A Friendly Reminder: Friendly PC Arrangements are Subject to Scrutiny

As healthcare grows increasingly complex, delivery structures continue to evolve. A popular arrangement is the “Friendly PC” model, where large medical groups are backed by private equity or health system investment and administrative support. But courts and lawmakers have become concerned that certain Friendly PC arrangements encroach on physician autonomy and violate the century-old prohibition on the corporate practice of medicine (CPOM). A recent lawsuit—American Academy of Emergency Medicine Physician Group, Inc. v. Envision Healthcare Corporation, et al., N.D. Cal., No. 22-cv-00421 (the AAEMPG case)—offers a good reminder that lay entities should be careful in setting up Friendly PC arrangements, lest they risk jeopardizing their businesses.

The Debate Over the Corporate Practice of Medicine

The CPOM bar is a broad and inconsistent patchwork of state laws designed to insulate physicians from the profit motive of corporations. The idea animating CPOM laws is that a physician’s medical judgment should be unencumbered by commercial influence. This approach echoes a time-honored view of medicine where the one-to-one relationship between physician and patient is paramount. 

But modern commentators have criticized CPOM laws as “archaic,” “obsolete,” and “antiquated.” These critics argue that the century-old CPOM bar is out of step with our modern healthcare economy. What’s worse, they argue, is that the CPOM doctrine isn’t just a dusty relic from a bygone era—it’s an anchor weighing down American healthcare and stifling innovation.

Regardless of the pros and cons of the doctrine, CPOM laws remain on the books in a majority of states. And California’s CPOM laws are some of the most robust in the country, restricting the practice of medicine to licensed individuals and prohibiting lay entities (companies not owned and run by physicians) from directly or indirectly controlling medical practices or otherwise interfering with medical decision making.

The Friendly PC Model: CPOM Solution?

In order to access capital and shift administrative burdens away from doctors, a lot of medical groups have adopted the Friendly PC model. Under this arrangement, a professional corporation employs doctors to treat patients and concurrently contracts with a lay entity that provides management services to the practice. The professional corporation is either owned by a group of shareholder physicians who have adopted this model, or, as appears increasingly with this model, is owned by a single shareholder physician who has been selected by the private equity firm or health system. This model has been championed by private equity firms looking to invest and innovate in the physician practice sector of the patient care market. 

While much has been written about the Friendly PC model and its popularity has exploded in the last decade, California law has been slow to catch up. No statute or regulation prohibits the Friendly PC model, and precedential case law is scant. That said, there have been rumblings from the California legislature about curtailing Friendly PC arrangements, echoing a worry that the CPOM bar is more honored in the breach than the observance.

The AAEMPG Case: Testing the Friendly PC Model in Court

Against this backdrop came the recent decision in AAEMPG, the latest case to pressure test California’s CPOM bar. According to the complaint, AAEMPG and Envision are competitors. Both provide management services for professional medical groups. But AAEMPG lost its contract with a group of emergency physicians when a hospital awarded the contract to an Envision-affiliated medical group. 

AAEMPG sued Envision, and the core of plaintiff’s claim is Envision’s version of the “Friendly PC” model. AAEMPG argued that defendant’s Friendly PC arrangement violates California’s CPOM bar because the ultimate control of physicians lies in lay corporations and unlicensed executives. 

Envision moved to dismiss the lawsuit, arguing that enforcement of CPOM laws is the exclusive purview of the Medical Board of California and that Courts should abstain from dipping their toes into unchartered regulatory waters. The thrust of their argument was that applying California’s CPOM laws to a complicated business structure requires a delicate balancing of competing public policy concerns in a multi-billion dollar industry with many stakeholders—a task more appropriate for administrative agencies than courts. 

But last month the Court denied the motion to dismiss. In cataloging the long history of CPOM laws in California, the Court rejected the notion that the Medical Board has sole jurisdiction to enforce the CPOM bar, even questioning whether the Medical Board could investigate and pursue a case like this one. And when reviewing the substance of AAEMPG’s allegations, the Court concluded that, if proven, they demonstrate “classic CPOM violations.” 

It remains to be seen whether plaintiff will ultimately prevail, but the AAEMPGlitigation is a good reminder that California’s CPOM doctrine is alive and well. 

So What Should Stakeholders Do?

Although Friendly PC arrangements are under increased scrutiny, even the most ardent advocates of CPOM laws concede that an appropriately designed integration of medical groups and lay entities can comply with the CPOM doctrine. But in practice, predicting what arrangements will trigger regulatory or judicial review can be more art than science, causing understandable consternation for parties looking to harness the efficiencies of large medical groups without stepping on CPOM landmines. 

Medical groups, health systems, and investors would be well served to revisit their Friendly PC arrangements to mitigate regulatory and litigation risk. Particular attention should be paid to:

• the makeup of executive and director positions at the medical group;
• the division of clinical and non-clinical responsibilities;
• the responsibility for supervision, hiring, firing, and disciplining licensed professionals of the medical group;
• the allocation of practice revenue;
• the scope of any restrictive covenants or stock transfer agreements;
• the design and functioning of the corporate compliance program; and
• the process for unwinding the arrangement should a new law restrict the use of the Friendly PC model.