CA “Friendly PC” Model at Risk

Many medical practices in California actually include two separate but contractually related entities: A management services organization (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 “MSO-Friendly PC” structure allows lay investors, sometimes private-equity backed, a way to be involved in healthcare.

Legislative Challenge

This year, the California Legislature put a bill (SB-642) on hold that would have significant implications for the operation of Friendly PCs.  This bill would have further limited non-physician involvement with PCs by prohibiting non-PC personnel (like MSOs) from having control over the assets and internal operations of PCs.

In this post, we will give a brief history of the bill, highlighting its essential provisions, and then discuss some of its implications for the future of corporate-medical involvement in California. 

Quick History of the Bill 

The bill passed through Senate Committee on Health successfully. But, subsequently, the bill was placed in the “suspense file” of the Senate Appropriations Committee. This means that the bill is in stasis while the Appropriations Committee reviews its potential impact. An amended version of the bill could reappear during the next annual legislative cycle.  

Specifics

The bill would have added provisions mandating:

  • 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

What are we to make of this? As mentioned, the State of California already limits non-physician influence over PCs in a direct way. This newly proposed legislation would further limit non-physician involvement, but it would do so in a more indirect way mainly by targeting arrangements between MSOs and PCs.  At the present time, many PCs outsource various tasks to MSOs in order to promote efficiency and greater focus on clinical activities. PCs often outsource accounting tasks, marketing, real estate property management, contract negotiation and execution, human resources, and others as well. When PCs outsource to MSOs in this manner, PCs still retain control over key tasks, as well as the “final say” on a wide range of critical things.  Bill SB-642, in its current wording, would seemingly call into question the validity of these PC-MSO arrangements, and could end up restricting them in many ways.

Contact Weavil Law for More Information

This is just a quick overview of what’s happening with SB-642 and its provisions. In our next post, we will dive more deeply into the implications of this proposed legislation, and the arrangements between PCs and MSOs. For now, if you have questions, contact Weavil Law 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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