The American Academy of Emergency Medicine Physician Group (AAEM-PG) sued Envision Healthcare in California, alleging that Envision’s use of so-called “friendly PC” business structures violates California’s laws regarding the corporate practice of medicine (CPOM). The suit, which is set for trial in January 2024, has significant potential implications for physician practice management (PPM) companies and private equity sponsors that have invested heavily in PPMs and physician groups.
At least 30 states, including California, have enacted some form of CPOM restriction. CPOM laws are generally intended to prevent unlicensed persons or entities from employing physicians or controlling the practice of medicine. The restrictions take many different forms and vary significantly from state to state. States with CPOM laws generally require that all of the owners of a physician practice entity must be licensed to practice medicine, subject to certain limited exceptions. As a result, private equity sponsors and other unlicensed investors generally cannot own the equity of a physician practice.
In order to facilitate investment in physician practices, private equity sponsors and other investors typically use what is known as a “friendly PC” structure. Under a standard friendly PC structure, the investors own equity in a management services organization (MSO) that purchases the nonclinical assets of the professional corporation (PC) that operates the practice. The PC retains all clinical assets and continues to employ the physicians. The MSO then enters into a long-term management agreement with the PC that provides for the MSO to perform nonclinical administrative services for the PC in exchange for a management fee. Management agreements typically provide for the PC and its physicians to have sole and exclusive authority over clinical decisions and the practice of medicine. The MSO also generally enters into an equity transfer restriction agreement with the physician-owners of the PC, pursuant to which the MSO can require the physician-owners to transfer ownership to a physician designated by the MSO upon the occurrence of certain triggering events.
In the suit, AAEM-PG argues that Envision’s use of friendly PC arrangements constitutes illegal control over the practice of medicine by its managed medical groups in violation of California’s CPOM laws. Advocates for PPMs have defended the friendly PC model, arguing that it facilitates necessary investments in physician practices that are facing increased cost pressures and allows physicians to focus on practicing medicine without being distracted by administrative matters.
AAEM-PG initially filed the suit in December 2021, but the suit has gained significant attention following a story published last month by Kaiser Health News in which David Millstein, lead attorney for AAEM-PG, was quoted as saying “We are simply asking the court to ban this practice model.” A decision in AAEM-PG’s favor could require PPMs operating in California to undergo a significant restructuring to comply with the court’s interpretation of California’s CPOM laws. The outcome of the case could also lead to CPOM challenges or new legislation in other states. King & Spalding has received several inquiries from interested clients regarding the potential impact of this case and we are monitoring the developments closely. If you have any questions, please contact Tom Hawk or Gardner Armsby.
The case is American Academy of Emergency Medicine Physician Group, Inc. v. Envision Healthcare Corporation et al, Case No. 3:22-cv-00421 (N.D. Cal.).
