PRACTICE MANAGEMENT CONTRACTS:

STATE OF THE LAW

It is not surprising, therefore, that practice management companies with their promise of relieving doctors from all but the clinical responsibilities of the medical practice have proliferated.; There are a number of large, publicly traded practice management companies such as Phycor and Medpartners, but there are many, many small management companies that provide services to as few as one medical practice.; All have one thing in common: a contractual relationship between the medical practice and the management company which describes and delineates the business and legal relationship.

Management companies and their associated contracts are only needed in those states where the prohibition on the corporate practice of a profession does not allow a medical practice to be directly owned by anyone other than medical doctors.; Almost half of the states allow a professional practice to be owned by an ordinary business corporation which, in turn, may be owned by laypersons.[1] A few additional states allow limited liability corporations also to be owned by laymen and to practice medicine.; New York and New Jersey both clearly uphold and enforce the prohibition against corporate practice of medicine.[2] This article will survey recent decisions in both states that have thrown some light in this area but also have created a clearly conflicting position.

The Office of Counsel disapproved of this method of compensations for similar reasons stated above in the above discussed federal ruling letter; if the management company is providing the patients, the management company cannot be paid on a per patient basis.[8]

THE CLASSIC CASES

Until the recent flurry of activity in this area, there had been only two cases which actually arose out of management contracts for medical services for a medical practice.; The first was the Flynn Brothers case in Texas in 1986 and the second was the New Jersey case of Women’s Medical Center v. Finley in 1983.

First Medical Associates, et al.[9] was a proceeding brought by the management company owned by the Flynn brothers against; medical practice to collect monies claimed due for management services provided.; The medical practice defended against the claim on the grounds that the management contract was unenforceable because legally defective.; The legal defect was alleged to be a percentage compensation provision in the contract which provided that the Flynn brothers would be paid as their compensation for providing medical services two-thirds of the gross revenues of the medical practice.

WOMEN’S MEDICAL CENTER V. FINLEY

The Appellate Division carefully and extensively analyzed the language in the management contract quoting it extensively and noting that the language specifically preserved to the medical practice the right to exclusive control over all clinical aspects and patient relationships while carefully limiting the management company to business and financial aspects only.; The court then ruled that the contract properly preserved the respective rights and duties of the parties limiting the medical practice to the medical area and the management company to the business area.

Although this seminal management contract case appears to provide clear cut guidelines for management company relationships with physician practices, there are two major considerations which militate against its utility.; The first is that the Court is not considering the legal question of whether the nature of the relationship was consistent with corporate practice prohibition principles but, rather, whether the professional practice was required to be regulated as a health care facility under the State Certificate of Need laws by virtue of its relationship with a management company.

For many years, these cases were the only guidelines for lawyers seeking to draft contracts describing the relationship between a practice management company and a medical practice.; There are now a number of cases providing a great deal more guidance, unfortunately, the cases are conflicting.

THE CURRENT CASES

Few of the cases to be discussed and described here actually discuss permissible (or impermissible) phrases or wording in management contracts as was actually the case in the Women’s Medical Center v. Finley case.; The cases do, however, discuss other permissible parameters of the relationship between a business entity and a medical entity including other corporate mechanisms are used to protect the investment and business relationship of the management company with the medical practice.

THE NEW JERSEY CASES

Plaintiff charged that defendants created a series of sham professional corporations that appeared to be owned by New Jersey licensed physicians but were actually controlled by defendant management companies through management contracts and other corporate devices.; The corporate control devices alleged and attacked by plaintiffs included the facts that the medical doctor owners of the professional corporations did not work in the professional corporations and resided outside the state (although licensed in New Jersey).; Further, these doctors signed “undated resignation letters, undated stock assignment agreements”[19].; These devices, along with the management contract, allowed defendant management companies to exercise unacceptable amounts of control over defendant corporations, it was found.

The Court said that the lease between the management company and the medical practice which did not allow termination by the medical practice and which provided automatic renewal each year unless the management company decided not to renew was evidence of “sham ownership” of the medical P.C.[26].; Further, the Court stated that the management services contract was defective because the compensation was calculated entirely by the management company and, again, the services agreement could not be terminated by the medical practice.

THE NEW YORK CASES

The next case in New York considering management contracts was Mainline Medical Services, Inc., et al. v. Thomas Tyebo, et al.[32] decided November 20, 2000.; This was a case where a management company sued a medical P.C. that it managed for money owed for services rendered.; One of the defendants, a doctor shareholder who owned the managed professional corporation, claimed that the plaintiff management company exercised excessive control over the P.C. and, accordingly, its contracts were void, unenforceable and its claims for compensation should be denied.; The defendant claimed that the management company “controlled all primary indicators of ownership; including management of money, billing, collection receivables and had absolute discretion with respect to paying the bills”.[33] Despite the management company’s argument that “arrangements for lay people to provide financial services to a medical P.C. are both proper and lawful”, the court denied the management company’s motion for summary judgment because it believed an issue of fact was raised as to whether the medical doctor “actually owned or controlled” the professional corporation that had contracted with the management company or whether the management contracts “were a scheme by the [management company] to and intended to create an appearance of compliance with the statute”.[34] This case was decided by Judge Ira Gammerman who also decided the Progressive discussed below which is a much larger case with significant factual differences but with a similar legal issue presented.

Fordham Medical and Pain Treatment, P.C. v. State Farm Mutual Insurance Company[35] is a decision denying a motion for summary judgment by plaintiffs.; This action was commenced against State Farm Insurance Company for payment for medical services rendered by a medical P.C. that was managed by a management company.; Payment had been denied because State Farm charged that the P.C. was formed and operated in violation of Article 15 of the New York Business Corporation Law which governs professional corporations.

Judge Gammerman refused to grant summary judgment to the defendants in the Progressive case just as he also refused to grant summary judgment to the plaintiff in the Mainline Medical Services, Inc. v. Teyibo case because he had problems with the control by the management company over medical practices.; In the Progressive case, he appeared to believe that that could be sufficient reason to permit an insurance company not to pay or even to recover payments already made.; In the Mainline case, in almost the reverse factual situation, he appeared to believe that such excessive control would allow a medical P.C. to avoid having to pay a management company for services the management company had rendered.

Also, there is a pending indictment against a management company and several chiropractors and medical doctors, United States v. Andrew Orlander.[54] Although the thrust of the indictment is fraudulent billing, in paragraph 29(a), it is alleged that the chiropractor converted his practice into a medical practice and through a management company, he “maintained control over the finances, assets, management, professional and lay personnel, hiring, firing and the policies governing treatment of patients of the professional corporation.; Through a series of contractual arrangements between the newly formed professional corporation and management company [the defendants] received all profits from the operation of [the medical practices].”; It is further alleged in the indictment that the defendant chiropractor maintained control of the medical practices through a series of contractual agreements, “these included for each facility, a management agreement, which gave to the management company the responsibility of the professional corporation’s day-to-day operation which funneled all the proceeds of the P.C., with the exception of payment of the salary of the physicians and certain limited incidental costs such as malpractice insurance, to the management companies.”[55]

(Louisiana Board of Medical Examiners, Statement of Position: Corporate Practice of Medicine; Applicability of Louisiana Medical Practice Act to Employment of Physician by Corporation other than a Professional Medical Corporation.)

[1] See, e.g., Mars, The Corporate Practice of Medicine: A Call for Action, 7 Health Matrix 241 (1997); Parker, Corporate Practice of Medicine: Last Stand or Final Downfall; 3 Journal of Hospital and Health Law; Jacobson, Prohibition Against Corporate Practice of Medicine: Dinosaur or Dynamic Doctrine, 1993 Health law Handbook 67 (1993 ed.); Rosoff, The Business of Medicine; Problems with the Corporate Practice Doctrine, 17 Cumb.