CA “Friendly PC” Model at Risk – Part 2

In Part 1, we provided a quick history of a California state bill (SB-642) that was placed on hold after passing through the California Senate Committee on Health. The bill was intended to further limit the role of management services organizations (MSOs) in California. Even though it was put on hold, this bill will likely reappear in an amended form during the next legislative cycle. In this post, we will give a more in-depth discussion of the potential ramifications of SB-642.

“Friendly PC-MSO” Model

Many medical practices in California actually include two separate but contractually related entities: An MSO, often owned by non-physicians or non-physicians and physicians, and a professional corporation (PC), owned by physicians and responsible for the clinical components of the business.

This structure has developed in part due to California’s restrictions on “lay” persons or entities from owning or operating a medical practice or employing physicians. This so-called “Friendly PC-MSO” structure allows lay investors, sometimes private-equity backed, a way to invest indirectly in medical practices.

Recap on Provisions of SB-642

SB-642 attempted to add a section to the Business and Professions Code providing that:

  • That the shareholders, directors and officers of PCs manage and maintain ultimate control over the assets and operations of the PC
  • That the management and ultimate control of PC shareholders, directors and officers cannot be curtailed or replaced by any non-physician entity or person, and that this includes curtailment or replacement via stock transfer restriction agreements or other contractual agreements (like management services agreements (MSAs) with MSOs)

Implications

Through legislative prohibitions on the corporate practice of medicine, California law prohibits unlicensed persons from owning PCs or directly employing physicians.

The broad language used in the bill mandates that PC shareholders, directors and officers have managerial control and ultimate control over business assets and operations, and that control cannot be displaced by non-licensed persons.

ARM’S LENGTH MSO ARRANGEMENTS

Even for MSOs truly providing third-party, arm’s length administrative services to PCs — things like billing, bookkeeping and accounting tasks, contract negotiation and execution, non-clinical staffing and related human resources functions — the new language goes beyond current rules and could circumscribe the ability of MSOs to provide those core functions. That may limit the ability of PCs and physicians to off-load non-clinical functions that MSOs can handle more efficiently so that the doctors can focus on healthcare delivery.

FRIENDLY PC-MSO PRACTICES

For Friendly PC-MSO practices, where the MSO’s reach often extends into the heart of the practice’s business except for actual clinical functions, the new legislation could pose a very serious challenge. That may in fact be the intention of the bill. Given the prevalence of Friendly PC-MSO practices in California, many practices may need to rethink their structure and contractual arrangements should a similar bill become law.

Contact Weavil Law for More Information

For more information, contact Weavil Law today by calling 650-308-8187 or by email at contact@weavillaw.com.

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Weavil Law

At Weavil Law PC, our unique approach to Corporate and Healthcare counsel is informed by decades of experience. Scott Weavil is Weavil Law PC’s founder and Principal Attorney. He began his career as a Mergers and Acquisitions attorney at Skadden in New York City, consistently ranked among the top law firms in the country.
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