy expressly excluded spinal surgical procedures from coverage.  Following the procedure, Jarrell experienced a new pain in his left side and “drop foot.” Jarrell underwent a revision surgery, performed by another doctor, to correct Dr. Kaul’s work.  Jarrell thereafter asserted several claims against Dr. Kaul, among them: (1) a direct negligence claim against Dr. Kaul based on his uninsured status; (2) a claim seeking damages for lack of informed consent; and (3) a negligent hiring claim against Market Street Surgical Center, the facility granting privileges to Dr. Kaul.

Physicians in New Jersey, pursuant to N.J.S.A. 45:9-19.17, must maintain medical malpractice liability insurance in the sum of $1,000,000.00 per occurrence and $3,000,000.00 per policy year or provide a letter of credit for at least $500,000.00. Failure to maintain these minimum standards is punishable via civil penalties and license revocation or suspension. The public policy consideration behind these provisions is to provide some level of recourse in the event of medical malpractice.

While neither the statute nor the regulations expressly permit a patient to bring claims against a treating physician who does not comply with the insurance mandate, the Supreme Court in Jarrell clarified that the statutory and regulatory scheme does not implicitly provide for such a private cause of action against a noncompliant physician. The Court reasoned that the Board of Medical Examiners’ oversight and enforcement was the legislature’s chosen mechanism to enforce the law’s compliance — an aggrieved patient bringing a lawsuit is not the vehicle by which the legislature wished to enforce compliance.

The Court further held that Dr. Kaul’s lack of malpractice insurance did not implicate the doctrine of informed consent. The Court was unwilling to expand informed consent jurisprudence to the financial consequences of an uninsured physician’s negligence.  The Court so ruled because a physician’s medical malpractice insurance or lack thereof has little bearing on the nature of the attendant risks of the patient’s treatment. A patient’s inability to recover a judgment is not the injury contemplated by the informed consent doctrine.

However, and importantly, Jarrell’s claim against the Market Street Surgical Center for negligent hiring survived. The Court held that when a principal, in this case the surgical center, retains an independent contractor, here the physician, for a task that requires certain permits and licenses, the principal has a continuing duty to ensure that the contractor maintains the requisite licensure. Because medical malpractice insurance is an essential condition for a license to practice medicine in New Jersey, the surgical center had a continuous duty to ensure that physicians with privileges to practice at the facility carry the required malpractice insurance.

In the wake of the Court’s decision in Jarrell, healthcare facilities granting privileges to physicians must be vigilant and take extra care in ensuring that physicians at their facility, whether employees or contractors, have the minimum required professional liability insurance as well as any other required licenses.

[1] Jarrell v. Kaul, 2015 N.J. LEXIS 963 (Sept. 29, 2015)

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