The Corporate Practice of Medicine in a Changing Healthcare Environment

California Research Bureau California State Library

The Corporate Pracce

of Medicine in a Changing

Healthcare Environment

April 2016

900 N Street, Suite 300, Sacramento, CA 95814 www.library.ca.gov/crb

California Research Bureau | California State Library

ABLE OF CONTENTS

EXECUTIVE SUMMARY 1

THE CORPORATE PRACTICE OF MEDICINE BAN IN CALIFORNIA 2

BACKGROUND 2

INITIAL IMPACT OF THE BAN ON HEALTHCARE 3

CALIFORNIA PHYSICIANS 3

EXEMPTIONS TO THE BAN 4

HOW CONSISTENT ARE CALIFORNIA’S EXEMPTIONS? 7

CALIFORNIA IN CONTEXT: EXEMPTIONS TO THE EMPLOYMENT BAN IN OTHER STATES 10

NON-PHYSICIAN MEDICAL PROFESSIONALS AND THE CORPORATE PRACTICE OF MEDICINE 11

ADVANCED PRACTICE REGISTERED NURSES 11

OPTICAL MEDICINE 12

HEALTHCARE INTEGRATION AND THE CORPORATE PRACTICE OF MEDICINE 14

HOSPITAL-PHYSICIAN ALIGNMENT STRATEGIES 14

ACCOUNTABLE CARE ORGANIZATIONS: FROM ALIGNMENT TO INTEGRATION 16

RETAIL MEDICINE AND THE CORPORATE PRACTICE OF MEDICINE 17

MEDI-SPAS AND THE CORPORATE PRACTICE OF MEDICINE 18

PREVENTING CONFLICT OF INTEREST IN PATIENT PROTECTION – BEYOND THE CORPORATE PRACTICE OF

MEDICINE 19

CONSUMER PROTECTION: ENSURING THE BEST INTEREST OF THE PATIENT 20

CURRENT RESEARCH: CONFLICT OF INTEREST WITHIN THE HEALTHCARE SYSTEM 20

OWNERSHIP, EMPLOYMENT AND AUTONOMY 21

POLICY OPTIONS 23

APPENDIX A: CORPORATE PRACTICE OF MEDICINE BAN AND DISTRICT HOSPITALS 26

ENDNOTES 28

The Corporate Practice of Medicine in a Changing Healthcare Environment

Authors

Primary Authors: Pamela Martin, Anne Neville

Research and Writing Assistance: Kellie Jean Hogue, Maeve Roche, Carley Herron, Jason MacCannell,

John Cornelison, Chris Berger, Tonya Lindsey, Sabah Eltareb and Jaemin Lee.

Requested by

The Senate Committee on Business, Professions and Economic Development

Acknowledgements

The authors wish to thank the agencies and organizations that gave their time to provide information for

this report: the Office of the Attorney General, the Association of California Hospital Districts, the

California Association of Physician Groups, the California HealthCare Foundation, the California Hospital

Association, the California Medical Association, the California Optometric Association, Covered

California, the Kern County District Attorney’s Office, the Medical Board of California, the University of

California, Irvine and the University of California, San Francisco.

Recommended Citation:

Martin, Pamela and Neville, Anne. “The Corporate Practice of Medicine in a Changing Healthcare

Environment.” California Research Bureau, Apr. 2016.

ISBN 1-58703-271-6

California Research Bureau | California State Library

Executive Summary

The ban on the corporate practice of medicine

has historically prevented corporations from

practicing medicine, which includes the

employment of physicians. From the late 1920s,

California courts have staunchly protected the

right of physicians to practice without being

subject to potential interference by corporate

employers. Since that time, California has

created a number of exemptions to the ban on

the corporate practice of medicine. Where

exemptions do not exist, physicians and

hospitals work together without creating

employment relationships.

In 2007, when the California Research Bureau

published a report examining the status of the

ban, it argued that exemptions had created a

doctrine whose “power and meaning are now

inconsistent.” It also raised the idea that the

many exemptions to the ban may “signal a

change in public opinion.” As a result of these

findings, the Research Bureau provided several

policy options for the legislature to consider.

These focused on clarifying which organizations

were exempt and also on increasing the

number of exemptions. The report also included

an option to eliminate the ban entirely,

provided some employment safeguards were in

place. This paper reviews the current status of

the ban in California and key policy issues

associated with it.

Since 2007, the provision of healthcare has

undergone changes in California. The Affordable

Care Act is responsible for an increase in

insured patients across the state. In 2016-2017,

13.5 million Californians are expected to have

enrolled in Medi-Cal, up from 7.9 million in

2012-2013, and 1.5 million people will be

enrolled in Covered California at the end of

2015-2016. As a result, more insured patients

than ever are accessing healthcare services

without a commensurate increase in healthcare

practitioners. California has also made changes

to the way optometrists and opticians work

together. The legislature has begun to consider

increasing the autonomy of nurse-midwives and

nurse practitioners, leading to questions about

whether they would be subject to the corporate

ban. Policymakers hope that innovations such

as Accountable Care Organizations will increase

consumer health outcomes and efficiencies. In

addition, retail clinics and medi-spas, which

were relatively new in 2007, have expanded

significantly across California and the United

States.

The first Research Bureau paper on this topic

included four policy options:

• Determine which organizations are

subject to the corporate practice of

medicine ban;

• Determine hospital employment

permissibility;

• Expand retail clinics; and

• Eliminate the ban.

This paper reviews these options and suggests

additional options for policymakers to consider:

• Assess changing financial incentives;

• Consider whether other methods of

protecting physician autonomy are

sufficient;

• Increase patient access to data about

physician-hospital relationships and

hospital metrics;

• Determine whether the current

alignment strategies used by physicians

and hospitals are more costly than

direct employment models; and

• Collect additional data to better

understand the impact of the ban.

The Corporate Practice of Medicine in a Changing Healthcare Environment

The Corporate Practice of

Medicine Ban in California

Background

The corporate practice of medicine ban has

historically prevented a corporation from

practicing medicine, which includes the

employment of physicians. The ban has been

enshrined in California law since the early

twentieth century in order to prevent the

“conflict between the professional standards

and obligations” of medical professionals “and

the profit motive of the corporate employer.”

The policy underlying the corporate practice of

medicine ban can be traced to the distinction

between professions and occupations.

Professions are unique in their “social contract

with the state … the promise of providing

complex and esoteric scientifically-supported

knowledge to clients in exchange for state

protections. Professions are legally protected

against competitors…. In return, professionals

should put their clients’ interests above their

own financial and bureaucratic interests.”

California’s ban on the corporate practice of

medicine was well established by 1928, but the

clearest policy rationale was not established

until 1932. That year, the state Supreme Court

heard the case of Painless Parker. Born Edgar

Randolph Parker, he was a licensed dentist and

consummate marketer who had legally changed

his first name to “Painless.” His dental

corporation hired dentists and opened practices

across the United States and Canada. In

considering Parker’s commercial dental

enterprise, the court argued that “the

underlying theory upon which the whole system

of dental is framed is that the state’s licensee

shall possess consciousness, learning, skill and

good moral character, all of which are individual

characteristics, and none of which is an

attribute of an artificial entity.”

Over 65 years

later, another court put it even more clearly:

“The rationale behind the doctrine is that a

corporation cannot be licensed to practice

medicine because only a human being can

sustain the education, training, and character-

screening which are prerequisites to receiving a

professional license.”

The California Research Bureau’s 2007 report

on this topic focused on the history of the

corporate practice of medicine ban and its

relevance to current healthcare practices.

the request of the Assembly Committee on

Health, it looked at these issues through the

lens of hospital employment of physicians in

California. The report explored the idea that

exceptions to the ban created at the state and

federal levels could be interpreted as a shift in

how society viewed the risks associated with

physician employment by non-physicians. While

the Research Bureau agreed that the policy

rationale for the ban was still relevant, it also

put forward the idea that the ban had been

“eroded” by the number of exemptions placed

in law. As a result, the Research Bureau

deliberated whether the corporate practice of

medicine ban was still necessary, particularly as

it related to employment.

This updated report examines the status of the

ban in California and in other states. It discusses

the different entities that are exempted from

the ban and the changes to the healthcare

system since the Research Bureau last

examined the subject. While continuing to focus

most on physicians, this report also covers

other medical professions and their relationship

to the corporate bar. In addition, the report

reviews research that examines the influences

on physician behavior in the modern healthcare

environment.

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Initial Impact of the Ban on Healthcare

As states banned the corporate practice of

medicine, the initial practical impact was to

create distance between the person holding a

professional license, such as a physician or

dentist, and the corporate entity, thus reducing

the ability of the corporation to control or

coerce the licensee. For example, the ban

eliminated clear conflicts that one railroad

surgeon discussed in 1903. “We must bear in

mind that as railway surgeons we occupy a

different position toward the patients we are

called upon to treat in that capacity from the

one we assume in private practice. We owe a

duty to the corporation that employs us as well

as the patient....”

Employment, both direct and contract, of

doctors by corporations also caused serious

issues for employees. Workers objected to

these arrangements for the same reason

described by the railroad surgeon above: it

created a divided loyalty between the needs of

the doctor’s employer and that of his

employees. Direct and contract employment of

doctors also eliminated choice for the

employee. The combined effect of these two

issues was limited trust by employees of

doctors affiliated with their employer. The

evidence for this distrust was clear in a federal

report from 1947. It demonstrated that mining

companies were employing doctors based on

friendships and financial arrangements and not

professional expertise. This resulted in “minimal

public health and sanitary facilities in mining

areas and inordinately high rates of infant

mortality.” Company doctors also approved

workers’ compensation claims in only 21

percent of cases, compared to 89 percent by

non-company doctors. Once the miners’ union

took control of healthcare through a medical

fund to which the employees and mine owners

contributed, it “brought about a dramatic

change in miners’ health and medical care.”

One reason for this was that the fund could

“refuse payment to private doctors whom its

staff physicians judged to be incompetent or

excessive in their charges.”

This new structure

supported physician autonomy and, to some

extent, an ability to self-regulate by doctors.

The fund was also a form of insurance, which by

itself introduced a new set of incentives into the

market, particularly over-hospitalization and an

increase in cost for medical services.

California physicians

Today, over 100,000 licensed physicians and

more than 71,000 active physicians practice

medicine in California.

The California Research

Bureau found that no agency tabulates the

exact number of physicians working within each

type of healthcare organization. However, in

2015, the University of California, San Francisco

completed a survey of physicians who are in

active practice in California, have completed

training and provide patient care at least 20

hours per week. The results of the survey

indicate a quarter of California’s physicians

(25.1 percent) operate solo practices. Nearly

half (49.9 percent) indicate they work in group

practices ranging from small partnerships

(defined as partnerships of 2 to 9 physicians) to

large group practices employing 50 or more.

(Table 1)

The Corporate Practice of Medicine in a Changing Healthcare Environment

Table 1. Active California Physicians by Practice Type

Practice Type

Percentage

Confidence Interval

Solo Practice

25.1%

23.0% to 27.1%

Small Partnership (2 to 9 physicians)

19.4%

17.4% to 21.4%

Mid-sized Group Practice (10 to 49 physicians)

13.0%

11.2% to 14.7%

Large Group Practice including academia (50 or more physicians)

17.5%

15.6% to 19.4%

Kaiser Permanente

13.5%

11.7% to 15.3%

Community or public clinic

5.0%

3.9% to 6.2%

VA or military

1.7%

1.1% to 2.4%

Other

3.2%

2.4% to 4.1%

Unknown/Not reported

1.5%

0.9% to 2.1%

Source: Philip R. Lee Institute for Health Policy Studies, University of California, San Francisco, 2015. N = 1,884. Estimates are weighted to reflect

the age and gender of the population of patient care physicians in California and their distribution across regions. There is a 95% confidence

interval indicating that, for example, the percentage of California physicians in small partnerships (2 to 9 physicians) is between 17.4% and

21.4%.

Exemptions to the Ban

The extent and history of bans on the corporate

practice of medicine have varied by state. At

one time nearly all states had laws or court

decisions that banned the practice, and up until

the 1950s, the corporate practice of medicine

ban continued to gain strength in most states.

However, this changed as some courts began to

coalesce around the legitimacy of certain

exemptions, particularly in nonprofit hospital

settings. In fact, as the Research Bureau’s 2007

report stated, “many courts found that

employment of physicians at not-for-profit

hospitals was not illegal CPM, but rather an

independent contractor arrangement as long as

hospitals did not attempt to control medical

policy.”

California maintains one of the most

comprehensive bans in the country.

Nonetheless, the ban now looks different than

it did in the middle of the twentieth century.

Beginning in 1968, the state introduced a

number of exceptions to the ban in response to

specific policy needs, court decisions or federal

requirements.

Professional Corporations

Corporations Code, Section 13400-13410

With the passage of the Moscone-Knox

Professional Corporation Act in 1968, California

allowed physicians, dentists and lawyers to

create professional corporations. California

adopted this law to meet Internal Revenue

Service requirements for professional

corporations.

The Moscone-Knox Act

specifically allowed physicians to create

professional medical corporations, for-profit

enterprises within which physicians and other

licensed professionals could serve as

shareholders, officers, directors, or professional

employees.

Professional corporations must, in

general, be engaged in rendering professional

services in a single profession. For example,

physicians and lawyers cannot serve as

shareholders, officers, directors, or professional

employees of each other’s corporations.

However, the Moscone-Knox Act exempted

medical professions.

Today, as a result of additions to the Moscone-

Knox Act, license holders in a variety of other

health professions can also serve as

shareholders, officers, directors, or employees

of professional medical corporations. These

include: podiatrists, psychologists, nurses,

optometrists, marriage and family counselors,

clinical social workers, physician assistants,

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chiropractors, acupuncturists, naturopathic

doctors, professional clinical counselors and

physical therapists. Corporations Code, Section

13400-13410 specifies that physicians and

surgeons can also serve in these capacities in

other professional healthcare corporations,

including corporations of the following types:

podiatric, psychological, nursing, marriage and

family therapist, clinical social worker, physician

assistants, optometric, chiropractic,

acupuncture, naturopathic doctors, dental,

professional clinical counselor and physical

therapy. While California enacted most of these

exemptions between 1970 and 1980, the most

recent change came in 2013 when physical

therapy professional corporations were created

and physical therapists were granted the

explicit authority to serve as shareholders,

officers, director or professional employees of

professional medical corporations. Unlike

discussions surrounding previous changes to

Moscone-Knox, the legislative record for AB

1000 (Wieckowski, Chapter 620, Statutes of

2013) demonstrates the legislature’s clear

intent to allow physical therapists to serve as

professional employees of a medical

corporation, regardless of whether they were

also serving as shareholders, officers or

directors.

Clinics and Hospitals Operated for the

Purpose of Medical Education

Business & Professions Code, Section 2401(a)

Initially codified in 1980, an appellate court’s

decision in 2000 further clarified that medical

schools are not subject to the corporate ban

even if they are in competition with nonexempt

organizations. In the court’s decision, it agreed

with the university that “every patient is

potentially a teaching case, notwithstanding

that some patients may not be seen by an

intern, resident or other trainee.” Additionally,

“to provide a full range of medical problems

and procedures for the training of its interns,

residents and other students, it must admit a

large and diverse patient population.” The court

stated that “concerns about for-profit

corporations have nothing to do with non-profit

teaching hospitals.”

Today, approximately

6,000 physicians are employed through

academic appointments across the five

University of California campus health systems

and California’s three private medical schools.

Nonprofit Community Clinics

Health & Safety Code, Section 1204(a)

A “community clinic” is a clinic operated by a

tax-exempt nonprofit corporation that is

supported and maintained by donations, grants,

and government funds. Charges to a patient are

based on a sliding scale, based on a patient’s

ability to pay. The California HealthCare

Foundation notes that community clinics have

been variously referred to in statute as primary

care clinics and charitable clinics.

Community

clinics currently employ approximately 1,839

full-time physicians.

County Hospitals

Though not delineated in statute, county

hospitals may also employ physicians. In 1996,

the Superior Court of Ventura County in

Community Memorial Hospital of San Buena

Ventura v. County of Ventura (1996), citing a

1936 estate case, stated that “laws prohibiting

the corporate practice of law or medicine do

not apply to counties.”

The California Medical

Association has also concluded that counties

are exempt from the ban on the corporate

practice of medicine, citing “the broad ‘police

powers’ granted to them.”

There are 12

county-owned hospital systems in California.

The Research Bureau was unable to gather a

definitive number of employed physicians

because each county has its own classification

system for their employed and contracted

physicians.

State Agencies

Government Code, Section 18500

The State of California has the authority to

create a state civil service, including healthcare

The Corporate Practice of Medicine in a Changing Healthcare Environment

professionals. For example, the California

Department of Corrections and Rehabilitation

employs physicians, surgeons, psychiatrists, and

dentists, among other types of medical

professionals. As of December 2015, there were

534 physicians and surgeons, 631 psychiatrists

and 284 dentists employed by the state.

Nonprofit Research Clinics

Business & Professions Code, Section 2401(b)

Health & Safety Code, Section 1206(p)

Nonprofit research clinics are licensed by the

California Department of Public Health. These

clinics conduct research in such areas as

prostatic cancer and cardiovascular disease, and

provide healthcare services to patients only in

conjunction with the research being conducted.

Clinics may employ physicians and charge for

their professional services. However, the law

states that a clinic “shall not interfere with,

control, or otherwise direct the professional

judgment of a physician and surgeon in a

manner prohibited by Section 2400 or any other

provision of law.” The Research Bureau was

unable to determine the number of physicians

employed by nonprofit research clinics.

Narcotic Treatment Programs

Business & Professions Code, Section 2401(c)

Health & Safety Code, Section 11839, et seq.

Narcotic treatment programs, which are

operated under Section 11876 of the Health &

Safety Code and regulated by the Department

of Health Care Services, may employ physicians

and charge for professional services rendered.

Health & Safety Code, Section 11839.5 requires

all narcotic treatment programs to be licensed

in order to use narcotic replacement therapy.

The Legislature included language in the

enabling legislation prohibiting treatment

programs from interfering with or controlling

the judgment of employed physicians. Narcotic

treatment programs currently employ 108

physicians throughout the state.

Specialty Pediatric Hospitals

Business & Professions Code, Section 2401(e)

Specialty pediatric hospitals are owned and

operated by a licensed charitable organization

that offers only pediatric subspecialty care. As

noted above, charitable institutions may

employ physicians. Business & Professions

Code, Section 2401(e), added to statute in

2012, allows specialty pediatric hospitals to

charge for professional services rendered to

patients. The hospitals must accept every

patient in need of services, regardless of ability

to pay. There are eight hospitals in this

category. The Research Bureau confirmed with

three of the eight hospitals that they do not

hire physicians, but instead contract with

physician groups. It was unable to attain

employment data for the other five hospitals.

Health Maintenance Organizations (HMOs)

42 U.S.C., Section 300e

Health & Safety Code, Section 1340, et seq.

HMOs have been exempt from California’s ban

on physician employment since Congress

required the state to do so when it enacted the

Health Maintenance Organization Act of 1973.

The purpose of the HMO Act was to reduce

healthcare costs by increasing managed care. As

the Research Bureau’s 2007 report describes,

California’s Knox-Keene Act addressed the

concerns of the corporate practice of medicine

ban directly while allowing employment and

contract relationships between physicians and

HMOs. There are three types of HMO models:

staff, group, and independent practice

association. The only model that directly

employs physicians is the staff model, and there

are few, if any, HMOs of this type today in

California.

While many think of Kaiser

Permanente as a staff model, it is actually a

group model, defined as when one physician

group “provides, on an exclusive basis, virtually

all of the care for plan members in an area.”

Independent practice associations, also known

as IPAs, are different from the staff or group

models in that they are made up of “private

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physicians in their own offices.” These

physicians “belong to an association for

contracting purposes,” and the association

negotiates reimbursements on their behalf with

managed care organizations or other insurers.

Independent practice associations vary in size.

For example, as of 2013, Hill Physicians counted

3,800 physicians and Sutter Independent

Physicians’ IPA included 548 members.

Certain Charitable Institutions,

Foundations, or Clinics

Business & Professions Code, Section 2400

16 California Code of Regulation, Section 1340

California law allows a particular exemption

from its declaration that corporations have no

professional rights, privileges, or powers.

Business & Professions Code, Section 2400

states:

… the Division of Licensing [of the

medical Board of California] may in its

discretion, after such investigation and

review of such documentary evidence

as it may require, and under regulations

adopted by it, grant approval of the

employment of licensees on salary basis

by licensed charitable institutions,

foundations, or clinics, if no charge for

professional services rendered patients

is made by any such institution,

foundation, or clinic.

In its regulations (16 California Code of

Regulations, Section 1340), the Medical Board

of California permits any licensed charitable

institution, foundation or clinic to employ

physicians and surgeons so long as it does not

charge for professional medical services. In such

a case, the physician or surgeon would directly

bill the patient or the insurance company. To

date, the Medical Board has made no

exemptions under this section.

How Consistent are California’s

Exemptions?

Excluding professional medical corporations,

the organizations covered under the exceptions

are either nonprofit or government

organizations. The exceptions are not based

solely on nonprofit or government status,

however, and certain nonprofit and

government organizations are not exempted.

For example, both nonprofit hospitals and

hospitals owned by healthcare districts are

subject to the ban. Conversely, medical school

health systems, which sometimes compete with

nonprofit and for-profit hospitals, are not

subject to the ban. Below, we review three

types of organizations, two that are not exempt

(nonprofit hospitals and hospital districts) and

one that is (medical school health systems).

Nonprofit Hospitals

It could be argued that the nonprofit status of

these hospitals eliminates profit-seeking

motives that could lead to the need to protect

physicians. Over the last decade, there has been

considerable debate as to the merit of such an

argument. A 2005 study observed that, “[w]hile

for-profit hospitals were only somewhat more

likely than nonprofits to offer relatively

profitable services, both for-profit and

nonprofit hospitals were considerably more

likely than government hospitals to offer

relatively profitable services.” The author

concluded, “[a]lthough all hospitals must earn

sufficient profits to operate, the evidence here

suggests that for-profits are more likely to

respond to profitability than the other types are

when making supply decisions.… Nonprofit

hospitals are often the intermediate type in

terms of balancing profit seeking and serving

the poor through service choices.”

A more

recent study, published by a professor at the

Harvard School of Public Health, found that

“[h]ospital conversion to for-profit status was

associated with improvements in financial

margins but not associated with differences in

quality or mortality rates or with the proportion

The Corporate Practice of Medicine in a Changing Healthcare Environment

of poor or minority patients receiving care.”

is important to note that, while both of these

studies were rigorous, their measures ended

before the implementation of the Affordable

Care Act, which is changing how healthcare

organizations are measuring quality.

A more recent report from a team of

researchers at the University of California, San

Francisco found that non- and for-profit

hospitals in California between 2011 and 2013

were providing the same level of

uncompensated care – 4.4 percent. (There are

263 nonprofit hospitals and 145 investor-owned

hospitals in California.

) Uncompensated care,

which is a combination of charity care and bad

debt, is the traditional measure by which

nonprofit tax status is evaluated. Nonprofit

hospitals did provide more charity care (1.9

percent) than did for-profit hospitals (1.4

percent), but there was considerable variation

among hospitals. The report found that 50

percent of nonprofit hospitals used between 0.8

percent and 2.6 percent of their operating

budget for charity care, while 50 percent of for-

profit hospitals used between 0.5 and 2.1

percent. No nonprofit hospital spent more than

11 percent of their operating budget on charity

care, and no for-profit hospital spent more than

4.9 percent of their operating budget on charity

care. There was at least one nonprofit hospital

and one for-profit hospital that provided no

charity care.

In contrast to these figures, the 21 public

healthcare systems in California, which include

county owned and operated hospitals and the

University of California medical centers, provide

40 percent of all care to California’s uninsured

population.

A number of factors in addition to

tax status also determine a hospital’s behavior,

including location and insurance payment rates,

which result from an institution’s bargaining

power.

This research implies that while some

nonprofit hospital systems act significantly

different from for-profit hospitals, nonprofit

hospital systems as a group are still subject to

profit-seeking behavior that could result in

undue influence on a physician’s medical

decisions.

Medical School Health Systems

Medical school health systems, which can

employ physicians, serve a wide variety of

patients and so by their nature compete for

patients and insurance dollars with other

hospitals in an area. The University of California

notes that if it “is to fulfill its public mission of

providing care to underserved patients, then

the reimbursement received from patients with

commercial insurance is critically important in

helping to subsidize the public mission.”

The

current reimbursement mix helps them do that

as they “receive roughly $1.40 from commercial

insurers for every $1 of expense. Medicare

reimburses 90 cents for every $1 spent.” The

excess that they receive from commercial

insurers helps to underwrite the actual costs of

Medicare and university research.

As the medical school health systems expand,

they align with existing physician groups and in

some cases employ them directly. In other

cases, they use alternative methods, like

contracting, to affiliate with physicians. The

University of California, for example, extends

some faculty employment contracts for

physicians to primarily serve patients rather

than conduct research or teach classes.

In a

2013 report, the California State Auditor found

that the medical centers at the University of

California, Los Angeles and the University of

California, San Francisco provide millions of

dollars in salary support to their faculty

physicians by transferring revenues from the

medical centers to other departments on their

campuses. The report noted that the purposes

for the monetary transfers appeared valid and

complied with university policy, though the

universities’ financial reports lacked specificity

about the reasons for the transfers.

California’s teaching hospitals occupy a unique

position in the state, providing significant

uncompensated care, teaching new physicians

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and conducting medical research. This unique

position can be sizeable. (In the University of

California medical system, for example, the

largest of the four systems had revenue of $8.6

billion in FY2014.

) However, simply because a

teaching hospital is large does not mean that it

is circumventing the principles of the ban. In

fact, in the 2000 appellate court case (California

Medical Association, Inc. v. Regents of

University of California), the court did not find

evidence that the teaching hospital was

interfering with relationships between

physicians and their patients.

Hospital Districts

Hospital districts were created in California in

1945 “to give rural, low income areas without

ready access to hospital facilities a source of tax

dollars that could be used to construct and

operate community hospitals and healthcare

institutions, and, in medically underserved

areas, to recruit physicians and support their

practices.”

There are currently 78 hospital

districts located in 40 counties.

Though

counties and the state may employ physicians,

hospital districts may not.

A pilot project in place from 2003 to 2011

attempted to determine whether lifting the

corporate practice of medicine ban for certain

hospital districts would increase the number of

physicians in rural communities. As in 2003,

today there is still a shortage of physicians in

California’s rural counties. American Medical

Association figures show that, on average,

California has 80 primary care physicians and

138 specialty physicians per 100,000 residents.

This is in the upper range for primary care

physicians (60-80) and above the range for

specialty care physicians (85-105)

recommended by the Department of Health

and Human Services. However, when

disaggregated by region, there is a coverage

disparity. California’s rural regions have lower

numbers of physicians than its urban areas. For

instance, the San Joaquin Valley has only 45

primary care physicians and 74 specialty

physicians per 100,000 residents, compared

with the Bay Area’s 78 primary care physicians

and 155 specialists per 100,000 residents. The

number of healthcare providers, including

primary care physicians, in California is not

anticipated to dramatically increase soon.

One reason for the coverage disparity may be

that physicians have a disincentive to practice in

rural or remote areas, which inherently pose

significant economic risks because rural areas

are often economically disadvantaged. In

addition, the California Hospital Association

says that the foundation model, used by many

other hospitals, can be hard for hospitals of 200

beds or fewer, which can be the case for

“smaller community hospitals.”

Attempting to address the rural healthcare gap,

Senate Bill 376 (Chesbro, Ch. 411, Statutes of

2003) established a pilot project to allow

qualified hospital districts to directly employ

physicians. The project allowed each hospital

district to hire two physicians, for a total of 20

physicians throughout the state.

To qualify for the pilot project, a hospital

district was required to have:

• been in a county with population of

750,000 or less;

• reported net losses in 2000-01; and

• had at least 50 percent of combined

patient days from Medicare, Medi-Cal,

and uninsured patients.

SB 376 was sponsored by the Association of

California Healthcare Districts, which argued

that authorizing the employment of physicians

could improve the ability of district hospitals to

attract the physicians required to meet the

needs of the communities and ensure the

continued survival of district hospitals.

Proponents hoped direct employment would

provide the kind of economic security that

might encourage physicians to choose a rural

community, just as the State of California is able

The Corporate Practice of Medicine in a Changing Healthcare Environment

to offer when it directly hires physicians and

staffs its rural prisons.

The California Medical Association opposed SB

376, noting the legislation would create a broad

exception to the ban against the corporate

practice of medicine and arguing the ban

intended to preserve the integrity of the

medical decision-making process. Though the

bill was written in response to “growing fiscal

deficits of individual district hospitals,” the

Association maintained the ban is even more

necessary in such situations, as it deflects

economic pressure from physician-patient

relationships.

During the pilot project, five participating

hospital districts recruited and hired six

physicians, whose employment contract periods

ran three to four years. The Medical Board of

California sent letters to participating

physicians, participating administrators, and

also administrators in nonparticipating hospital

districts to get their views on the project. All six

participating physicians were positive about the

employment experience. Responding

administrators acknowledged it would have

been more difficult to recruit the physicians

without the employment opportunity, and

expressed support of the project. Responding

nonparticipating administrators also generally

supported the project as a means of recruiting

physicians into rural areas.

The Medical Board of California, in its

assessment, stated there was not enough

evidence to draw conclusions about the

effectiveness of the program, but believed

there might be justification to extend the pilot

so a comprehensive analysis could be made.

The Medical Board of California also noted that,

“[f]rom the responses received to the Board’s

queries about the pilot, there seems to be a

universal belief that many physicians hesitate

settling in California, especially rural areas of

the state, because of the disincentive created

by the laws governing the corporate practice of

medicine – most physicians in California work as

contractors, not employees. Hospital

administrators view the prohibition of the

corporate practice of medicine as complicating

their ability to ensure adequate staffing.”

Though legislators initiated a number of bills to

continue the pilot project or allow hospital

districts to employ physicians, none became law

and the pilot expired on January 1, 2011. A

summary of those bills is in Appendix A.

California in Context: Exemptions to

the Employment Ban in Other States

There is considerable variation in how states

approach the ban with regard to the

employment of physicians. Nearly all states

allow for some type of employment of

physicians by certain specified government,

nonprofit or corporate entities.

In fact, the

one similarity across all states is that each

allows physician employment by professional

corporations or similar entities as long as

physicians own the corporation.

However,

unlike California:

• 28 states (55%) allow hospitals to

employ physicians;

• 30 states (59%) allow physicians to

operate a medical practice as a limited

liability company; and

• 9 states (17%) allow physicians to

operate a medical practice as a limited

liability partnership.

Three of the five states noted in the Research

Bureau’s original report as maintaining the

most robust laws and enforcement —

California, Colorado, and Iowa — continue to do

so. In the other two states — Ohio and Texas —

state legislatures have made changes to the

ban:

• Ohio’s corporate practice of medicine

ban now “appears to be all but

extinct.”

• Texas modified its ban in 2011 to allow

direct employment of physicians by (1)

certain rural hospitals, (2) certain

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hospital districts and (3) certain

counties for inmate care. Employers are

required to have written policies to

ensure that physician employees may

exercise independent medical judgment

when providing care.

It appears that a larger number of states than

were noted in the 2007 report may also have

robust bans on the corporate practice of

medicine. For example, both Minnesota

and

Massachusetts

have recently reaffirmed their

bans. The idea that only five states had a

particularly robust ban stemmed from a survey

of hospital emergency room administrators in

1991, and the report acknowledged that even in

those five states, the prohibition did not apply

in all situations.

Today, more than half of the

states clearly prohibit the corporate practice of

medicine, though enforcement varies and no

organization is tracking the practical application

systematically.

Many states, including California, have also

historically engaged in policy debates about

how the corporate practice of medicine applies

to dentistry. In California’s 1932 Painless Parker

case, the Supreme Court of California ruled that

the law could not be interpreted as separating

the “business side” of dentistry from the

professional practice itself, and that by forming

corporations, and employing licensed dentists,

Painless Parker was unlawfully engaged in the

corporate practice of dentistry.

Today,

professional corporations in California

(including dental corporations), tax-exempt

charity or “free” clinics, clinics owned by a

public hospital or health system, and county

hospitals may employ dentists.

Across the

country, 39 states and the District of Columbia

prohibit the corporate practice of dentistry. Six

states clearly permit the employment of

dentists by corporations or non-licensees; one

state may allow employment in clearly defined

circumstances and four states have no guiding

statutes or case laws, or have unclear statutory

or case law guidance. In these 11 states,

corporations and non-licensees that employ

dentists are clearly prohibited from interfering

with the professional judgment of dentists.

Non-Physician Medical

Professionals and the Corporate

Practice of Medicine

In addition to physicians and surgeons, the state

has extended or considered extending the

corporate practice of medicine ban on other

healthcare professions.

Advanced Practice Registered Nurses

An advanced practice registered nurse has a

graduate or doctoral degree in a nursing

specialty in addition to undergraduate nursing

education and practice experience. They are

trained and certified to assess, diagnose and

manage a broad range of healthcare issues,

including acute and chronic treatment. Most

advanced practice registered nurses are

engaged in primary care services.

Nationally, there are four categories of

advanced practice registered nurses: certified

nurse-midwife, clinical nurse specialist, certified

nurse practitioner and certified registered nurse

anesthetist. These nurses, depending on state

regulations, often diagnose and prescribe

treatments and medications. In some states,

this is under the supervision of, or in

collaboration with, a physician. In other states,

these nurses practice independently.

Advanced practice registered nurses are

certified to perform a wide variety of primary

care services. Nurse practitioners may order

medical equipment, place orders for

medication, certify disability claims, and

approve treatment for patients in home health

services, under the supervision of a licensed

physician or surgeon. Due to their advanced

training and focus on general practice, a nurse

practitioner is sometimes the only health

professional to see a patient during a visit.

certified nurse-midwife is a registered nurse

The Corporate Practice of Medicine in a Changing Healthcare Environment

who is also a graduate of a nurse-midwifery

program. Nurse-midwives provide primary

healthcare service to women and newborns.

Under the supervision of a licensed physician

and surgeon, a certified nurse-midwife is

authorized to attend cases of normal childbirth

and to provide prenatal, intrapartum, and

postpartum care. Services include providing

basic gynecological care, ordering laboratory

tests, providing immediate care of newborns,

prescribing medications including birth control,

and signing birth certificates.

Nurse

anesthetists are registered nurses who

administer anesthesia ordered by physicians

and other healthcare specialists. A nurse

anesthesia practice may include performing a

comprehensive physical, developing and

initiating a patient-centered plan of care,

ordering and administering drugs, and providing

pain management services.

One approach some states are taking to meet

the increased demand for healthcare services is

to redefine, and often expand, the scope and

standards of practice for non-physician

practitioners. As of February 2013, there were

42 nurse-related scope-of-practice bills

proposed across 17 states, including Alabama,

Florida, Hawaii, Illinois, Indiana, Iowa, Michigan,

Mississippi, Missouri, Montana, Nevada, New

Mexico, New York, North Dakota, Oklahoma,

Oregon, and Virginia.

The bills did not include

a prohibition against the corporate practice of

medicine.

In California, two bills were introduced in 2015

to expand the scope of practice and allow these

medical professionals to perform their duties

without physician supervision. Senate Bill 323

(Hernandez), introduced in 2015, sought to

permit licensed nurse practitioners permission

to practice, without being supervised by a

physician and surgeon. Assembly Bill 1306

(Burke) would have granted an extended,

independent scope of practice – procedures,

actions, and administrative processes – to

certified nurse-midwives, eliminating the need

for supervision of a licensed physician or

surgeon. The nurse practitioner bill did not

include a corporate practice of medicine ban,

but the nurse-midwife bill did – meaning that

nurse-midwives would not be allowed to be

employed by non-exempted corporations (such

as hospitals). Both bills included language

prohibiting an employer from interfering with

the professional’s care of a patient, and both

bills would require these professionals to obtain

malpractice insurance.

In the discussion around these bills, some

stakeholders opposed a corporate practice of

medicine ban, arguing other non-physician

professionals already enjoy autonomy in their

practice without being subject to the ban. Nurse

anesthetists, for instance, practice

independently and may be employed by

corporations. In addition, no other state with

expanded scope of practice laws for nurse

practitioners bans hospital employment, or

employment by corporations.

Proponents

of the ban argued that the expanded duties and

responsibilities would be similar to those of

physicians and surgeons, so nurse practitioners

and nurse-midwives should be subject to the

same ban.

If the legislature expands the

scope of practice for these professions, it could

lead to an increase in the number of retail

clinics (such as one might find in a Target or

Rite-Aid) and medi-spas, both of which are

primarily staffed by nurse practitioners today.

Optical Medicine

Recent court decisions and legislation have

changed the way retail optical corporations can

do business in California while reinforcing the

ban on the corporate practice of medicine.

Retail opticians, such as Walmart, Costco,

Pearle Vision and LensCrafters, have operated

in California for decades. A registered

dispensing optician is defined in Business &

Professions Code, Section 2550 as an individual,

corporation or firm engaged in the business of

filling prescriptions for prescription lenses or

related products. They fill prescriptions on

California Research Bureau | California State Library

behalf of physicians licensed by the Medical

Board of California, or optometrists licensed by

the State Board of Optometry, and may also

take facial measurements and adjust the fit of

glasses.

The business model offered by these retail

opticians is a “one-stop shopping” experience:

customers may have eye exams in the store,

conducted by an optometrist, and then have

glasses made for them on site. When Pearle

Vision entered the California market, they

created a business model where optometrists

were employed by Pearle’s sister company, a

health plan called VisionCare, within Pearle

Vision stores. The company defended this

practice as similar to the way HMOs work. In

2006, the California Supreme Court ruled

unanimously against Pearle Vision and its

business model, saying the Knox-Keene Act

does allow optometrists to work for HMOs, but

that Business & Professions Code, Section 655

prohibits opticians from entering into

agreements with each other that might create a

financial conflict of interest for the optometrist

or constrain the physician-patient

relationship.

In 2003, the National Association of

Optometrists and Opticians, representing

registered dispensing opticians such as

LensCrafters and Eye Care Centers of America,

sued the State of California, arguing that several

sections in California law violated the dormant

Commerce Clause of the constitution. The

plaintiff argued that licensed optometrists were

permitted to employ or contract with opticians,

giving consumers a value-added one-stop

shopping experience, but opticians such as

LensCrafters, which also wanted to offer the

one-stop experience, could not hire or align

with optometrists. After a district court loss in

2006, the state appealed, and the U.S. Court of

Appeals for the Ninth Circuit found for the state

in 2009 and 2012. In its 2009 decision, the 9

Circuit found that the state was not

discriminating against similarly situated entities,

noting that opticians “are not bound by the

same ethical and professional responsibilities”

as optometrists and ophthalmologists.

The

U.S. Supreme Court denied review of an appeal

in 2013, upholding the Ninth Circuit’s opinion.

Though the constitutionality of California’s law

was now settled, “the law did not anticipate the

myriad leasing, co-locating, and employment

relationships that rose during its debated

legality.”

In addition, there was an interest in

ensuring that multiple business models could

operate in the state and “that consumers’

interests are protected and an optometrist’s

clinical judgment is preserved.”

To meet these

goals, the state passed Assembly Bill 684 (Alejo,

Ch. 405, Stat. of 2015).

As a result, California law (Business &

Professions Code, Section 655) now permits a

“direct or indirect landlord-tenant relationship

with an optometrist” by “an optometrist, a

registered dispensing optician, an optical

company, or a health plan.” The lease

arrangement, however, must include certain

protections for optometrists such as

independence in scheduling, control over staff

and fees, and ability to contract with multiple

insurers. Lease payments cannot be based on

the number of eye exams performed,

prescriptions written, patient referrals or the

promotion of a particular health plan. Statute

now also includes an additional provision

stating that “[t]he registered dispensing

optician or optical company shall not interfere

with the professional judgment of the

optometrist.” The allowability of a landlord-

tenant relationship is new, as this relationship

was previously illegal. Notably, however, the

state did not change the ability of opticians to

employ optometrists – they were not allowed

to before AB 655, and are not able to now. (As

mentioned above, however, a number of

optometrists were illegally employed during the

period the statute was in litigation.)

AB 684 delineated strict boundaries between an

optometrist’s practice and the corporation from

which it leases space. The law went into effect

The Corporate Practice of Medicine in a Changing Healthcare Environment

on January 1, 2016, and the long-term effects

are not yet known, but elements of the law

could be considered as a model for other

business relationships in the medical industry.

Retail clinics, for instance, operate under a

model in which medical corporations or groups

contract with retail stores. If California chose to

decrease potential conflicts of interest in these

retail care clinics, it could consider prescribing

specific prohibitions related to business

practices and autonomy protections, as the

state has now done between optometrists and

opticians.

Healthcare Integration and the

Corporate Practice of Medicine

Hospital-Physician Alignment

Strategies

As the Research Bureau noted in its 2007

report, the corporate practice of medicine ban

“now most commonly refers to the

employment of physicians by hospitals, but is

also still used to refer to employment of

physicians by for-profit and non-profit

corporate entities and government.” This

section provides an overview of strategies that

California physicians and hospitals use to align

services without creating employment

relationships.

Historically, hospitals relied on affiliated

physicians to volunteer for emergency room

shifts. In this model, hospitals allowed

individual physicians to utilize a hospital’s

equipment and laboratories, and in exchange,

the physician volunteers agreed to staff hospital

emergency rooms. In this way, hospitals were

“acting in ways that are beneficial to physicians,

such as by acquiring new equipment, in

exchange for physicians receiving hospital-

admitting privileges that include implied

responsibilities, such as participating in quality

improvement activities and providing

emergency call coverage.”

With changes to

the healthcare system over the last several

decades, however, hospitals across the country

are using the voluntary model in fewer

numbers. Today, a number of hospitals outside

California also employ physicians. In fact,

“hospital employment of physicians remains

one of the most frequently cited strategies for

hospitals and physicians to meet the challenges

of the post-health reform marketplace.”

However, the percentage of doctors employed

by hospitals is a debated statistic. The 2014

American Medical Association’s annual survey

put the percent of physicians at 7.2 percent,

but the American Hospital Association’s 2012

statistics showed 17.3 percent.

When

hospitals do not employ physicians, they do use

other models to create service integration.

In California, where for-profit and most

nonprofit hospitals may not employ physicians,

hospitals align with physicians in various ways.

In fact, California has a reputation as “a leader

in innovative health care organizational

practices.”

Below are three examples that do

not violate the employment ban but do create a

relationship between a physician and a hospital.

Medical Foundations

Health & Safety Code, Section 1206(l)

One way non- and for-profit hospitals work with

a group of physicians is by setting up a medical

foundation that can contract directly with

physicians. A medical foundation “conducts

medical research and health education and

provides healthcare to its patients through a

group of 40 or more physicians and surgeons,

who are independent contractors representing

not less than 10 board-certified specialties, and

not less than two-thirds of whom practice on a

full-time basis at the clinic.” To comply with the

corporate practice of medicine ban, the

foundation arranges for physician services

through a professional services agreement with

medical groups or with individual doctors.

noted earlier, the requirements for medical

foundations can prevent smaller hospitals from

creating them. The California HealthCare

Foundation notes, for example, that “the

California Research Bureau | California State Library

complexity and costs of [establishing medical

foundations] may preclude smaller, financially

weaker, and rural hospitals from pursuing them,

thus widening gaps between them and

stronger, competing hospitals.”

The Palo Alto

Medical Foundation, Dignity Health, and First

Choice Physician Partners (a foundation Tenet

Healthcare created) are examples of medical

foundations.

Hospital Outpatient Departments

Health & Safety Code, Section 1206(d)

Another strategy hospitals use to align with

physicians is to form hospital outpatient

departments. These facilities provide outpatient

services and coordinate with their owner-

hospitals to provide care for patients with

chronic or complex conditions. Health & Safety

Code, Section 1206(d) defines hospital

outpatient departments as “clinics conducted,

operated, or maintained as outpatient

departments of hospitals.” Using a professional

services agreement or contract, the hospital

agrees to provide infrastructure, administrative

assistance and support services, while the

physicians provide medical services. Physicians,

not hospitals, generally bill third-party payers.

A hospital outpatient department is exempt

from clinic licensure laws because it is an

extension of a hospital, which itself must be

licensed by the Department of Public Health.

Because hospital outpatient departments are

owned by hospitals, they are not exempt from

the corporate practice of medicine ban.

Hospitals Purchasing Medical Practices

Though hospitals in California may not employ

physicians, they may purchase the physical

assets (building, equipment, etc.) of physician

practices. The non-physician entities manage

the administrative and operational side of the

practice while doctors continue to be

responsible for medical decisions and direct

billing of insurers. Many hospitals purchased

physician practices in the 1990s. But the trend

decreased as hospitals often found the cost of

purchasing and maintaining physician practices

was not offset by cost savings. Today, however,

the trend is on the rise again, as hospitals seek

to expand their referral networks and make

their managed-care operations more flexible.

Physicians who sell their medical practices to

hospitals reduce their administrative burden, as

the hospitals provide the support staff, supplies,

equipment and general maintenance.

Another

advantage to the physician who sells the

practice to a hospital is the opportunity to take

advantage of Medicare reimbursement rate

differences. Medicare fee-for-service payments

for non-emergency procedures can vary widely

between in-office visits and hospital visits,

because when Medicare determines an

equitable rate of reimbursement, it factors in

the higher overhead costs associated with

hospitals.

When Medicare reimbursements change, the

result can be a shift in the number of physician

practices that agree to sell to hospitals. In one

example, Medicare lowered the reimbursement

rate for a procedure commonly performed by

cardiologists in private practice. The

cardiologists received lower reimbursements

for the procedure in their own offices than

those who did the same procedure in a hospital

setting. This is because there was an assumed

overhead cost for the hospital-based

cardiologists. The result was a rise in the

number of cardiologists selling their practices to

hospitals in order to qualify for the better

reimbursement rate.

In a 2013 report to Congress, the Medicare

Payment Advisory Commission acknowledged

this disparity in payment reimbursement rates

and agreed that Medicare should carefully

study the matter and possibly make changes to

the reimbursement structure. But the report

also cautioned that equalizing the rates is a

complicated procedure. “[P]utting the principle

of paying the same rate for the same service

across sectors into practice can be complex

The Corporate Practice of Medicine in a Changing Healthcare Environment

because it requires that the definition of the

services and the characteristics of the

beneficiaries across sectors be sufficiently

similar.”

Recent research also suggests that

while the integration of physicians with

hospitals could “improve communication and

reduce waste,” hospital-owned practices may

also result in an increase in hospital prices as

they increase their market share.

Other Alignment Strategies

Hospitals and physicians are also using other

types of alignment strategies, such as joint

ventures, emergency call coverage

arrangements, and the use of hospitalists

(physicians whose practice emphasizes

providing care to hospitalized patients).

Hospitals may choose to use more than one

alignment strategy, and may base their

alignment strategies on their unique

circumstances and on budgetary constraints.

Accountable Care Organizations: From

Alignment to Integration

An Accountable Care Organization is a type of

clinical integration system in which a network of

coordinated healthcare providers serves

designated groups of patients. These

organizations seek to improve service efficiency

while remaining accountable to patients and

third-party payers, including Medicaid or

Medicare, for quality healthcare. Many

organizations now use the term

loosely to refer

to integrated efforts among providers to

improve efficiency and quality of care. For

instance, an Accountable Care Organization

might coordinate care across hospital affiliates,

physician groups, individual doctors and

specialty caregivers to reduce instances of

duplicate tests and services while increasing

cost-effective treatment. The Department of

Health and Human Services has created three

types of Accountable Care Organizations. The

most integrated form is an employment model,

as mentioned above.

Accountable Care Organizations that succeed in

reducing costs for the Medicare program may

receive “shared savings” through the Medicare

Shared Savings Program, which are distributed

to participating entities in the network.

All

providers, even individual physicians, may share

in any cost savings as long as the Accountable

Care Organization meets federal efficiency and

health quality goals. To enable participation in

the Shared Savings Program, the Department of

Health and Human Services has issued waivers

to the federal anti-kickback and Stark laws

for

Accountable Care Organizations “formed in

connection with the Shared Savings Program.”

The final rules for these waivers were originally

published on Nov. 2, 2011, and then again, with

minor changes, on Oct. 29, 2015.

There are some who argue that Accountable

Care Organizations are made inefficient by the

corporate practice of medicine ban. In a 2011

report published by UC Berkeley Law, the

authors noted that the state could write an

anti-kickback waiver that would parallel the

federal waiver for Accountable Care

Organizations. By contrast, there was and is no

federal equivalent to the state’s corporate

practice of medicine ban, nor has the Medicare

Shared Savings Program pre-empted the ban.

The authors argued that even the workarounds

used by other healthcare organizations

“obstruct the ability to coordinate care and

achieve significant savings.” For these reasons,

they recommended that California should do

away with the corporate practice of medicine

ban, or at least exempt all Accountable Care

Organizations.

Despite these warnings, however, there are

currently 67 Accountable Care Organizations

operating in California.

Further, in states that

have varying levels of regulation with respect to

the corporate practice of medicine,

Accountable Care Organizations have

demonstrated initial success. For example, the

Texas corporate practice of medicine doctrine

prohibits corporations from employing

physicians, but certain government-run

California Research Bureau | California State Library

hospitals are exempt from the ban, including

rural hospitals. The Memorial Hermann

Accountable Care Organization in Texas, a

shared savings program, operates a clinically

integrated hospital-physician network

consisting of 13 nonprofit hospitals and 5,500

affiliated physicians. In 2013, this Accountable

Care Organization served 34,430 Medicare

beneficiaries and earned shared savings of

$28.3 million.

The State of Maine, with no

corporate practice of medicine laws in statute,

is home to MaineHealth Accountable Care, a

shared savings program in Portland. It has an

independent board, staffed through a

physician-hospital association. It is working

toward a single care plan across its 10 hospitals

and 1,300 member physicians. In 2013, it served

over 48,000 Medicare beneficiaries, earning

shared savings of $9.4 million.

100

These early

results from Texas and Maine indicate that it

may be possible for an Accountable Care

Organization operating under the ban to be as

successful as one operating without it.

Retail Medicine and the Corporate

Practice of Medicine

Retail clinics continue to grow as part of the

primary care delivery system. As of 2015, over

2,000 retail clinics were operating across 41

states and Washington, D.C., primarily in urban

areas.

101

They provided two percent of primary

care visits in the United States.

102

These clinics

typically offer extended hours and allow walk-in

patients. Some are located within larger retail

settings. Many retail clinics, including those in

California, “are owned by medical groups

operating under contract with the retail store in

which they are located.”

103

Nurse practitioners

also own practices in the 17 states in which they

can practice autonomously.

104

When the Research Bureau published its first

report on the corporate practice of medicine in

2007, it noted “one of the reasons cited for

their [retail clinics’] limited growth in California

is the strength of the CPM doctrine in this

state.”

105

In considering options, the report

recommended that California consider

“whether convenient care clinics, or retail

clinics, should be encouraged to expand in

California, in which case the legislature could

allow corporations other than professional

medical corporations to operate these clinics

and employ physicians.”

106

In 2010, the RAND

Corporation, in a report for the federal

Department of Health and Human Services,

made a similar conclusion, observing that “[t]o

the extent that retail clinics are owned by

corporations, these [corporate practice of

medicine] regulations may limit the clinics’

ability to expand into certain states, or they

may require changes in the business and

operating practices of these organizations.”

107

Implementing this change would require

California to make an exception to the existing

corporate practice of medicine ban.

The Research Bureau report also noted that the

legislature could specify the scope and

conditions of convenient care clinics.

108

Currently, retail clinics treat a variety of minor

ailments and injuries. If retail clinics were to

expand the scope of practice, and more types of

patients could be treated, then the demand for

physicians – or nurse practitioners and

physician assistants – would be greater. As the

legislature considers expansion of the scope of

practice of nurse practitioners such that they

could practice autonomously, it may wish to

consider whether retail clinics should be

allowed to employ nurse practitioners, and

whether nurse practitioners themselves may

own retail clinics.

The research about the effect of scope of

practice on the growth of retail clinics is mixed

and limited. One study found that there is no

clear relationship.

109

Another report argues

that state scope-of-practice laws “impede the

development of retail clinics.”

110

Recent

research does, however, indicate that the scope

of practice regulations are related to cost-

effectiveness in retail clinics. In states in which

nurse practitioners can practice autonomously,

researchers found that the cost-per-episode in

The Corporate Practice of Medicine in a Changing Healthcare Environment

retail clinics was less than in those states in

which they could not do so.

111

Similarly, research concerning retail clinics and

the corporate practice of medicine doctrine is

also limited. Though a number of factors

influence a company’s decision to open a retail

clinic, including population density, licensing

requirements, regulations related to the

corporate practice of medicine and out-of-state

ownership limitations, the Research Bureau

found no research that assessed the impact of

all of these variables. As of 2009, (which is the

latest data publicly available), Florida had 152,

while California and Texas had 84 and 85,

respectively. These three populous states have

very different corporate practice of medicine

regulations. California and Texas do not allow

general corporations to employ physicians, but

Florida does. Though compelling on its face, this

raw data does not consider other site selection

elements. Merchant Medicine, an organization

collecting market data on retail clinics, has

instead suggested that “market demand play[s]

a more significant role than state regulations in

clinic operators’ location decisions.”

112

If policymakers hope retail clinics will continue

to grow and support the state’s primary care

needs, and the number of primary care

physicians and nurse practitioners will not grow

commensurately, the legislature may wish to

further investigate why clinics decide to open in

certain areas and not others, as well as the

impact of scope of practice and corporate

practice of medicine regulations on those

decisions.

Medi-Spas and the Corporate Practice

of Medicine

Medical spas, also called medi-spas, are

businesses that offer elective cosmetic

treatments such as Botox, laser hair removal

and tattoo removal, usually in an office setting.

Estimates suggest that revenues of the 2,100

medical spas in the United States reached $1.94

billion in 2012, and will increase to $3.6 billion

by the end of this year. Average revenues per

facility are $924,000 – with about 80 percent

coming from procedures and 20 percent from

retail product sales.

113

In California, a nurse practitioner, registered

nurse or physician assistant may perform the

cosmetic procedures, including the use of

lasers, prescriptions and prescriptive devices

under the supervision of a physician. It is the

physician’s responsibility to examine the patient

before delegating responsibility to another

medical professional.

114

115

116

In 2006, in

response to concerns surrounding medi-spas, in

which unqualified or unsupervised staff were

using lasers in cosmetic procedures, California

enacted SB 1423 (Figueroa, Ch. 873, Stat. of

2006), directing the Medical Board of California

and the Board of Registered Nursing to conduct

a joint investigation. The two boards concluded

that California needed to better enforce the

current law to identify laypersons or

nonmedical corporate entities acting as owners

of medi-spas.

117

In 2012, as a result of AB 1548

(Carter, Ch. 140, Stat. 2012), California also

increased the fines for medi-spas that violate

the corporate ban.

As of 2015, three regulatory agencies (the

Medical Board of California and the California

Board of Registered Nursing, in consultation

with the Physician Assistants Committee) are

reviewing issues surrounding the use of laser

devices in elective cosmetic procedures, paying

particular attention to the appropriate level of

physician supervision and level of training, as

well as procedures to be followed.

While all professional medical corporations are

for-profit, medi-spas are defined in Business &

Professions Code, Section 2417.5(b) as

providing “medical procedures or treatments

that are performed to alter or reshape normal

structures of the body solely in order to

improve appearance.” The for-profit nature of

these corporations is not necessarily balanced

by the particular healthcare needs of a patient,

since all of the treatment is elective. The growth

of medi-spas is limited by anti-kickback and

California Research Bureau | California State Library

other rules, and the corporate practice of

medicine ban prevents non-physicians from

legally owning and operating a medi-spa. A

limited number of physicians do act as absentee

medical directors, which is allowed by law. To

the extent that the procedures patients

undergo at these facilities require physician-

level training, medi-spa owners who flout the

law jeopardize the health of patients.

Preventing Conflict of Interest in

Patient Protection – Beyond the

Corporate Practice of Medicine

Having discussed the status of the ban on the

corporate practice of medicine in California, we

turn to the question of how effective it is in

meeting its goals. In Physicians Service v. Aoki

Diabetes Research Institute, the court succinctly

stated the end goal of the corporate practice of

medicine ban, writing, “[it] is meant to protect

patients.”

118

Historically, public policy

supporting the ban has been rooted in the

belief that if a corporation were making medical

decisions, then it would abide by the

“fundamental premise in business law that

corporations have a duty of loyalty to their

shareholders.”

119

In contrast, policymakers

expected that licensed professionals would

operate “above the market and pure

commercialism … [and that they] have set

higher standards of conduct for themselves

than the minimal rules governing the

marketplace … [such] that they can be judged

under those standards only by each other, not

by laymen.”

120

The assumption then was that the higher

standards would manifest themselves in such a

way that “licensed professionals … will always

act independently in the best interests of their

patients, regardless of their self-interests or the

interests of others who stand to benefit from

the patient-physician relationship.”

121

Similar to

members of other professions, some license

holders will not act in this way. For example, in

California, the Office of the Attorney General

collects statistics on Medi-Cal fraud and elder

abuse by licensed or certified individuals,

including but not limited to physicians,

audiologists, chiropractors, dentists, nurses,

psychologists and pharmacists. Between 2010-

2015, the Attorney General’s office investigated

536 cases of Medi-Cal fraud and/or fiduciary

abuse, ultimately filing 159 criminal cases.

These 159 cases represented 42 percent of all

criminal cases that the Bureau of Medi-Cal

Fraud and Elder Abuse filed. In these types of

cases, it is clear that license holders subverted

the best interest of the patient for their own

self-interests.

122

These particular examples of criminal

wrongdoing reflect the broader complexity of

the healthcare environment with its many

providers, payers and alignment structures. In

fact, there is an ongoing debate about whether

and to what extent healthcare has become

corporatized. Managed care, non-negotiable

reimbursement rates with the government, and

the growth of third-party payers have led some

to argue that physicians have lost their

autonomy in this new corporatized

environment.

123

Literature on this topic points to a variety of

issues that cause conflicts of interest (though

not necessarily wrongdoing) within the

healthcare field, and in particular for physicians.

The most up-to-date findings in the field

demonstrate that financial incentives lead to

conflicts of interest that create bias in physician

decision-making. These financial incentives

include: self-referrals for office services and

physician-owned centers; physician salaries,

reimbursement models and bonuses, including

the influence of health insurers; and

pharmaceutical promotions and drug

samples.

124

Patient self-advocacy and influence

is an additional conflict of interest that can

create bias in decision-making.

125

While it is

clear that these conflicts of interest create bias,

“the sociological and policy literatures have

been unable to settle whether professionalism

The Corporate Practice of Medicine in a Changing Healthcare Environment

has actually declined and whether the

commercialization of health care inevitably

leads to negative health effects.”

126

With

respect to physician autonomy, recent survey

research indicates that physicians’ status as

salaried employees in large organizations

(medical practices, medical schools, hospitals,

etc.) is not associated with decreased “reports

[by physicians] of freedom in making clinical

decisions.” However, physicians in larger

organizations do experience less autonomy in

logistic-based decisions, partly attributable to

managed care relationships.

127

As discussions

about the corporate practice of medicine

continue, it is important that public policy

discussions consider it within the context of

conflicts of interest and autonomy in the

modern healthcare environment.

Consumer Protection: Ensuring the

Best Interest of the Patient

The corporate practice of medicine doctrine

exists within a broader set of policies meant to

protect patients through eliminating or

reducing conflicts of interest. During the latter

half of the 20

Century Congress passed two

sets of laws. The federal Anti-Kickback Statute

(42 U.S.C. Section 1320a-7b) became law in

1972. It prohibits “offering, paying, soliciting or

receiving anything of value to induce or reward

referrals or generate Federal health care

program business.”

128

In 1989, Congress passed

the Stark Law (42 USC Section 1395nn, with

revisions in 1993 and 1994), which was focused

on physician self-referrals for Medicare

patients. The Stark Law: (1) “prohibits a

physician from referring Medicare patients for

designated health services to an entity with

which the physician (or immediate family

member) has a financial relationship,” and (2)

“prohibits the designated health services entity

from submitting claims to Medicare for those

services resulting from a prohibited referral.”

129

The Stark Law was a legislative response to a

practice called “self-referral,” in which a

patient’s medical doctor refers him/her for

medical treatment or services “to an entity in

which either the physician or an immediate

family member of the physician has a financial

interest.”

130

These arrangements were most

prevalent in non-hospital facilities such as

clinical labs, ambulatory surgery centers,

outpatient diagnostic imaging centers, and

durable medical equipment companies.

131

Although the bill for this law was originally

introduced in 1988, it did not gain traction in

Congress until the U.S. Department of Health

and Human Services’ Office of the Inspector

General issued a special report in 1989 stating

“empirical evidence suggested physicians were

abusing the referral process in order to

financially benefit themselves.”

132

Two findings

were likely instrumental in changing Congress’s

attitude about passing the Stark Law: (1)

patients of physicians owning or investing in

independent physiological labs received 45

percent more clinical lab services than average

Medicare patients; and (2) the cost of increased

use of these clinical labs cost the Medicare

program approximately $28 million in 1987

dollars.

133

134

This Inspector General report was

not, however, the first time some physicians’

referral practices elicited concern. In 1949, the

California legislature passed a law, led by both

the Better Business Bureau and the California

Medical Association, to regulate kickbacks.

135

Like Stark, this law was the direct result of

concerns about the impact of these activities on

patient care and the professionalism of

medicine.

136

Current Research: Conflict of Interest

within the Healthcare System

As the healthcare ecosystem changed over the

last century – adding more entities to the

patient, physician and employer relationships,

specifically including insurers, pharmaceutical

companies and device manufacturers –

research has begun to address the role of

commercialism in medical care and its impact

on decision-making and autonomy. The

Research Bureau reviewed current literature to

assess the impact of conflicts of interest on

California Research Bureau | California State Library

physician decision-making – in particular, the

physician’s role as employee. Much of the

research focuses on the field of healthcare

conflicts of interest in general, in which factors

related to employment are one subset within

the broader array of financial incentives.

The peer-reviewed evidence supports the idea

that “financial relationships bias physician

decisions to different degrees [across] three

areas: the payments to referrers, the incentives

created by health insurers, and the largesse

provided by the drug and device industries.”

137

What remains unclear is the extent to which

patients were harmed – or in some cases,

perhaps even helped – as a result of this bias.

Even among the best research, the studies were

unable to “establish a baseline of appropriate

care using practice guidelines or independent

care…” Without a baseline, it is not always

possible to demonstrate that the “financial

interest was contrary to the interests of the

patient … [and] it is possible that, even if

financial relationships are changing physician

behaviors, they are changing them for the

better in certain situations. It may be that most

patients get MRIs too rarely, and that self-

referring physicians are actually approximating

the optimal rate of prescriptions, while other

physicians are lagging.”

138

Similarly, while the

impact of the financial incentives was evident in

a study that reviewed physicians that held

capitated (fixed price per patient) contracts

with insurance companies – patients were

admitted to lower cost hospitals that were

farther away – the researchers did not find

either decreased patient health outcomes or

decreased quality of care.

139

In some cases, the

final health outcome for patients may still be

debatable, but it does not contravene the

evidence that current incentive structures

create “conflicts of interest [that] contribute to

bias [in decision-making.]”

140

In California, it is notable that the state has

adopted a specific public policy related to the

influence of insurers on physician decision-

making. Business & Professions Code, Section

510 states “that a health care practitioner be

encouraged to advocate for appropriate health

care for his or her patients … [by] appeal[ling] a

payer’s decision to deny payment for a service

… or to protest a decision, policy, or practice …

[that] … impairs the health care practitioner’s

ability to provide appropriate health care to his

or her patients.”

Ownership, Employment and

Autonomy

Various ownership structures can also create

conflicts of interest. A study specifically

examining facilities in which physicians maintain

a financial interest (in this case, physician-

owned specialty hospitals) found clear evidence

of overutilization with respect to referrals.

141

Physician-owned specialty hospitals tripled

between 1990 and 2003, largely as a result of

two factors: “profit motivations fueled by

decreasing physician salaries… [and] community

hospital administrators and corporate hospital

conglomerates that frustrated physicians’

efforts to exercise reasonable and legitimate

controls over their clinical practices.”

142

Regulators were increasingly concerned with

specialty hospitals’ overutilization of services

that created unnecessary healthcare

expenditures, “referral patterns [that]

“undermine public and community hospitals”

by taking more lucrative and healthier patients

and “inadequate emergency care.”

143

address these concerns, the Affordable Care Act

created new limitations on and oversight of

these organizations. For those seeking Medicare

reimbursement, the law prevented new

physician-owned hospitals from opening and

existing physician-owned hospitals from

expanding, except in limited circumstances. The

law also required physician-owned hospitals to

provide more transparency about their

investors. It is important to note, however, that

“popular media and government reports

support the view that patient satisfaction at

physician-owned specialty hospitals is generally

high – in some instances higher than it is in

The Corporate Practice of Medicine in a Changing Healthcare Environment

competitor full-service, community

hospitals.”

144

In the case of physician-owned specialty

hospitals, it appears that physicians responded

to financial interest (decreasing salaries) and a

need for autonomy in decision-making by

creating new organizations that they owned

and to which they could refer patients. These

organizations created greater costs to the

overall healthcare system through

overutilization of services and often sought the

most profitable patients, sometimes harming

community hospitals in the process.

145

Despite

this, these hospitals delivered value to many

patients that translated into high levels of

satisfaction. However, to achieve this end, the

hospitals and physicians engaged in the very

practice that the Stark laws were meant to

prevent. It is only because Stark allows an

exception for a whole hospital that these

specialty hospitals are able to self-refer.

Different from traditional hospitals in that they

narrowly specialize in cardiac, orthopedic or

other highly profitable surgical procedures,

specialty hospitals are licensed as hospitals, and

thus eligible for the exception.

146

When physicians are not partial- or full-owners,

but instead a hospital owns the practice,

conflicts may also arise. The most recent

research on this subject (August 2015)

demonstrates that when a hospital or system

owns a physician’s practice, the physician’s

patient is substantially more likely to choose the

owner-hospital even when other hospitals have

lower costs and higher quality.

147

Absent

ownership, patients are more likely to choose

the opposite: closer, less expensive and higher

quality hospitals. This outcome for patients in

physician-owned practices would seem to

undermine the goal of healthcare integration:

greater coordination and efficiency, leading to

better outcomes for patients.

These questions of independence appear across

all types of physician employment relationships.

For example, comparing data between 1996

and 2005, a recent study based on national,

longitudinal data reviewed physicians’ own

sense of autonomy across different practice

types. The analysis examined solo/two

physician practices, practices of three to ten

physicians and practices greater than ten and

including hospitals and medical schools. Similar

to prior research, this study found that

physicians in larger practices felt less autonomy

in logistic-based decisions (as determined by

believing they had “adequate time with

patients”) than physicians in smaller practices.

These lower levels of perceived autonomy were

partly explained by increased managed care

participation and status as an employee rather

than an owner.

148

In contrast to logistic-based decisions,

knowledge-based decisions are those “that

require specialized knowledge imparted to the

profession during a prolonged training period.”

The study found that the level of knowledge-

based decision-making was determined by

whether the physician felt s/he had “the

freedom to make clinical decisions that meet

my patients’ needs.” Importantly, the results

showed that there is “no association between

salaried status and reports of freedom in

making clinical decisions.” In addition,

physicians in larger practices reported higher

levels of autonomy than did physicians in solo

practices. This may be because “[s]maller

practices may not be able to keep financial and

clinical considerations separate due to their

decreasing share of the healthcare market, and

thus physicians in such situations may feel

limited in their choice set of clinical actions,

leading to lower levels of perceived autonomy.”

However, the solo-practitioner result was

unexpected and it would be worthwhile to

conduct additional research on that topic.

149

Nonetheless, it is important to note that these

two indicators (logistic- and knowledge-based

decisions) are not necessarily inclusive of all

types of employment constraints. For example,

recent research has raised concerns about

restrictive employment contracts within for-

profit, physician-owned medical specialty

California Research Bureau | California State Library

groups and the impact of these contracts on

physician autonomy and quality of care.

150

Doctor-patient frameworks have historically

focused on the role of the physician’s advocacy

for the patient, the trust between the physician

and the patient, and the vulnerability of the

patient. In recognition of today’s far more

complex healthcare environment, it may be

worthwhile to consider a conceptual model that

reflects the “vulnerability and compromised

judgment on the part of both the patient and

the provider.”

151

Framing conflicts of interest

within this theoretical model would support a

broad-based policy discussion that includes

physician employment status as one of many

issues that can result in biased decision-making

by physicians and other medical professionals.

Policy Options

California enacted the ban on the corporate

practice of medicine arguing that there was a

clear difference between the “consciousness,

learning, skill and good moral character”

152

the professional license holder and the profit-

seeking motives of a corporation. Nationally,

removing the influence of corporations in

medical decisions was important to extending

quality healthcare in the first part of the

twentieth century, especially in industries like

mining. The Research Bureau’s 2007 report

demonstrated that “the legislature has clearly

and repeatedly stated its intent that physicians,

and not corporations, be responsible for patient

care decisions.” However, the report also

argued that the fragmented manner in which

California had extended the ban resulted in a

doctrine whose “power and meaning are now

inconsistent.” It also considered the idea that

the many exemptions to the ban may have

“signal[ed] a change in public opinion.”

153

While the provision of healthcare in California

has changed considerably in the nine

intervening years, many of the same issues

surrounding the corporate practice of medicine

remain. The Research Bureau’s 2007 report

offered four options that the Legislature could

consider to resolve these issues. Below we

discuss these options:

• Determine which organizations are subject

to the corporate practice of medicine ban:

The exemptions to the corporate practice of

medicine ban were created through statute,

court decisions and Attorney General

opinions. To clarify the status of affected

organizations, the Research Bureau’s report

proposed to “determine and enumerate the

types of entities that may (or may not)

lawfully employ physicians.” The Legislature

did not address this issue and could still do

so. The underlying question policymakers

would consider under this option is whether

a license holder’s employer could exert

influence over his or her professional

decisions, presumably for financial gain.

Making these determinations would result

in a consistent policy rationale for applying

(or not applying) the ban to professions,

nonprofit organizations and governments in

California.

• Determine hospital employment

permissibility: Today, nonprofit, for-profit

and district hospitals are included under the

ban, while state, county, teaching and

pediatric specialty hospitals are exempted.

The Research Bureau’s 2007 report

suggested that the Legislature could

determine whether hospitals should employ

physicians, conditioned on the agreement

that “physicians remain in control of

medical decisions.” If the legislature

determined that it was not in the best

interest of doctors and patients to allow all

hospitals to employ doctors, it could

consider whether to exempt additional

hospitals. It could also specifically

reconsider whether to exempt hospitals

owned by hospital districts. To determine

whether a hospital would try to usurp a

physician’s medical decisions, policymakers

could consider a number of different

The Corporate Practice of Medicine in a Changing Healthcare Environment

metrics that may impact a hospital’s

decision-making, including the amount of

uncompensated care, patient outcomes,

geographic service area or fiscal health.

• Expand retail clinics: Retail clinics have

continued to expand across California since

2007. The Research Bureau’s first report

noted that to encourage their growth, “the

legislature could allow corporations other

than professional medical corporations to

operate these clinics and employ

physicians.” Research about the factors that

inhibit retail clinic growth is inconclusive. If

the legislature is interested in supporting

clinic expansion, a second option is to

expand the scope of practice for nurse

practitioners and then support professional

nursing corporations owning retail clinics in

addition to professional medical

corporations. In a policy move similar to

allowing the landlord-tenant arrangement

for optometrists and opticians, the

legislature could also consider requiring

certain lease provisions for retail stores that

wish to rent space to these clinics, whether

they are owned by physicians or by nurses.

• Eliminate the ban: The Research Bureau’s

2007 report included an option to end the

corporate practice of medicine ban “and

delineate lawful physician employment.”

Current policy bars direct employment in

many circumstances, but it permits

workarounds that allow hospital-physician

alignment. These workarounds are

intended to create distance between

hospital administration and physicians

while allowing coordination between the

two groups. Physicians might have

admitting privileges at a hospital and

physician groups may contract with

hospitals directly to provide services.

Hospitals own practices and may also

contract with medical foundations. The

2007 report did not focus on incentive

structures outside the physician-employer

relationship, but these are critical to the

modern healthcare environment. For

example, physician groups must negotiate

with insurance providers to join their

networks. If they are not part of a network,

they cannot be reimbursed by a consumer’s

insurer for services they provide. If the rates

at which the insurer or the government

reimburses are too low, the physician may

not make any profit. The Research Bureau

did not find research that compared levels

of physician protections across different

employment structures, but we did find

data about physician autonomy across

differently sized practices and the myriad of

potential conflicts of interests that can lead

to bias in medical decision-making.

It should also be noted that district

attorneys across the state currently rely on

the corporate practice of medicine ban

when prosecuting certain cases in which

unlicensed individuals practice medicine. If

the legislature considers eliminating the

ban, it would be important to ensure that

the state does not lessen its ability to

prosecute these types of cases.

154

155

Additional Policy Options

Based on the information gathered for this new

report, the Research Bureau offers the

following additional options that policymakers

could consider:

• Assess changing incentive structures:

Hospitals and insurers (including the

government) are beginning to move away

from per-procedure payment plans and

toward compensation models that reward

coordinated, high quality and efficient

patient care. Policymakers may wish to

consider whether this new common

incentive structure will create shared

incentives between physicians and

hospitals, thus potentially removing the

need for a hospital ban on the corporate

practice of medicine. In addition, it is clear

that threats to the quality and affordability

California Research Bureau | California State Library

of care resulting from potential provider

conflicts of interest can be found in any kind

of healthcare office or organization. Some

of these incentives may be removed

through a new common incentive structure,

but in other cases policymakers may

consider statutory protections against such

threats that exist separately from, though

not necessarily in lieu of, bans on certain

employment structures.

• Consider whether other methods of

protecting physician autonomy are

sufficient: Prohibitions against employer

interference in physician medical decisions

are currently in two of the statutes

authorizing exemptions to the corporate

practice of medicine ban. Similar language

is included in physician-employee contracts

in other states. In a few circumstances,

hospital physician-employees have formed

unions in order to increase their influence

within their hospitals.

156

The state could

determine whether these alternative

protections provide physicians enough

autonomy in employment situations. If they

do, they could consider replacing the

employment restrictions of the corporate

practice of medicine ban in some or all

situations.

• Increase patient access to data about

physician-hospital relationships and

hospital quality/cost metrics:

o Research indicates that patients of

physicians whose practices are

owned by hospitals are more likely

to choose those hospitals, even if

they are higher cost and lower

quality than alternatives. One way

to mitigate this issue could be to

advise patients of their hospital

options and rank those options by a

set of measures (cost, quality of

care, geography, etc.)

o The Affordable Care Act has

introduced a number of pricing

transparencies into the system,

157

and California could consider

increasing its required disclosures

as well.

• Determine whether the current alignment

strategies used by physicians and hospitals

are more costly than direct employment

models: The corporate practice of medicine

ban is so institutionalized in California that

hospitals and other healthcare

organizations have created a number of

strategies to legally work around it and still

meet many of their needs. These

alternative structures may introduce

inefficiencies in the system, but no one has

conducted an analysis to determine the

extent of these inefficiencies compared

with the direct expenses associated with

employment.

• Collect additional data to better

understand the impact of the ban: Limited

data makes it more difficult to assess how

the corporate practice of medicine ban

affects California’s doctors. The state does

not collect the specific numbers of doctors

that are employed directly by nonprofit

clinics, teaching hospitals, state

governments, and some county

governments and pediatric hospitals. The

Research Bureau could not find data for

some county governments or pediatric

hospitals and could not find any reliable

data for professional medical corporations

or medical foundations. Without a full

understanding of how many physicians in

the state are employed through an

exemption, it is difficult to know whether

the exemptions are, as the original

Research Bureau report argued, so broad as

to dilute the meaning of the ban.

158

The Corporate Practice of Medicine in a Changing Healthcare Environment

Appendix A: Corporate Practice of Medicine Ban and District Hospitals

During the years the SB 376 pilot project was in effect, legislators introduced nine bills that would have

extended or modified the SB 376 pilot project. A summary is below:

SB 1640 (Ashburn)

Introduced

Feb. 22, 2008

This bill would have extended the SB 376 pilot project to

January 1, 2016, and revised it to authorize “general acute

care hospitals,” as defined in Health & Safety Code, Section

1250, to employ an unlimited number of physicians and

surgeons, and to charge for professional services rendered

by those physicians. The acute care hospitals would be

limited to those in rural or underserved areas.

Failed passage in the

Senate Committee

on Business,

Professions &

Economic

Development

SB 1294 (Ducheny)

Introduced

Feb. 19, 2008

This bill would have extended the SB 376 pilot project to

January 1, 2017. It would have allowed district hospitals to

hire an unlimited number of physicians and surgeons,

subject to board approval. It would also have changed the

definition of a qualified district hospital to a hospital that,

among other things, is located in a medically underserved

area or a rural hospital that had net losses in the most

recent fiscal year.

Failed passage in the

Assembly

Appropriations

Committee

AB 1944

(Swanson)

Introduced

Feb. 13, 2008

This bill would have eliminated the SB 376 pilot project. In

its place, it would have permanently authorized healthcare

districts to employ physicians to primarily treat Medi-Cal

patients and bill for the physicians’ services with their

approval. It would have prohibited the hospital from

interfering with the professional judgment of physicians

and surgeons.

Failed passage in the

Senate Health

Committee

AB 646 (Swanson)

Introduced

Feb. 25, 2009

This bill would have eliminated the SB 376 pilot project.

Instead, it would have authorized a healthcare district and a

clinic owned or operated by a healthcare district to employ

up to 10 physicians and surgeons within each healthcare

district, if the healthcare district’s service area included a

Medically Underserved Area (MUA) or a Medically

Underserved Population (MUP), or if it had been federally

designated as a Health Professional Shortage Area (HPSA).

The bill would have provided that a district may extend any

employee contracts up to 10 years. It also required a study

of the program’s effectiveness and a sunset date of January

1, 2021.

Failed passage in the

Senate Committee

on Business,

Professions &

Economic

Development

California Research Bureau | California State Library

SB 726 (Ashburn)

Introduced

Feb. 27, 2009

This bill would have extended the SB 376 pilot project to

2018. It would have revised the pilot to authorize the direct

employment by qualified healthcare districts and qualified

rural hospitals of an unlimited number of physicians and

surgeons, and authorized such hospitals to employ up to

five physicians and surgeons at a time with a term of

contract not to exceed 10 years.

Failed passage in the

Senate Committee

on Business,

Professions &

Economic

Development

AB 648 (Chesbro)

Introduced

Feb. 25, 2009

This bill, by the author of the SB 376 pilot, would have

established a new pilot project that extended the scope of

the first pilot. This bill would authorize a rural hospital to

employ up to 10 physicians and surgeons at one time and

to retain all or part of the income generated for medical

services billed and collected, provided the physician and

surgeon in whose name the charges are made approved

the charges. The bill would require a rural hospital to

develop and implement a policy regarding the independent

medical judgment of the physician and surgeon. This pilot

would expire January 1, 2020.

Failed passage in the

Senate Committee

on Business,

Professions &

Economic

Development

AB 926 (Hayashi)

Introduced

Feb. 18, 2011

By 2011, the SB 376 pilot project had sunset. This bill would

have reenacted the pilot project as written, but would have

allowed all qualified district hospitals to employ not more

than 50 physicians and surgeons. This pilot would have

expired January 1, 2022.

Failed passage in the

Assembly

Committee on

Business,

Professions &

Consumer

Protection

AB 1360

(Swanson)

Introduced

Feb. 18, 2011

This bill was similar to bill language in AB 646 (2009). It

would have authorized a new pilot project that allowed a

healthcare district and a clinic owned or operated by a

healthcare district to employ physicians and surgeons if the

service area included a Medically Underserved Area (MUA)

or a Medically Underserved Population (MUP), or had been

federally designated as a Health Professional Shortage Area

(HPSA). The bill would have provided that a district could

extend any employee contracts up to 10 years. It also

required a study of the program’s effectiveness and a

sunset date of January 1, 2022.

Failed passage in the

Assembly

Committee on

Health

AB 824 (Chesbro)

Introduced

Feb. 17, 2011

This bill was similar to bill language in AB 648 (2009). It

extended the proposed pilot project to January 1, 2022.

Failed passage in the

Assembly

Committee on

Health

The Corporate Practice of Medicine in a Changing Healthcare Environment

Endnotes

See California Medical Association, Inc. v. Regents of University of California, et al. Court of Appeal, 2nd District, Division 1,

California. No. B135863. March 29, 2000. http://caselaw.findlaw.com/ca-court-of-appeal/1403063.html#sthash.gHzPfo1Q.dpuf

Timmermans, Stefan and Oh, Hyeyoung. “The Continued Social Transformation of the Medical Profession.” Journal of Health

and Social Behavior 51(S), 2010, pp. S94-S106.

See Parker v. Board of Dental Examiners, 216 Cal. 285 [1932]. https://casetext.com/case/painless-parker-v-board-of-dental-

exam

See Berlin v. Sarah Bush Lincoln Health Ctr., Supreme Court of Illinois, No. 81059, Oct. 23, 1997.

http://caselaw.findlaw.com/il-supreme-court/1200484.html

Kim, Allegra. “The Corporate Practice of Medicine Doctrine.” California Research Bureau, Oct. 2007.

The Railway Surgeon, National Association of Railway Surgeons, Volume 10, “The Medical Expert” Edward O. Plumbe. Chicago:

The Railway Age, 1903, p. 167.

Starr, Paul. The Social Transformation of American Medicine. New York, Basic Books, Inc., 1982.

ibid

California Healthcare Almanac, 2014, California HealthCare Foundation, 2014.

http://www.chcf.org/~/media/MEDIA%20LIBRARY%20Files/PDF/PDF%20C/PDF%20CaliforniaPhysiciansSurplusSupply2014.pdf

Silverman, Stuart. “Corporate Practice of Medicine: A Fifty State Survey.” American Health Lawyers Association, 2015.

Kim, Allegra. “The Corporate Practice of Medicine Doctrine.” California Research Bureau, Oct. 2007.

AB 783 bill analysis, Senate Committee on Business, Professions and Economic Development. Jun. 13, 2011.

See for example: AB 1000 bill analysis, Assembly Committee on Business, Professions and Consumer Protection. Apr. 30,

2013.

See California Medical Association, Inc. v. Regents of University of California. Court of Appeal, Second District, Division 1.

Decided March 29, 2000.

http://caselaw.findlaw.com/ca-court-of-appeal/1403063.html#sthash.gHzPfo1Q.dpuf

Saviano, Elizabeth C. California’s Safety-Net Clinics: A Primer. California HealthCare Foundation, 2009.

CRB tabulation and data from the California Primary Care Association. http://www.cpca.org/

See Community Memorial Hospital v. County of Ventura. Superior Court of Ventura County, No. 146407. Aug. 20, 1996.

http://law.justia.com/cases/california/court-of-appeal/4th/50/199.html

California Medical Association Legal Counsel, Document No. 0200, Jan. 2015.

California State Controller’s Office, private tabulation, Dec. 2015.

Private tabulation provided by the California Department of Health Services.

Roth, Debra L. and Reidy Kelch, Deborah. “Making Sense of Managed Care Regulation in California.” California HealthCare

Foundation, Nov. 2001.

Telephone interview with Maribeth Shannon, Director, California HealthCare Foundation, Oct. 15, 2015.

Roth, Debra L. and Reidy Kelch, Deborah. “Making Sense of Managed Care Regulation in California.” California HealthCare

Foundation, Nov. 2001.

ibid

Garcia, Art. “Independent Physicians Unite for Role in Health Reform.” Sacramento Business Journal, Sep. 6, 2013.

Electronic mail, Jennifer Simoes, Chief of Legislation, Medical Board of California, Feb. 2, 2016.

Horwitz, Jill R. “Making Profits and Providing Care: Comparing Nonprofit, For-Profit, and Government Hospitals.”

HealthAffairs vol. 24 no 3, May 2005. http://content.healthaffairs.org/content/24/3/790.full

Joynt, Karen E., et al. “Association Between Hospital Conversions to For-Profit Status and Clinical and Economic Outcomes.”

JAMA vol. 312 no. 16 (Oct 22-29, 2014) pp. 1644-1652. http://jama.jamanetwork.com/article.aspx?articleid=1917437

CRB tabulation and data from OSHPD. http://oshpd.ca.gov/hid/Products/Hospitals/Utilization/Hospital_Utilization.html

Valdovinos, Erica, et al. “In California, Not-for-Profit Hospitals Spent More Operating Expenses On Charity Care Than For-

Profit Hospitals Spent.” HealthAffairs, vol. 34 no. 8, Aug. 2015. http://content.healthaffairs.org/content/34/8/1296.full

California Association of Public Hospitals and Health Systems. Fast Facts about California’s Public Health Care Systems.

http://caph.org/caphmemberhospitals/fastfacts/

Horwitz, Jill R. “Making Profits and Providing Care: Comparing Nonprofit, For-Profit, and Government Hospitals.”

HealthAffairs vol. 24 no. 3, May 2005. http://content.healthaffairs.org/content/24/3/790.full

Regents of the University of California, Committee on Health Services, Meeting Minutes, Mar. 17, 2015.

http://regents.universityofcalifornia.edu/minutes/2015/h3.pdf

ibid

California Research Bureau | California State Library

See UC Irvine – Children’s Hospital of Orange County discussion (“Consideration is currently being given to a single

employment model under which CHOC physicians would join UC Irvine faculty,” page 12 of minutes, Regents of the University

of California, Committee on Health Services. http://regents.universityofcalifornia.edu/minutes/2015/h3.pdf

“UCLA and UCSF Medical Centers.” California State Auditor. Report No. 2013-111, Jan. 2014.

Regents of the University of California, Committee on Health Services, Meeting Minutes, Mar. 17, 2015.

http://regents.universityofcalifornia.edu/minutes/2015/h3.pdf

California Medical Association, Inc. v. Regents of University of California. Cal. App. 2 Dist. March 29, 2000.

http://caselaw.findlaw.com/ca-court-of-appeal/1403063.html

Taylor, Margaret. California’s Health Care Districts. California HealthCare Foundation, Apr. 2006.

Telephone interview with Ken Cohen, director, Association of California Health Care Districts, Dec. 17, 2015.

National Conference of State Legislatures. “Scope of Practice Overview,” Sep. 2013.

http://www.ncsl.org/research/health/scope-of-practice-overview.aspx

“SoCal Hospitals Work on Way to Get Around Physician Employment Ban.” HealthLeaders Media, May 17, 2010.

http://healthleadersmedia.com/page-1/COM-251089/SoCal-Hospitals-Work-On-Way-to-Get-Around-Physician-Employment-

Ban##

SB 376 bill analysis, Senate Rules Committee, Aug. 29, 2003.

Telephone interview with Ken Cohen, director, Association of California Health Care Districts, Dec. 17, 2015.

SB 376, Senate Floor Analysis, Jun. 3, 2003.

Medical Board of California. SB 376: Direct Employment of Physicians Report to the Legislature. Sep. 10, 2008.

ibid

Silverman, Stuart, ed. “Corporate Practice of Medicine: A Fifty State Survey.” American Health Lawyers Association, 2014.

There is great variation when it comes to the types of entities that may employ physicians. Entities eligible in at least one state

include: ambulatory care facilities, community mental healthcare centers, cooperatives and defined network plans, county

hospitals, educational healthcare institutions, faculty practice corporations, federally qualified health centers, general

partnerships, health care districts, health care institutions, health maintenance organizations, health service districts, hospice,

hospital affiliates, hospital corporations, hospital districts, hospital service entities, hospitals owned and operated by a

healthcare district, licensed health care facilities, licensed nursing facilities, limited liability corporations, limited liability

partnerships, long-/short-term care facilities, medical clinics, medical corporations, medical treatment insurance carriers,

narcotic treatment programs, nonemergency walk in centers, nonprofit corporations, nonprofit healthcare services

corporations, nonprofit health corporations, nonprofit health plans, nonprofit medical service corporations, nonprofit medical

schools, nonprofit research corporations, nonprofit faculty practice corporations, physician professional associations, prepaid

limited health service organizations, private nonprofit medical schools or research institutions, private nonprofit university

medical schools, professional corporations, professional limited liability corporations, professional medical corporations,

professional organizations, professional services corporations, professional services limited liability corporations, registered

limited liability partnerships, rural health clinics, school-based health centers, and school districts.

Schaff, Michael F. and Prives, Glenn P. “The Corporate Practice of Medicine Doctrine: Still Alive and Kicking.” Bureau of

National Affairs, 2011.

In its 1991 report, the U.S. Department of Health and Human Services, Office of the Inspector General used data from a

random national sample of hospital administrators on issues related to emergency room care. It asked the administrators if

their state prohibited employment, and it also sought information from state hospital associations. OIG focused solely on

beliefs of hospital administrators in emergency room care about hospital employment of physicians, and did not enter into the

larger question about the utility of the corporate practice of medicine ban. The report concluded that the prohibition itself did

not present a major obstacle for hospitals in these five states, nor was it a major national problem. Other factors combined

with the prohibition – shortage of specialty physicians, low reimbursement rates, fear of increased malpractice liability, and

disruption of private practices – were more important limitations to hospital operations than the ban.

http://oig.hhs.gov/oei/reports/oei-01-91-00770.pdf

Heard, David. “Changes to the Corporate Practice of Medicine Doctrine.” Dallas Bar Association website, Jul. 24, 2015.

http://www.dallasbar.org/book-page/changes-corporate-practice-medicine-doctrine

Gospin, Daniel E. “Recent District Court Case Highlights State Variation in Applying Corporate Practice of Medicine and Global

Billing Restrictions to MRI Providers.” Epstein, Becker & Green, May 2014.

http://www.ebglaw.com/content/uploads/2014/06/60307_HCLS-Client-Alert_Corporate-Practice-of-Medicine-and-Global-

Billing-Restrictions.pdf

The Corporate Practice of Medicine in a Changing Healthcare Environment

Niewenhous, M. Daria. “Massachusetts Corporate Practice of Medicine Regulations Finalized. Health Law & Policy Matters

blog post, Feb. 15, 2012.

https://www.healthlawpolicymatters.com/2012/02/15/massachusetts-corporate-practice-of-

medicine-regulations-finalized/

“State Prohibitions on Hospital Employment of Physicians.” Office of the Inspector General, Department of Health and

Human Services, Nov. 1991. http://oig.hhs.gov/oei/reports/oei-01-91-00770.pdf

See Parker v. Board of Dental Examiners, 216 Cal. 285 [1932]. https://casetext.com/case/painless-parker-v-board-of-dental-

exam

See Corporations Code, Section 13401.5, and Business & Professions Code, Section 1625.1.

Moriarty, Jim and Siegal, Martin J. “Survey of State Laws Governing the Corporate Practice of Dentistry.” Law Offices of James

R. Moriarty, 2012. http://www.moriarty.com/content/documents/ml_pdfs/cpmd_4.10.12.pdf

Gilman, Daniel J., et al. “Policy Perspectives: Competition and the Regulation of Advanced Practice Nurses.” Federal Trade

Commission, 2014. http://www.aacn.nche.edu/government-affairs/APRN-Policy-Paper.pdf

“Scope of Practice Overview,” National Conference of State Legislatures. Sep. 2013.

http://www.ncsl.org/research/health/scope-of-practice-overview.aspx

“General Information – Nurse Practitioner.” Department of Consumer Affairs. No date.

http://www.rn.ca.gov/pdfs/regulations/npr-b-23.pdf

“General Information – Nurse-Midwife Practice.” Department of Consumer Affairs. No date.

http://www.rn.ca.gov/pdfs/regulations/npr-b-31.pdf

“Scope of Nurse Anesthesia Practice.” American Association of Nurse Anesthetists. No date.

http://www.aana.com/resources2/professionalpractice/Documents/PPM%20Scope%20of%20Nurse%20Anesthesia%20Practice

.pdf

“Scope of Practice Overview,” National Conference of State Legislatures. Sep. 2013.

http://www.ncsl.org/research/health/scope-of-practice-overview.aspx

Telephone interview, Susanne Phillips, DNP, UC Irvine, Mar. 24, 2016.

Telephone interview, Carolyn Buppert, NP, JD, Author and Health Care Attorney. Mar. 16 2016.

Telephone interview, Susanne Phillips, DNP, UC Irvine, Mar. 24, 2016.

SB 323 bill analysis, Assembly Business and Professions, Jul. 13, 2015.

AB 1306 bill analysis, Senate Business, Professions and Economic Development, Jul. 10, 2015.

See People v. Cole, S121724 Supreme Court of California. Decided Jun. 12, 2006.

http://caselaw.findlaw.com/summary/opinion/ca-supreme-court/2006/06/12/140250.html

Egelko, Bob. “Eye care giant slapped in court/Ruling could lead to separation of optometrists and opticians.” SFGate, Jun. 14,

2006. http://www.sfgate.com/business/article/Eye-care-giant-slapped-in-court-Ruling-could-2494764.php

See National Association of Optometrists & Opticians v. Brown, 567 F.3d 521, 524-28 (9th Cir. 2009)

http://caselaw.findlaw.com/us-9th-circuit/1349311.html#footnote_ref_3

See National Association of Optometrists & Opticians v. Harris.

http://www.supremecourt.gov/search.aspx?filename=/docketfiles/12-461.htm

AB 684 bill analysis, Senate Business, Professions and Economic Development, Sep. 10, 2015.

ibid

Draper, Debra A., et al. A Tighter Bond: California Hospitals Seek Stronger Ties with Physicians. California HealthCare

Foundation, Dec. 2009.

Gayland Hethcoat, Terminating the Hospital-Physician Employment Relationship: Navigating Conflicts Arising from the

Physician’s Dual Roles as Employee and Medical Staff Member, 23 U. Miami Bus. L. Rev. 425 (2014)

http://repository.law.miami.edu/umblr/vol23/iss3/6

Press release. “New AMA Study Reveals Majority of America’s Physicians Still Work in Small Practices.” American Medical

Association, Jul. 8, 2015. http://www.ama-assn.org/ama/pub/news/news/2015/2015-07-08-majority-americas-physicians-

work-small-practices.page

Bush, Haydn. “Hospital Statistics Chart Rise in Physician Employment.” H&HN Daily, American Hospital Association, Jan. 6,

2012. http://www.hhnmag.com/articles/5455-hospital-statistics-chart-rise-in-physician-employment

Ciliberto, Federico and Dranove, David. “The Effect of Physician-Hospital Affiliations on Hospital Prices in California.” Journal

of Health Economics, 25 (2006) 29-38.

Gordon, Jill and Steve Lipton. Hospital-Physician Alignment Strategies. California Hospital Association, Dec. 16, 2010.

Draper, Debra A., et al. “A Tighter Bond: California Hospitals Seek Stronger Ties with Physicians.” California HealthCare

Foundation, Dec. 2009.

ibid

California Research Bureau | California State Library

“Hospital Outpatient 1206(d) Clinics – Legal Considerations Impacting Physicians.” California Medical Association Legal

Counsel, Jan. 2014.

“Corporate Practice of Medicine Bar.” California Medical Association Legal Counsel, Jan. 2015.

Kutscher, Beth. “Making Physicians Pay Off: Hospitals Struggle to Balance Current Costs with Future Benefits of Employing

Docs.” Modern Healthcare, Feb. 22, 2014. http://www.modernhealthcare.com/article/20140222/MAGAZINE/302229986

“Why Are Hospital Systems Buying Physician’s Groups?” Medical Billing Advocates of America. No date.

http://billadvocates.com/resources/hospital-systems-buying-physicians-groups/

Baltic, Scott. “Monopolizing Medicine: Why Hospital Consolidation May Increase Health Costs.” Medical Economics, Feb. 24,

2014. http://medicaleconomics.modernmedicine.com/medical-economics/content/tags/hospital-employment/monopolizing-

medicine-why-hospital-consolidation-

Sanger-Katz, Margot. “When Hospitals Buy Doctors’ Offices, and Patient Fees Soar.” The New York Times, Feb. 6, 2015.

http://www.nytimes.com/2015/02/07/upshot/medicare-proposal-would-even-out-doctors-pay.html

“Report to Congress: Medicare Payment Policy.” Medicare Payment Advisory Commission, Mar. 2013.

http://medpac.gov/documents/reports/mar13_entirereport.pdf

Baker, Laurence C., et al. “Vertical Integration: Hospital Ownership Of Physician Practices Is Associated With Higher Prices

And Spending.” Health Affairs, vol. 33 no. 5 (May 2014) pp. 756-763.

Draper, Debra A., et al. “A Tighter Bond: California Hospitals Seek Stronger Ties with Physicians.” California HealthCare

Foundation, Dec. 2009.

Hethcoat, Gayland. “Terminating the Hospital-Physician Employment Relationship: Navigating Conflicts Arising from the

Physician’s Dual Roles as Employee and Medical Staff Member.” University of Miami Business Law Review, vol. 23 no. 425

(2014). http://repository.law.miami.edu/umblr/vol23/iss3/6

“Accountable Care Organizations: What Providers Need to Know.” Department of Health and Human Services, Centers for

Medicare & Medicaid Services. Apr. 2014.

Section 1899(f) of the Social Security Act (Act) provides that the Secretary of the Department of Health and Human Services

may waive such requirements of Sections 1128A and 1128B, and title XVIII of the Act as may be necessary to carry out the

provisions of Section 1899 of the Act. https://www.gpo.gov/fdsys/pkg/FR-2015-10-29/pdf/2015-27599.pdf

Federal Register, vol. 80 no. 209, Thursday, Oct. 28, 2015, p. 2.

Chayt, Matthew, et al. Breaking Down Barriers to Creating Safety-Net Accountable Care Organizations: State Statutory and

Regulatory Issues. UC Berkeley Law, Dec. 2011.

Shortell, Stephen and Scheffler, Richard. “Accountable Care Organizations Taking Hold and Improving Health Care in

California. HealthAffairs blog, Jun. 2, 2015.

http://healthaffairs.org/blog/2015/06/02/accountable-care-organizations-taking-

hold-and-improving-health-care-in-california/

Cheney, Christopher. Medicare Shared Savings ACO Trio Shares Keys to Success. HealthLeaders Media, Oct. 12, 2015.

http://healthleadersmedia.com/content.cfm?topic=FIN&content_id=321542

100

ibid

101

“Retail Health Clinics: State Legislation and Laws.” National Conference of State Legislature. Nov. 2011; material added Jan.

2016. http://www.ncsl.org/research/health/retail-health-clinics-state-legislation-and-laws.aspx

102

Bachrach, Deborah, et al. The Value Proposition of Retail Clinics. Robert Wood Johnson Foundation, Apr. 2015.

103

Note: Nurse practitioners and physician assistants, however, primarily staff the clinics. See

http://www.pewtrusts.org/en/research-and-analysis/blogs/stateline/2016/01/05/states-let-commercial-walk-in-health-clinics-

grow-unregulated.

104

“Scope of Practice Overview,” National Conference of State Legislatures. Sep. 2013.

http://www.ncsl.org/research/health/scope-of-practice-overview.aspx

105

Kim, Allegra. “The Corporate Practice of Medicine Doctrine.” California Research Bureau, Oct. 2007.

106

ibid

107

Weinick, Robin M., et al. “Policy Implications of the Use of Retail Clinics.” RAND, 2010.

108

Kim, Allegra. “The Corporate Practice of Medicine Doctrine.” California Research Bureau, Oct. 2007.

109

Tu, Ha T. and Cohen, Genna R. “Checking Up on Retail-Based Health Clinics: Is the Boom Ending?” The Commonwealth Fund,

Dec. 2008.

110

Bachrach, Deborah, et al. “The Value Proposition of Retail Clinics.” Robert Wood Johnson Foundation, Apr. 2015.

111

Spetz, Joanne, et al. “Scope-of-Practice Laws For Nurse Practitioners Limit Cost Savings That Can Be Achieved in Retail

Clinics.” HealthAffairs vol. 32 no. 11 (Nov. 2013).

112

Tu, Ha T. and Cohen, Genna R. “Checking Up on Retail-Based Health Clinics: Is the Boom Ending?” The Commonwealth Fund,

Dec. 2008.

The Corporate Practice of Medicine in a Changing Healthcare Environment

113

American Society for Dermatological Surgery http://www.asds.net/

114

Medical Board of California. “Medical Spas – What You Need to Know.” No date.

http://mbc.ca.gov/Consumers/Medical_Spas.aspx

115

Medical Board of California. “The Bottom Line: The Business of Medicine – Medical Spas.” No date.

http://www.mbc.ca.gov/Licensees/medical_spas-business.pdf

116

“Ownership – Medical Spas.” American Society for Dermatologic Surgery. No date.

http://www.asds.net/asdsa/content.aspx?id=5715#Ownership

117

AB 1548 Senate floor analysis, Jun. 26, 2012.

118

See California Physicians Service v. Aoki Diabetes Research Institute, 163 Cal.App.4th 1506 (2008).

http://caselaw.findlaw.com/ca-court-of-appeal/1202979.html

119

Juniper, Kathleen and Leone, Alyson M. The Business of Health Care: Navigating the Corporate Practice of Medicine

Doctrine. Physicians and Hospitals Law Institute, 2015. www.buchalter.com/wp-content/uploads/2015/04/d_juniper_leone.pdf

120

Starr, Paul. The Social Transformation of American Medicine. New York, Basic Books, Inc., 1982.

121

Hethcoat, Gayland. “Terminating the Hospital-Physician Employment Relationship: Navigating Conflicts Arising from the

Physician’s Dual Roles as Employee and Medical Staff Member.” University of Miami Business Law Review vol. 23 issue 3 (2014).

122

Private tabulation provided by the California Bureau of Medi-Cal Fraud & Elder Abuse, California Department of Justice,

Office of the Attorney General. Feb. 24, 2016.

123

As summarized in Lin, Katherine Y., “Physicians’ Perceptions of Autonomy Across Practice Types: Is Autonomy in Solo

Practice a Myth?” Social Science and Medicine, vol. 100, Jan. 2014.

http://www.sciencedirect.com/science/article/pii/S0277953613005819

124

Timmermans, Stefan and Oh, Hyeyoung. “The Continued Social Transformation of the Medical Profession.” Journal of Health

and Social Behavior 51(S), 2010, pp. S94-S106.

125

Huff, Charlotte. “Four Ethical Decisions Facing Physicians.” Medical Economics, Aug. 10, 2014.

126

Timmermans, Stefan and Oh, Hyeyoung. “The Continued Social Transformation of the Medical Profession.” Journal of Health

and Social Behavior 51(S), 2010, pp. S94-S106.

127

Lin, Katherine Y. “Physicians’ Perceptions of Autonomy Across Practice Types: Is Autonomy in Solo Practice a Myth?” Social

Science and Medicine, vol. 100, Jan. 2014.

128

“Comparison of the Anti-Kickback Statute and Stark Law.” Office of the Inspector General. No date.

http://oig.hhs.gov/compliance/provider-compliance-training/files/StarkandAKSChartHandout508.pdf

129

See http://oig.hhs.gov/compliance/provider-compliance-training/files/StarkandAKSChartHandout508.pdf for a chart that

compares the Stark Law and the Anti-Kickback Statute.

130

Sutton, Patrick A. “The Stark Law in Retrospect.” Annals of Health Law, vol. 20 no. 15 (2011)

131

ibid

132

Ibid

133

Ibid

134

Patients in California are further protected by the state’s anti-kickback law, which became law in 1949, and the state’s

medical referral law, which prevents corporations or people from referring or recommending a physician, hospital or similar

entity for a profit.

135

See ARTICLE 6. Unearned Rebates, Refunds and Discounts [650 - 657] (Article 6 added by Stats. 1949, Ch. 899.)

136

“Rebating to Doctors Forbidden by Law Now.” Los Angeles Times. Jun. 20, 1949.

137

Robertson, Christopher, et al. “Evidence of Financial Relationships on the Behaviors of Health Care Professionals: A Review

of the Evidence.” Journal of Law, Medicine and Ethics, vol. 40 no. 452 (Fall 2012).

138

ibid

139

Ho, Kate and Pakes, Ariel. “Hospital Choices, Hospital Prices and Financial Incentives to Physicians.” National Bureau of

Economic Research. Working Paper 19333. Aug. 2013.

140

Robertson, Christopher, et al. “Evidence of Financial Relationships on the Behaviors of Health Care Professionals: A Review

of the Evidence.” Journal of Law, Medicine and Ethics, vol. 40 no. 452 (Fall 2012).

141

Perry, Joshua E. “Physician-Owned Specialty Hospitals and the Patient Protection and Affordable Care Act: Health Care

Reform at the Intersection of Law and Ethics.” American Business Law Journal, vol. 49, issue 2369-417, Summer 2012.

142

ibid

143

See Physician Hosps. of Am. v. Sebelius, 781 F. Supp. 2d 442 (E.D. Tex. 2011); see also Perry, Joshua E. “Physician-Owned

Specialty Hospitals and the Patient Protection and Affordable Care Act: Health Care Reform at the Intersection of Law and

Ethics.” American Business Law Journal, vol. 49, issue 2369-417, Summer 2012.

California Research Bureau | California State Library

144

Perry, Joshua E. “Physician-Owned Specialty Hospitals and the Patient Protection and Affordable Care Act: Health Care

Reform at the Intersection of Law and Ethics.” American Business Law Journal, vol. 49, issue 2369-417, Summer 2012.

145

ibid

146

ibid.

147

Baker, Laurence C., et al. “The Effect of Hospital/Physician Integration on Hospital Choice.” National Bureau of Economic

Research, Working Paper No. 21497, Aug. 2015.

148

Lin, Katherine Y. “Physicians’ Perceptions of Autonomy Across Practice Types: Is Autonomy in Solo Practice a Myth?” Social

Science and Medicine, vol. 100, Jan. 2014.

149

ibid

150

Kinney, Eleanor D. “The Corporate Transformation of Medical Specialty Care: The Exemplary Case of Neonatology.” Journal

of Law, Medicine & Ethics, vol. 36 no. 4 (Winter 2008), pp. 790-802.

151

Perry, Joshua E. “Physician-Owned Specialty Hospitals and the Patient Protection and Affordable Care Act: Health Care

Reform at the Intersection of Law and Ethics.” American Business Law Journal, vol. 49, issue 2369-417, Summer 2012.

152

See Painless Parker, Appellant, v. the Board of Dental Examiners, etc., et al., Respondents. 216 Cal. 285 (Supreme Court of

California, 1932).

153

Kim, Allegra. “The Corporate Practice of Medicine Doctrine.” California Research Bureau, Oct. 2007.

154

See The People, ex rel. Monterey Mushrooms, Inc., v. Stephen P. Thompson, et al. (2012) 136 Cal. App. 4th 24.

155

Telephone interview, Kate Zimmermann, Kern County Deputy District Attorney, Dec. 16, 2015.

156

Scheiber, Norm. “Doctors Unionize to Resist the Medical Machine.” The New York Times, Jan. 9, 2016.

http://www.nytimes.com/2016/01/10/business/doctors-unionize-to-resist-the-medical-machine.html?_r=0

157

“Transparency and Disclosure of Health Costs and Provider Payments: State Actions.” National Council of State Legislatures.

Updated Aug. 2015.

158

Inconsistent and limited data collection is a national problem. For more information on this issue, see Marbury, Donna. “Is

the Physician Exodus to Hospitals Being Exaggerated?” Modern Medicine Network, Oct. 10, 2013.

http://medicaleconomics.modernmedicine.com/medical-economics/content/tags/ama/physician-exodus-hospitals-being-

exaggerated?page=full