Red Flags – Absentee Physicians: Medical Director Agreements (Part 2)

March 9, 2022

In Part 2, Michael and Brad share the story of an entrepreneur who ignored important steps in developing a compliant medical service organization (MSO). Tune in as we spot the red flags in this story and evaluate the MSO model and understanding why the physician’s clinical involvement, even with elective medicine, is so critical to being compliant.

Listen to the full episode using the player below, or by visiting one of the links below. Below is the episode’s transcript which has been edited for readability. If you have any questions or would like to learn more, email us at


Intro: [00:00:00] Welcome to Legal 123s with ByrdAdatto. Legal issues simplified through real client stories and real world experiences. Creating simplicity in 3, 2, 1.

Brad: Welcome back to another episode of Legal 123s with ByrdAdatto. I am your host Brad Adatto with my co-host Michael Byrd.

Michael: As a business and healthcare law firm, we are sometimes triggered by certain buzzwords our clients will say in conversation. We know there is potential disaster when we hear these words and we’re immediately on high alert. This season’s theme is red flags.

Brad: Oh yeah, Michael…

Michael: Ding! Well, sorry, you dominated in our first episode with so many things that I felt like I just had to get off on the right start.

Brad: Fair point. I did dominate. I agree with you. Well said. Well, today’s show Michael, if you remember, it’s part two of our episode of last week show when we had series regular and our partner Jay Reyero on [00:01:00] and he joined us to discuss red flags and absentee physicians with consulting agreements. And it started getting me thinking about movies when there’s a first movie that comes out and it’s great. And then there’s a second one and it’s not so much…  

Michael: Are you trying to suggest that this show will not be as good as the one we did with Jay? Because if so, remember, our audience is listening and we want them to continue listening. And so I don’t think its good marketing to kind of call your shot that it’s not going to be a good show.

Brad: No honestly, Michael, the show is going to be amazing because I’m still on it.

Michael: Ding!

Brad: All right. So the reason I bring up the movies is did you ever see the original Karate Kid movie?

Michael: Ding! A, because you’re bringing up old movies again, although I will say you haven’t been doing it as much this season so all of your therapy sessions are working. That’s good. [00:02:00] But secondly, ding! Well, of course I’ve seen it. I mean, that’s a classic. I was borderline dating Elizabeth Shue back in the eighties

Brad: I’m sure you were, just like your other girlfriend from Niagara Falls. So you’re right. Yes, the first movie did come out in 1984. But in my defense its Vogue again because Netflix has released this TV series called Cobra Kai and Cobra Kai is obviously decades later from the original Karate Kid movie tournament where Johnny and Daniel battle it out. And they just released season four on the last day of 2021 so the rivalry still exists. And so the movie reference Karate Kid is back in pop culture.

Michael: Okay, fine. I’m curious.

Brad: All right. Well, in 1986, going back to part two of the Karate Kid was released. And probably if you remember, it just was not nearly as good. It really lost a lot of its thunder but it started thinking about, you know, I [00:03:00] know I’m not comparing us to Karate Kid 2 the movie, but I kept thinking about all the awesome lines and quotes that we all said and learned from the first karate kid movie. Do you remember any of them?

Michael: Yes, I’ve got them ingrained, but a few of the ones of course are tied to Daniel San’s training. The wax on wax off, and then paint the fence up down, side to side. And then of course, Cobra Kai, no mercy and finish him.

Brad: Yes, those are great ones. All right, those last two from Cobra Kai was Johnny’s sensei telling Johnny to like sweep the leg, Danny, you know, get him. And so in our age group if someone yells out sweep the leg, Johnny that means show no mercy. And so those who watched the movie, unlike Johnny’s sensei, Daniel’s sensei, Mr. Miyagi, he wanted to slow everything down and look [00:04:00] at the bigger picture of what is in Daniel’s trainings. So besides the statements like wax on wax off, he would say things like first learn stand, then learn fly, nature rule Daniel San, not me. And so point being is we would hear all these terms in the movie of two different cultures of fast and furious versus slow down and think about bigger pictures. So going back to our red flags, when we hear terms that a client is either getting hired as a medical director or…

Michael: Ding!

Brad: Or a client is hiring the medical director…

Michael: Ding! Sorry I am trained when we hear the word medical director we know that it’s an immediate red flag, but go ahead, finish your thought.

Brad: You’re right. And especially if we hear that term and the person who’s coming from a strong corporate practice medicine state. They’ll say we’re putting together an [00:05:00] MSO model with this medical director, but the physician on the professional entity will have nothing to do with the practice or the MSO and…

Michael: Ding! That’s a context ding, Brad. So let’s do a little bit of a vocab and this is a common vocabulary word I am just going to assume that there’s someone in our audience that needs context, just like me and may not have corporate practice of medicine or CPOM tattooed on their neck like you do.

Brad: All right, I’ll take the CPOM you take MSO. So the corporate practice of medicine, or as Michael likes to refer to my rapper name, CPOM or “C Pop” or “C Pop M”. This is a state doctrine and every single state state’s different, but it’s really developed to ensure that the licensed physicians or the entity is wholly owned by licensed physicians who are practicing medicine, less limiting the commercialization of medicine by non-physicians. The underlying purpose [00:06:00] of the corporate practice medicine doctrine is to protect patients and preserve the integrity of the health care in the sense of who’s providing the services, making sure that non-physicians are not interfering with patient care. Stated differently, this is a doctrine that restricts ownership of medical practices to just certain licensed physicians. And yes, there are some exemptions, but the concept all goes back to ensure patient care is held to the correct standard, which is typically the standard of care and that’s being controlled by physicians. So that’s the concept, and I know we’ve discussed in other shows, but assuming our audience hadn’t heard the other shows, Michael why don’t you give the vocabulary of MSO.

Michael: Yeah. And again, we’ve had entire episodes just dealing with the MSO model, the management services organization model. And it goes hand in hand with the corporate practice of medicine in the sense that it’s the solution when you have [00:07:00] non-doctors that are wanting to become involved in ownership of a business that’s providing medical services. And so the MSO at the very highest level takes this concept of A, we’re going to comply with the corporate practice of medicine that you just explained. So we’re going to have a doctor owned professional entity, or if they have an exception, it’ll be compliant within whatever those exceptions are. And then we’re going to have another entity that is going to be owned by anyone and whoever the business owners are. And so you have two separate business entities and you kind of marry those together through a contract called a management services agreement. And there’s a lot that is packed into there, but the general idea is we’re going to be compliant and we’re going to make the economics of the business arrangement work in a compliant way. So with that, that kind of leads us [00:08:00] as to why one of the reasons or the biggest reasons we get red flagged when we hear the word medical director, is this idea as we’ve been talking about the last couple of weeks of the absentee physician and just, you know this thought that oh, well we’ve got a medical director, we’ve got their license, but they don’t have to do anything else. And that’s where we get triggered and want to explore. So with that very full context in mind, let’s go into today’s story.

Brad: So last week, unlike last week story where we had a consulting agreement and federal payers involved, this one we’re not really dealing with any federal government payers.

Michael: Ding! Uh, well, sorry. I heard federal payers. You said did not have those, but I just it’s like a Pavlovian response.

Brad: Fair to ding me when you hear program payers. So correct. This week [00:09:00] story is for the elective medicine world where patients are the payers and there’s no commercial or federal payers involved.

Michael: And let’s pause again. What do we mean when we’re talking about elective medicine? When we talk about elective medicine, again, no insurance is involved. Cash pay is another word you’ll hear. But what you’ll see is medical spas, cosmetic centers, or cosmetic practices, weight loss centers, wellness centers, IV hydration bars, but the common element is cash pay. And so if we’re talking in our story today and we’re talking about cosmetics, understand audience that this concept applies to really any kind of cash pay based elective medicine type model.

Brad: I agree. Our client in this story is that entrepreneur. He has no medical background, but has started multiple other companies in [00:10:00] other industries over his lifetime. Extremely intelligent, fast learner on all these new industries, we will call him Johnny.

Michael: Sweep the leg. I’m assuming that you’re sticking with the Karate Kid theme there with the name Johnny.

Brad: Yes. Good catch there. Johnny is well-read on the cosmetic industry. He has researched this, has decided to work with the plastic surgeon, has been a patient of them, has a great grasp of the cosmetic market in general, and hired local counsel to assist with acquiring a med spa in the state of California.

Michael: Ding! I’m sorry, when you say California, it’s not just a strong corporate practice of medicine state, and everything is extra, including the enforcement. And so we just have an automatic ding that we have when we are doing work in California because we know the stakes are going to be a little bit higher.

Brad: [00:11:00] Well just get ready, buddy. Here we go. All right. The local council has noted that although he can buy the med spa from the nurse that currently owns it.

Michael: Ding!

Brad: Johnny needs to get a doctor involved as the medical director.

Michael: Ding!

Brad: Johnny agrees that the doctor should be involved and finds a radiologist to be the medical director.

Michael: Ding, ding!

Brad: Dr. Kreese…

Michael: Dr. Kreese? Explain.

Brad: Kreese was Johnny’s sensei of the Cobra Kai karate school.

Michael: No mercy, no mercy. Well, just keep rolling with this Karate Kid thing.

Brad: All right. So Dr. Kreese, a friend of Johnny’s works full-time at a hospital…

Michael: Ding!

Brad: Has never been inside a med spa…

Michael: Ding!

Brad: Much less has any cosmetic training…

Michael: Ding!

Brad: I’ll just get some mailbox money is what the doctor said.

Michael: Ding, ding!

Brad: So Johnny was going to hire that nurse who currently owns the med spa to be the sole employee of Johnny’s new med spa.

Michael: Ding!

Brad: Man you’re killing it, huh?

Michael: Yeah. Well, you know, [00:12:00] I’m going to win the contest this week. That’s all I’m going to say.

Brad: Michael, I thought we agreed that it’s not a contest who can ding more.

Michael: Yeah, right.

Brad: I’m kidding. Of course it’s a competition and everyone knows I’m winning the seasons ding competition.

Michael: Okay. Moving on and that’s not true. Moving on, I thought you said an MSO was part of this story. When does the MSO pop in?

Brad: You were paying attention. Thank you for paying attention, sir. Well, Dr. Kreese, he was smart enough to hire an attorney to review the medical director agreement and Dr. Kreese counsel noted that, hey, you’re in California and I remember once reading something that you can’t own a med spa. Only Dr. Kreese can actually own it.

Michael: Well, that’s like the anti-ding. That sounds promising.

Brad: Yes, it does sound promising. The party agrees to form a new professional entity in California, which Dr. Kreese will own and [00:13:00] the employees will be able to work under Dr. Kreese license. And Dr. Kreese will just receive about $500 a month.

Michael: Ding! Can we stop? I can’t keep track of all these red flags, but you know, you hear this work under the license thing and I think we just naturally know that what they’re selling is their license and not much else. And then what else are you going to do for $500 a month? You’re not going to be expected to do very much, or you’re not going to agree to do very much for that.

Brad: But Michael, like all commercials, but wait, there’s more. Johnny has made it clear to Dr. Kreese that he will have no ownership of the MSO. He will not have to do any work on behalf of the professional entity…

Michael: Ding!

Brad: As the nurse will take care of all the patient care as she’d been providing cosmetic services over the last 12 years.

Michael: Ding! Okay, well how did we get involved?

Brad: [00:14:00] You will love this one. The Cobra Kai MedSpa was operational for about two years with no problems until Dr. Kreese received a letter from the medical board.

Michael: Ding!

Brad: Yeah. A nurse practitioner was operating on his license without following the proper standard of care

Michael: Ding!

Brad: Yeah. We got a call from one of our physician clients in California and they were friends so he sent them our way, which brings us to date.

Michael: Okay. Wow. Well, first of all, kudos for slipping in Cobra Kai MedSpa as a term, and I approve that message.

Brad: The Cobra Kai MedSpa where they show no mercy. Would you want to go there?

Michael: Yeah. I mean, I think that the injection may leave you in a really bad position. People would know when they saw your face afterwards, for sure. [00:15:00] Well, there’s a lot to unpack there, Brad, so let’s go on a commercial break and on the other side we can kind of talk through the different dings and red flags. And just remember the absentee physician is the central issue here and we can kind of unpack the different pieces.

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Brad: Welcome back to Legal 123s with ByrdAdatto. I’m your host Brad Adatto with my cohost Michael Byrd. Michael during commercial break, it was confirmed that off-camera our podcast extraordinary, the person who helps make us sound so good, Riley agreed that Cobra Kai is pretty cool. So it is hip and because we’re old and she’s very young so it makes it’s going back. All right, back from commercial break, let’s just finish the story. For some reason you dinged me a lot, I think mostly because you were trying to win the competition, but in reality, I guess there was a ton of dings. One of the first dings that you hit me with was the question when I said the word medical director. Why did you ding that?

Michael: Well, first let me start as that there was just an implied ding a minute ago when you called yourself hip, but we’ll move on.

Brad: Fair enough.

Michael: So why ding the term medical director? So first of all it has become a very generic [00:17:00] term that means a lot of different things. Kind of like Kleenex is a term that at one time was specific to a brand. And now it’s just a very broad term. We use sometimes to bring in the fact that here in Texas, when someone says they want a Coke, it could mean any kind of soda. And so we know when we hear the term medical director, it really doesn’t mean much like we need to know more to understand what in the world’s going on. But even within the corporate practice of medicine world that we’re talking about, we’ve seen everything. I mean, we did a whole episode a few seasons ago where we had someone that was being asked to be a medical director and he was being asked to sign on as a general partner in the agreement. We have seen them coming on as independent contractors, but they’re really allowing, they quote MSO or the other entity to be the entity that’s practicing medicine. So there are so many different meanings to [00:18:00] it that you know, it’s an auto red flag.

Brad: Yeah. And that reminds me of show we did the Corporate Practice of Medicine, A Preventable Death to Your Practice. The one out in North Carolina, when the client didn’t even know that the state had that role, it was just being a medical director. But in this story, Dr. Kreese attorney identified early on that Johnny would not own the PC, which is great. That’s important. As you said, that’s a non-ding and that they needed a doctor to own that professional corporation. But you dinged me when I mentioned the doctor was a radiologist. Why was that?

Michael: Well, let me explain because there is a compelling or compliant point there. And that is the rule in a corporate practice of medicine state in California when you have to have a physician own an entity is they just have to be licensed in the state. So from that standpoint, it’s great. But we know when we hear radiologist that’s all they’re planning to do because they don’t even know anything about the rest of it. And [00:19:00] so that’s a big red flag that they’re probably going down a non-compliant path.

Brad: That’s a good point. And I think a lot of times people don’t realize that just having a physician involved like that is not again, that does not solve all the issues. So you also dinged me when Dr. Kreese was working full time at another facility and that the nurse was going to be providing all the patient care and I know that has a lot to unpack.

Michael: It ties into this absentee physician concept. So the first red flag we just talked about is okay, we know he doesn’t have the skills. So we’ve got someone who’s supposed to be supervising and delegating yet they don’t even know this area in which you’re going to do it. And now we find out that he’s working full-time somewhere else, completely disengaged from this business, which means there’s not going to be any actual supervision going. So it’s really going down this [00:20:00] path of truly I’m selling my license for a monthly fee.

Brad: Yeah and I think the other piece that you probably want to concentrate on is we we’ve talked about many other shows is the good faith exam issue.

Michael: Yeah. What we do know is that the chain of care in every state, when a new patient comes in, they have to receive a diagnosis and a treatment plan. In California it’s actually called a good faith exam.

Brad: That’s where originated.

Michael: Yeah. The concept here is that someone that has the scope of practice to exercise independent medical judgment has to be able to review the patient history, look at them and determine that whatever it is that’s a medical treatment that they’re going to get is appropriate. That’s done by a doctor, a nurse practitioner or a PA. And so when you hear full-time doctor engaged somewhere else, who also is a radiologist, you’re like okay well clearly he’s [00:21:00] not going to be doing the GFE. And so again, that is another flag that needs to be explored because it’s usually an indicator of a problem.

Brad: Yeah those are great points. And I think the part that a lot of people need to understand is a nurse can’t prescribe a treatment plan. It’s outside the scope of practice authority. They can definitely get in trouble with their nursing board and definitely get in trouble with the medical board. And as you said that they need a doctor or a PA or NP really to clear those persons. And in our story even though the nurse had been providing these cosmetic services for over 12 years, and may know more about it than a lot of physicians. It’s still outside of the scope to clear patients for medical treatments and because they are diagnosing, prescribing a drug, or prescribing a medical equipment, or prescribing a medical grade chemical of some sort.

Michael: Great points.

Brad: What are the risk factors? You [00:22:00] talked about supervising physicians, so let’s talk about some of those other risk factors that you were dinging.

Michael: Clearly the thing that’s front and center is patient care. And I say front and center because that’s what the board ultimately cares about. You started this episode early on talking about the importance of patient safety and the focal point, and that’s what the boards are looking at. And we see the consequences in a board action oftentimes directly tie into, did someone get hurt or not? We call it if there’s no patient harm, we call it a technical violation. But there are certain aspects when you have a quote medical director, supervising physician involved that may not really feel like they’re part of the chain of care, but there are things that some boards care about. California sometimes cares about it more than other states, but there are definitely risk factors that have to be talked [00:23:00] about. So we’re talking about the MSO, we often see the mid-levels, the RN’s staffed in the MSO, right? And so you have to have that conversation of what state are you in? What’s that going to look like? Is it clear that they may be employed by the MSO, but they’re being supervised by the professional entity? And even when you do that a medical board may not like it because they’re going to have to, you know, this isn’t what they’re doing every day and they’re going to be fixated on this you have a nurse employed by non-professional entity. And how do you work around that? There’s other areas of financial controls that you got to think about. And so again, some states look at it more than others, but an idea between the MSO is they’re providing these [00:24:00] turnkey service to the practice, the flip side is that an truly absentee physician, all of a sudden shows up, or the doctor may own the entity, but they don’t know anything about what’s going on in the business, they don’t know where the bank accounts are. And so sometimes boards will actually start digging into that as a thread to pull to say, hey, we got an absentee physician here that’s doing nothing. And patients are in danger. They don’t even know where they do their banking. And so it’s a conversation worth having. We encourage, even when that’s being done turnkey by the MSO, that there’s a channel of communication with the doctors so the doctors aware of what’s going on in the business side, in addition to the patient care side.

Brad: Yeah. And I think you had a great point there is that the patient care typically is the most crucial aspect. But again, we’re looking at all the red flags that we heard in this story and so we just want to make sure our audience understands how a board would [00:25:00] look at each one.

Michael: Yeah. Tell us, what’s the status of the case against Dr. Kreese?

Brad: Well, for those who know, or don’t know the wheels of the California medical board turn extremely slow. We have local counsel working with the California medical board, but we still haven’t had much progress yet as to what is the next phase of this investigation. However, Dr. Kreese has terminated his relationship by terminating his MSA. And he actually had a medical director agreement with his own PC, with Johnny and Johnny’s med spa. So, last we heard through council is that Johnny’s looking for a new doctor to work with. But the story is a perfect example of someone who feels like they’re compliant because they went out and got an MSA with a physician and they think that that’s sufficient for the MSO model. I mean, that is an important step to have that [00:26:00] management service agreement. That’s part of it, but it doesn’t by itself, make it a complete compliant MSO model. And the other takeaway would just be to understand that for Johnny, you know, he may not have been brought into this medical board investigation, but he’s basically shut down right now because he’s trying to find another doctor to actually build one compliantly. And in full disclosure, we do not represent Cobra Kai MedSpa. So I don’t know what the status of Johnny is right now. And Michael, what are some of your final thoughts?

Michael: Well first, if it was actually called Cobra Kai MedSpa, we would need to represent them.

Brad: Yes, Riley approves that statement.

Michael: Yes. Well, Elizabeth Shue was a really important girlfriend of mine in the eighties, but Brad, she was an absentee girlfriend. Like I never saw her. And so that caused a lot of problems. And so I would just say this, that [00:27:00] it may not have actually been a real girlfriend because I never actually saw her. And so if you have a med spa with an absentee doctor, who’s never there and never doing anything, you may have some similar problems to me. You might need to call me for some therapy.

Brad: Fair enough. So, sorry to hear about your absentee girlfriend. Join us next Wednesday. We have another new show, Red Flags – Non-Competes are Not Enforceable.

Outro: Thanks again for joining us today. And remember, if you liked this episode, please subscribe. Make sure to give us a five- star rating and share with your friends. You can also sign up for the ByrdAdatto newsletter by going to our website at ByrdAdatto is providing this podcast as a public service. This podcast is for educational purposes only. This podcast does not constitute legal advice, nor does it establish an attorney-client relationship. Reference to any specific product or entity does not constitute an endorsement or recommendation by ByrdAdatto. [00:28:00] The views expressed by guests are their own and their appearance on the program does not imply an endorsement of them or any entity they represent. Please consult with an attorney on your legal issues.

ByrdAdatto Founding Partner Bradford E. Adatto

Bradford E. Adatto

ByrdAdatto founding partner Michael Byrd

Michael S. Byrd