Building your Medical Corporate Structure Properly: Beware of Structural Defects that Could Cost You Dearly
If you would like more information about this topic or any other topic contact Scott Einiger or Stacy Steinberg
How your medical corporation is structured may not be high on your priority list of concerns, but it should be. The rapid and complex changes in the healthcare delivery system has led to a myriad of statutes both federal and state that could complicate structuring corporate entities and even lead to potential violations in your current corporate structure.
Without paying heed to the implications of these laws, providers run the risk of potential violations of the corporate practice of medicine doctrine, illegal fee sharing and licensure requirements that could be devastating to your livelihood. Therefore you need to be aware of the issues to avoid these potential problems.
A. Mallela v. State Farm and its progeny
A particular recurring theme which has caused civil claims for reimbursement is the improper structuring of the corporate entity resulting in refund demands by carriers against physicians. The recent case of Mallela v. State Farm ("Mallela")[1], and its progeny engages in the analysis of an insurance carrier's allegations of fraudulent corporate structure of a health care provider as the basis of recoupment of monies already paid to the provider for services rendered. Ultimately, the Mallela court held that where a medical entity is fraudulently incorporated, it is not entitled to reimbursement, with one important caveat: that is, according to Mallela, insurers must show "behavior tantamount to fraud", as "technical violations will not do." While this issue centered around the no-fault insurance industry, subsequent case law has not limited Mallela's application to no-fault carriers. Noteworthy to providers, courts interpreting Mallela, have also refused to set a judicial guideline for what constitutes a fraudulent corporation, and have refused to dictate "that a health care provider be personally involved in areas of his practice where he has not demonstrated expertise- equipment leasing, premises rental and maintenance, office management, etc." As such, corporate structure becomes crucial to avoid such Mallela-type issues and a carrier's attempt to recoup reimbursement.
B. Office Based Surgical Facilities
Corporate structuring also plays an important role in the area of office based surgical (OBS) facilities. A physician who owns an OBS facility and does not have an appropriate corporate structure can face huge refund demands for legitimate reimbursement on nothing more than a legal technicality. While this firm has successfully demonstrated to the Department of Health ("DOH") and carriers that OBS facilities may legitimately charge facility fees as part of their ongoing business arrangement with a carrier as a contractual negotiation, the facilities must also be cognizant of corporate structure and the mechanism of submission of claims for payment to the carrier. For instance, even the name of the entity must be scrutinized by the provider or counsel. Pursuant to Section 600.8 of the New York Compilation of the Codes, Rules, and Regulations, "Criteria for determining the operation of diagnostic or treatment center under Article 28 of the Public Health Law", the rule states that "It shall be prima facie evidence that a diagnostic or treatment center is being operated when any provider of medical health or health services describes itself to the public as a 'center' or 'clinic' ...." As such, we encourage clients to change the name of their entities by removing the word "center" or "clinic" from their entities' name to prevent any confusion, or allegations concerning misrepresentation as an Article 28 facility.
i. Department of Health opinion and its implications for corporate structure: The facility must be a professional entity.
The corporate structure and propriety of OBS facilities is a hot button issue in health law in New York. Recently, the DOH has issued a March 21, 2006 opinion where it has made clear that a facility that misrepresents itself as an Article 28 facility is not entitled to a facility fee, and might be investigated for fraud. Further, the DOH stated that "[a] physician who shares with a [general] business corporation a portion of an additional or enhanced fee for the physician's costs to perform professional services in the physician's office might be sharing fees in violation of Education Law § 6530(19)." See DOC General Opinion No. 06-01 (March 21, 2006). Both of these directives have direct impact on the corporate structure of an OBS facility, as the DOH will be scrutinizing not only the corporate structure of these facilities, but also the submission of their professional and facility fee claims. This directive in conjunction with the Mallela case demonstrates that the carrier will not only use corporate structure to recoup past funds, but may also use it to threaten the provider with an enforcement action by the DOH, or at least cause a DOH investigation of the OBS facility.
Under its plain language, the DOH opinion could be interpreted as stating that a general business corporation submitting facility fees (if a facility fee is deemed to be a professional fee) to the insurance carrier could be violating the corporate practice of medicine doctrine, and fee-splitting with physicians, which could lead to misconduct allegations against the provider. While this firm has asserted that a facility fee is a non-professional fee, based on the recent DOH letter, the safest course of action until we receive further clarification from the DOH is for an OBS facility to be structured as a professional corporation. In other words, an OBS facility should be structured as a professional entity, i.e. PLLC, M.D. PC, LLP, or a "doing business as" (d/b/a) through the MD PC with a separate tax identification number (if possible) when it is submitting facility fee charges. By having two professional entities, the notion (and consensus from leading health care attorneys) is that given the current stance of the DOH, the DOH will not be able to assert any violations of the corporate practice of medicine doctrine or fee splitting violations against the provider because it is a professional corporation (as opposed to a lay entity, i.e. Inc.).
In addition to advocating a professional entity to submit facility fees, we also stress that the carrier should receive full disclosure of the accreditation status of the OBS facility.
Certainly, as to past charges claimed by the carriers due to alleged misrepresentation as an Article 28 facility, we have vigorously opposed any attempt by any carrier to re-claim monies retroactively regardless of the corporate structure, and have been successful in preventing at least one major carrier from retracting its refund demands for past facility fee charges. Additionally, we intend to vigorously oppose any argument and/or efforts by the DOH to sanction prior corporate structure based on the recent DOH opinion.
ii. Employment issues and potential violations
An OBS facility must additionally be cognizant of employment issues regarding its professional staff to avoid licensure violations and/or violations of corporate practice of medicine doctrine. We have confronted instances where a lay entity (i.e. an Inc. or LLC) is employing professional staff such as nurses through their lay entities, and this employment of professional staff by a general business corporation runs afoul of the corporate practice of medicine doctrine.
While there is no relevant New York case law on point, the Department of Education referred to a Report from the 1998 meeting of the New York State Board of Regents entitled "The Corporate Practice of Medicine". According to the Report of the Board of Regents, Sections 6512 (stating it is a felony for an unlicensed person to practice medicine) and 6513 (stating the unauthorized practice of medicine is a crime) of the Education Law, "it is clear that business corporations cannot hire a licensee to provide professional services because the law neither authorizes such action nor provides an exemption." Indeed, as highlighted by the Board of Regents, the corporate practice of medicine doctrine "serves to protect the public from a business relationship that could place constraints upon professional judgment, unduly limit professional practice, invade the professional integrity of the professional, or permit the business to make professional decisions."
Additionally, the Office of the Professions has also commented on this issue in a statement entitled "Corporate Entities for Professional Practice." This document plainly states that, except where "specifically authorized by law", a general business corporation may not "have employees who offer professional services to the public."[2] Further, the Board of Regents remarked that if a general business (not professional) corporation has hired professional staff and since a corporation acts through its employees, it can be guilty of "practicing medicine" through employment of professional staff. According to the Board of Regents, this unauthorized practice of medicine would be a crime and referred to the Attorney General's office. The nurse or professional hired by the general corporation could also be guilty of professional misconduct for sharing in the profits of their practice with the corporation. Therefore, the severity of failure to comply is manifest.
In sum, no licensed professional staff should be employed by a lay entity, and thus professional staff should be compensated through a professional entity in order to avoid violation of the corporate practice of medicine doctrine.
iii. Options for OBS facilities in the current state of the law
An OBS facility has options as to how to approach corporate structure in the law's current state of flux. This firm has heavily participated in meetings and contributed substantially through submissions to the DOH to facilitate clarification of its opinion, which has been misused by major insurance carriers for their recoupment initiatives. A major breakthrough primarily through the efforts and submissions of this firm is that one carrier has renounced its efforts to pursue past monies for facility fee charges, and essentially, its argument that OBS facilities attempted to masquerade as Article 28-licensed entities. Given the DOH's current opinion that facility fees are considered professional services, one option, if an OBS facility wants to forge ahead with submission of facility fees, is the creation of a professional entity, either through another professional organization, or a d/b/a from the current professional medical corporation (MD PC) to submit facility fee charges.
As a sidenote, if another professional corporation is being formed, "Mini Stark", or the Health Care Practitioner Referral Statute must be considered. Essentially, Mini-Stark prohibits a physician from referring a patient to an entity where he owns a financial interest, if it is a designated health service, as for instance, clinical laboratory services, pharmacy services, radiation therapy services, physical therapy services or x-ray or imaging services. If the service, as here, is not a designated service under Mini-Stark, and the physician, as here, is the owner of both professional entities, the physician must simply make appropriate disclosure to the patient of the financial relationship. As such, we advise that once you have formed the professional corporation, to comply with Mini Stark, that you prepare a clear disclosure statement to patients to ensure awareness that both entities are owned by you, and that patients approve such an arrangement.
Alternatively, the OBS facility may wish to postpone transformation of the corporate structure until the DOH has further clarified its March 21, 2006 opinion and specifically commented upon the corporate structure of office based surgical facilities and the legitimacy of the collection of facility fees.
As well there are numerous other problem areas including structuring your relationships with other medical practices or management companies that can run afoul of the Stark and Mini-Stark laws in NY. In Part Two of this article, we will explore those concerns.
Please do not hesitate to contact Scott Einiger or Stacy Steinberg of this firm at (212) 279-9200 with any questions, or to schedule a consultation for assistance in this area.
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[2] The exceptions to the corporate practice of medicine doctrine include (1) professional corporations or partnerships comprised exclusively of physicians employing other physicians and certain licensed professionals (see Education Law § 6531); (2) not-for-profit medical or dental expense indemnity corporation or hospital corporation existing under the Insurance Law (see Education Law § 6527); and (3) a properly chartered medical school or a teaching hospital that enters into monetary, fee-sharing arrangements with physicians.
