Certain states are better than others when it comes to lucrative ketamine ventures. Whether you’re a physician looking to open a clinic in the space, or if you’re a third party lay person or entity looking to fund or manage such a practice, you need to be on the look-out for states with strict corporate practice of medicine (“CPOM”) regimes that will put a damper on straightforward business relationships between physicians and third parties who are not licensed healthcare providers. Making the top of our strict CPOM list is, in no particular order, New York, Washington State, and Texas. California gets an honorable mention, too. We’ll visit each states’ CPOM limits below.
First, the American Medical Association has a really nice, general summary of what the CPOM represents:
The corporate practice of medicine doctrine prohibits corporations from practicing medicine or employing a physician to provide professional medical services. This doctrine arises from state medical practice acts and is based on a number of public policy concerns, such as (1) allowing corporations to practice medicine or employ physicians will result in the commercialization of the practice of medicine, (2) a corporation’s obligation to its shareholders may not align with a physician’s obligation to his patients, and (3) employment of a physician by a corporation may interfere with the physician’s independent medical judgment. While most states prohibit the corporate practice of medicine, almost every state has broad exceptions, such as for professional corporations and employment of physicians by certain health care entities.
In the ketamine space, we’re typically approached by potential clients that want to manage/finance/develop/market a physician’s off-label ketamine infusion practice. Typically, this managing entity is referred to as a Management Services Organization (“MSO”). These would-be MSOs often have term sheets detailing proposed transactions that completely violate the CPOM of the state in which the physician’s practice is situated. Specifically, a term sheet will contemplate the company’s acquisition of equity in the physician’s professional corporation (“PC”) or equivalent professional entity. Most of these companies are initially shocked to learn about the CPOM because they typically aren’t well-versed in U.S. healthcare laws, even if they’re very good at launching ventures in a variety of industries.
Once we explain the overall complexities posed by the CPOM, the next question (after being asked to reform the CPOM-offending term sheets), is: “what are the best states for the CPOM?” There may be no “best” state when it comes to the CPOM, mainly because other local health care laws will apply anyway to take its place that are just as onerous. However, the easier issues at this point are: (1) which states have very little wiggle room when it comes to implementing the “friendly PC” model, and (2) which states enforce CPOM on a regular basis by the courts and/or Attorney General?
Here are the strictest CPOM states in our opinion, in descending order:
New York makes the list where its statutes, regulations, and its case law combine to create a very stringent CPOM situation whereby lay companies can only provide a very limited number of administrative services and resources to physicians and their PCs. The notorious cases in New York that serve as a bright lines for what not to do are the Carothers and Aspen Delta Management cases–basically any combination of MSO services that could equate to “extensive control” over a medical practice are going to land the parties in hot water, including term, consideration, fair market value, termination rights, and business oversight authority. Further, where an MSO may normally try lock up a professional corporation, via a management services agreement, through things like stock restrictions, such agreements or covenants are not permissible in New York because of the CPOM, and parties need to be very careful when crafting things like physician non-competes where they could be construed to violate the CPOM.
Washington surprisingly made the list where there’s been a resurgence and extension of its CPOM doctrine through recent case law. Including certain unpublished decisions, it seems to be the case in Washington State that other than very limited secretarial and office manager type functions, non-healthcare provider companies cannot do much more for a practice or clinic without running afoul of Washington’s somewhat vague and broad CPOM laws. In some of the cases at hand, services like maintaining the bank accounts of the practice, providing administrative or management advisory services, or getting a power of attorney for the practice for strictly administrative tasks violates the CPOM. And of course, no kind of fee splitting is permitted between the PC and any outside company or individual.
The CPOM doctrine in Texas smacks of that in New York in that any kind of direction or control over the practice by a non-physician can run afoul of the law. Texas case law has made it clear, too, that no one set of facts regarding the relationship between a physician and a lay company or person dictates, or creates a bright line for, what violates the Texas CPOM. What the courts look for is whether a physician has relinquished too much control over their practice to non-physicians. MSO services/compensation that offend the CPOM in Texas include, but are not limited to, (a) certain levels of profit sharing based on services rendered by the MSO and control of the PC by the MSO, (b) the ability of the MSO to enter into third party agreements on behalf of the PC, and (c) the MSO being able to select the PC medical staff with which the physician works. The bottom line in Texas is that the courts will scrutinize MSAs to determine whether the PC/physician retains adequate control of the medical aspects of the practice, which can easily spill over into the administrative aspects by an unwitting MSO.
California gets an honorable mention because it’s still a relatively strict CPOM state, which I wrote about here. A glowing exception is that physicians are, under certain circumstances, able to pay a portion of gross revenues from the practice for goods and services so long as such consideration represents the fair market value of the goods/services rendered.
If you’re looking into any kind of ketamine venture in the U.S., your first piece of diligence is to thoroughly investigate CPOM in the state you wish to target. Just going headlong into a CPOM jurisdiction without knowing where the red flags lie is an easy mistake to make, so be sure to check a state’s statutes, regulations, case law, and administrative decisions– including any Attorney General opinions and/or state agency stipulations.