An appeal is underway, but the case stands out among CPOM cases that typically focus on terms of a contract or on practice models and are limited to seeking declaratory judgments and not money damages. The case also serves as a reminder that breaching a contractual promise to follow applicable state laws (even those to be enforced by regulators and that do not provide for a private right of action) can carry real risk. The case is featured this month in Texas Medicine Magazine.

Background

As in many states, the Texas prohibition on the corporate practice of medicine (“CPOM”) has some exceptions and twists and turns, but at its core the prohibition is simple: corporations cannot control physicians’ practice of medicine.[1] The purpose of the prohibition is to ensure licensed physicians are free to exercise independent medical judgment in the best interest of the patient without the undue influence of the corporate bottom line.[2]

For years the physician group that filed suit (all board-certified hospitalists) had a direct contract with a hospital system. Under that contract, in exchange for a stipend, the group provided around-the-clock hospitalist services several of the system’s local hospitals. In 2014, the hospital system sought a different arrangement and put out a bid. It wanted a contract management group to provide and manage both the emergency medicine and hospitalist medicine services together.

But the bid winner had no employed practitioners to service the contract so it had to either acquire or contract for them. The winner approached the hospitalist group that had been providing the services for years, but the group wasn’t interested in selling. Hence, the parties entered into a subcontract arrangement, effectively placing the contract management group between the hospital and the hospitalist group. In the subcontract the management company agreed to comply in all respects with applicable state laws, regulations, and rules—which as the trial court later instructed, included the Texas prohibition on the corporate practice of medicine.

The subcontract relationship started fine according to trial testimony, but the honeymoon ended when the management company began pressuring the physicians to practice in ways that prioritized the hospital’s financial interests over patients’ best interests. The hospitalist group testified they were: told they would have to lead emergency codes even though hospitalists do not routinely lead codes; pressured to discharge patients earlier, sometimes before the physicians felt the patients were ready; pressured to round on patients in a particular order thought to be more efficient for the hospital; pressured to accept all patient transfers even when a needed specialist was not confirmed available; pressured to discipline physicians who did not respond to hospital billing queries even when they improperly suggested a diagnosis; and told to remove a physician whose average length of stay was above average despite it being undisputed that the physician was a “good doctor.” The hospitalists pushed back, but the management company threatened to terminate the contract if they did not fall in line. As the relationship continued to deteriorate, the management company began hiring away the group’s workforce to work for the management company’s friendly physician affiliate, in breach of a non-solicitation promise and in interference with the employed practitioners’ noncompetition agreements with the group. With no other practical choice according to the hospitalist group, it terminated the subcontract with the management company and immediately filed suit.

A Stand-Out CPOM Case

In addition to the notable $10 million jury verdict in a venue not known for run-away verdicts, the case is a stand-out among CPOM cases because there is no private cause of action for violating the CPOM prohibition. Rather, government regulators are supposed to enforce the CPOM prohibition, much as they do with criminal statutes and other offenses. Without a direct way to sue a company for violating the CPOM prohibition, parties are typically limited to seeking a declaration by the court that a contract between a physician and a company is illegal and therefore void, or that a physician owned entity is in fact owned by a company in violation of the CPOM prohibition and therefore illegal. In contrast, this CPOM case was filed as a breach of contract claim because the management company promised to comply with applicable state law, specifically the CPOM prohibition, but broke that promise. Filing the complaint as a breach of contract claim allowed the physician group to prove how the company tried to control the physicians’ medical decisions and seek the related contract damages suffered, not a mere declaration by the court. In this sense, the case is unique and serves as a reminder that breaking a promise to comply with applicable law can carry real risk.

This is the first case of its kind in the state of Texas—the novel issues presented required careful legal analysis and evidentiary development. No matter the legal vehicle, CPOM cases are typically founded on the same principle: the notion that license physicians, not corporations, should be making medical decisions in the best interest of their patients and not the bottom line.

The Appeal

The management company and related defendants are appealing the $10 million Judgment, so time will tell whether this unique CPOM case will stand as decided by the 12-member jury. 

[1] The CPOM prohibition is in part codified in several provisions of the Texas Occupations Code and Texas Administrative Code. Further, Texas courts applying the CPOM statutes have interpreted a lay entity’s practice of medicine to include the exertion of control over a physician’s medical decisions and judgment.  See, e.g., McCoy v. FemPartners, Inc., 484 S.W.3d 201, 205 (Tex. App—Houston [14th Dist.] 2015, no pet.); Doctors Hosp. at Renaissance, Ltd. v. Andrade, 493 S.W.3d 545, 548 (Tex. 2016) (listing cases).

[2] See Garcia v. Tex. St. Board of Med. Exam., 384 F. Supp. 434, 438 (W.D. Tex. 1974) (internal quotations omitted) (“To practice a profession requires something more than the financial ability to hire competent persons to do the actual work. It can be done only by a qualified human being, and to qualify something more than mere knowledge or skill is essential … No corporation can qualify.”).

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