Disclaimer: As with many client case studies, the names of the people have been changed to protect the attorney client information. However, the facts and laws are real and should be considered accordingly.
In the rapidly changing landscape of health care and elective medicine, compliance is more than just a buzzword—it is the foundation of professional integrity and sustainable practice. However, even well-meaning practitioners can find themselves in a legal dilemma when navigating unfamiliar regulations. This was the case for Dr. Smith, an OB-GYN in North Carolina, who inadvertently became the focus of a medical board investigation and faced financial turmoil due to a technical violation of Corporate Practice of Medicine (“CPOM”) laws. This case study serves as a cautionary tale, highlighting the importance of proactively understanding and addressing compliance risks.
The Case of Dr. Smith
Dr. Smith ran a traditional OB-GYN practice with most payments coming from commercial health insurance payers. When he became interested in aesthetics, he envisioned incorporating a medical spa next door so he began by investing in training and providing several non-invasive aesthetic treatments through the OB-GYN practice.
Coincidently, Dr. Smith was approached with what seemed like a straightforward opportunity—serving as the medical director for a medical spa who we will call North Carolina Medical Spa, LLC. The opportunity aligned with his recent interest and Dr. Smith felt like this was a logical step in developing this practice area in order to open his medical spa in the future.
On the surface, the arrangement appeared compliant. Dr. Smith engaged a seasoned contract attorney to review the medical director agreement that had been presented to him by North Carolina Medical Spa. However, while Dr. Smith’s attorney was proficient in traditional contract law, he lacked the critical health care experience. Dr. Smith ultimately signed the agreement and eagerly began participating in the role of supervising and delegating the aesthetic medical treatments performed at North Carolina Medical Spa. Dr. Smith even expanded his trainings so that he could appropriately delegate and supervise all the medical treatments offered at North Carolina Medical Spa.
Business Structure and Medical Board Scrutiny
This opportunity went great for Dr. Smith until he received a letter from the North Carolina Medical Board opening an investigation. The issue? He was being investigated for aiding and abetting the unauthorized practice of medicine. Triggered by an unhappy patient who was denied a requested refund for unused service (unbeknownst to Dr. Smith), the medical board alleged that North Carolina Medical Spa was engaged in the unauthorized practice of medicine and that Dr. Smith was helping this to happen. The unusual twist in this case is that the allegations did not involve the delegation and supervision of services to patients; rather, the allegations stemmed from an alleged violation of CPOM.
Entities Employing Physicians
One of the red flags to the medical board was the fact that North Carolina Medical Spa was a non-professional limited liability company (“LLC”) and not a professional limited liability company. In North Carolina, strict CPOM laws prohibit non-professional entities like LLCs from employing or contracting with physicians to practice medicine. This LLC clue opened pandora’s box for the medical board in its investigation. The medical board was quickly able to determine that North Carolina Medical Spa was owned by non-professionals, which further compounds the CPOM violation. Dr. Smith’s involvement with the LLC was found to be a direct violation of North Carolina’s strict CPOM laws. This critical oversight set the stage for a regulatory dumpster fire.
Preventable CPOM Violations
The corporate practice of medicine doctrine is rooted in the principle that medical decisions should be made by licensed professionals, free from the influence of non-medical entities. In most cases, technical violations of CPOM laws serve as add-ons to enforcement actions related to patient care issues. However, for Dr. Smith, the violation became the primary focus of the medical board’s scrutiny. Compounding matters, a second state where Dr. Smith held a license also launched an investigation, amplifying the stakes for Dr. Smith.
What made this situation especially devastating was its preventability. The clues of non-compliance were present in the medical director agreement. A health care attorney with expertise in CPOM laws would have identified the LLC structure as incompatible with North Carolina’s stringent regulations, potentially averting the entire ordeal.
The fallout from the investigation was swift and severe. Dr. Smith received professional discipline, including a report to the National Practitioner Data Bank, a searchable web-based repository containing information on medical malpractice payments and certain adverse actions related to health care practitioners. This left a permanent blemish on his record, but financially, the consequences were even more severe. Insurance companies suspended payments for his OB-GYN practice, impacting his primary source of income for over a year. While he eventually resolved the investigations and resumed his practice, the damage—both reputational and financial—was long lasting.
Navigating CPOM with MSOs
Dr. Smith’s entire situation could have been avoided by recognizing the need for and implementing a compliant business structure, such as the management services organization (“MSO”) model. In states like North Carolina, where CPOM laws are strict, an MSO provides a legally sound framework for collaboration between medical and non-medical entities.
How the MSO Model Works
- Two Entities: The model involves two entities—a professional entity (“PE”) owned by a licensed physician and a MSO owned by non-physicians, physicians or a mix of owners.
- Management Service Agreement (“MSA”): The two entities enter into an MSA, clearly delineating the non-clinical services the MSO will provide, such as billing, staffing, and leasing.
- Separation of Roles: The PE retains control over medical decisions, ensuring compliance with CPOM laws, while the MSO handles business operations.
This model reduces compliance risk, positions businesses for growth, and opens avenues for future sales to non-physicians. While it requires upfront investment and operational adjustments, the long-term benefits can far outweigh the costs.
To learn more about the MSO model, please feel free to download our free eBook.
Proactive Compliance Strategies
Understanding and addressing compliance risks proactively is essential to avoid situations similar to Dr. Smith’s. Knowing your state’s CPOM laws is critical, as these regulations vary in strictness across states. Engaging specialized legal counsel with health care compliance expertise is equally important because general business attorneys may overlook key health care-related issues. Investing in a compliant business structure and taking a proactive approach to identify and mitigate risks before they escalate is always more cost-effective than reacting to regulatory scrutiny or investigations.
While Dr. Smith ultimately regained his practice and reputation, the ordeal left permanent scars—a stark reminder of the risks associated with technical violations. For physicians who unknowingly enter a similar arrangement, the potential consequences can be devastating.
Avoid Compliance Pitfalls with ByrdAdatto
This case underscores the importance of aligning your business model with health care compliance standards. By leveraging tools like the MSO model and consulting experienced health care attorneys, practitioners can safeguard their careers and avoid preventable pitfalls. Our legal team is here to guide you through these complexities. Contact ByrdAdatto and to ensure that your practice’s foundation is as strong as your commitment to patient care.
