Generally speaking, licensed physicians in New Jersey cannot practice medicine in just any corporate form. But for a limited number of exceptions listed in N.J.A.C. 13:35-6.16, a general business corporation cannot employ a physician to provide healthcare services.  This is known as the prohibition against the corporate practice of medicine, or as we healthcare lawyers affectionately refer to it, CPOM.

The reason for the CPOM doctrine is that an inherent conflict exists between a physician’s obligation to provide medical care to his or her patient and the general business corporation’s motive to maximize profits.  The goal of CPOM is to remove the burden on physicians of choosing between providing appropriate medical care to their patients and being influenced by shareholders who are laypersons. The CPOM rule is enforced by the New Jersey Board of Medical Examiners (BME).

With this background, there are several ways physicians may structure their practices:

• As a solo medical practice with other employed professionals, including other physicians. It is important to note that in this structure, the physician, as the plenary licensed professional, must employ and supervise the limited licensed professionals such as nurses or physician assistants.
• As a partnership, professional association, or limited liability company, so long as the practice entity is composed solely of healthcare professionals who are licensed or authorized to provide the same or closely allied professional services.  Oftentimes, a plenary license physician wants to form a partnership with a limited licensed practitioner. This is not strictly prohibited but the physician must, at a minimum, maintain a greater ownership interest in the entity than the limited licensed partner. This is true whether the physician is in partnership with one or several limited licensed professionals – e.g., the physician must always maintain at least a 51% interest in the entity.
• Through an associational relationship (e.g., as an employee or independent contractor) with another physician or professional entity; however, the physician’s license may not exceed the scope of the hiring practitioner’s license.
• In certain circumstances, a physician may have an equity or employment interest in a professional practice that is a limited partner in a general business corporation that has a contractual relationship with a professional service entity. In this model, the general business corporation may contract to provide administrative services, such as management services, hiring of non-professional staff, provision of office space and equipment, and billing services.  The physician must ensure that an appropriate licensed healthcare professional determines and implements all medical services and policies, including decisions regarding patient fees and waiver of those fees, and must ensure that the general business corporation makes no representations to the public, under its own corporate name, about offering healthcare services which require licensure.

In the case of Allstate Insurance Company v. Northfield Medical Center, P.C., the New Jersey Supreme Court issued its most recent pronouncement on the CPOM doctrine. Suffice it to say, the CPOM doctrine is alive and well and provides important guidance to providers:

• A plenary licensed physician and a limited licensed (allied) healthcare professional cannot together own a medical practice that results in its control and direction by the limited licensed healthcare professional. In addition, an unlicensed individual cannot own a medical practice with a licensed healthcare professional.
• A general business corporation cannot employ or otherwise engage, for example, through an independent contractor relationship, a healthcare professional.

In light of the Supreme Court’s ruling, it is more important than ever to structure the management services organization (MSO) model between a management company, on the one hand, and a physician or medical practice, on the other, carefully to stay within the parameters of the CPOM rules.  Special attention needs to be paid to the terms of the management services contract and the manner in which it is implemented and operationalized.

This was the dilemma faced by the Court in Northfield Medical Center. Through an interwoven web of space rental leases, equipment leases, and management contracts, a chiropractor-owned management company was able to syphon profits from and maintain control over an affiliated medical practice. Although the majority of stock in the medical practice was owned by the physician, (1) the physician did not participate in day-to-day patient care, (2) medical practice profits were turned over to the management company in exchange for the provision of management services, leased space, and leased equipment, (3) the physician-owner of the medical practice signed an undated resignation letter and affidavit of non-issued or lost certificate bearing an unexecuted notary attestation for the physician’s signature and date, which permitted the chiropractor to remove the physician, and (5) the leases between the management company and the medical practice included a “break fee” of $100,000 intended to penalize the medical practice’s physician-owner for breaking the lease.

The New Jersey Supreme Court found that a factfinder could reasonably conclude the structure was “little more than a sham intended to evade well-established prohibitions and restrictions governing ownership and control of a medical practice by a non-doctor.”  Physicians, limited-licensed professionals, and lawyers alike are on notice that they will be imputed with knowledge of what the CPOM law requires, and conduct intended to protect an investment and circumvent these rules will not be tolerated.

The CPOM doctrine comes into play in virtually every multi-disciplinary practice structure, management contract negotiation, and private equity transaction. In all circumstances, control over and supervision of the clinical aspects of the medical practice and patient care must remain with the plenary licensed physician.