California's Corporate Practice Ban: Still Vibrant After All These Years

California is one of several states that still prohibits the corporate practice of medicine. In its most basic form, the corporate practice ban prohibits lay entities from providing medical services to the public through the employment of physicians. The doctrine dates to the 1930's and was intended to preserve the traditional physician/patient relationship and keep physicians out of the control of lay corporations who are presumed to place commercial motives ahead of professional judgment. Through Medical Board pronouncements, Attorney General Opinions and court decisions, however, the corporate practice doctrine has been expanded from this simple core to affect numerous business relationships involving physicians, including the ability of "franchise" medical providers to operate in California, the requirements applicable to management service relationships, and the operation of med spas and convenience clinics in settings other than traditional medical offices. Further, California's prohibition on licensee fee-splitting makes work-arounds more complex to structure because it affects how a lay entity can legally be compensated by a professional entity.

The following are some examples of how California's corporate practice prohibition has been interpreted and applied:

  1. Management Services Organization ("MSO"). An MSO or other non-professional entity may provide administrative services (billing, purchasing, managed care contracting) to a physician or medical group under a management services agreement. However, if the MSO interferes with decisions regarding the practice of medicine, the MSO may be engaged in the corporate practice of medicine. The California Attorney General issued an opinion in 2000 that invalidated a proposed agreement in which an MSO would arrange for radiology diagnostic services for union members. Because the MSO had discretion to choose the radiology provider, the Attorney General deemed the service to require professional expertise and therefore to violate the corporate practice ban.

    The California Medical Board has published guidance for physicians on the corporate practice ban. That guidance identifies a number of "business" or "management" decisions and activities that result in lay control over a physician's practice of medicine. The medical board unequivocally states that these decisions must be made by a licensed California physician and not by an unlicensed person or entity: ownership of a patient's medical...

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