By Michael Roitman
The business of healthcare requires compliance with a variety of state and federal laws and regulatory schemes. This includes licensing of healthcare professionals, standards of practicing medicine, methods of compensation, safeguards against fraud, waste, and abuse, and—as addressed in this article—the ownership of healthcare businesses. This article will take a closer look at Nevada state regulations on healthcare businesses and their relationships with Management Services Organizations (“MSOs”).
Nevada’s Corporate Practice of Medicine (“CPOM”) Doctrine prohibits persons who are not healthcare providers from owning businesses that practice medicine. See Op. Nev. Att’y Gen. No. 219 (1977); see also Op. Nev. Att’y Gen. No. 10 (2002). A Nevada Attorney General Opinion from 1977 (the “1977 AGO”) makes clear that for-profit corporations incorporated under Nevada Revised Statutes (“NRS”) Section 78 (2023) are barred from practicing medicine as broadly defined by NRS Section 630.020 (2015), and that such practice is expressly reserved for professional corporations. The CPOM Doctrine arises, according to the American Medical Association, from a number of public policy concerns, such as preventing (a) “commercialization of the practice of medicine;” (b) misalignment between the obligations of shareholders and a physician’s obligations to patients; and (c) interference with a physician’s independent medical judgement, which could result should a physician be employed by a corporation. American Medical Association, Issue Brief: Corporate Practice of Medicine, Advocacy Resource Center https://www.ama-assn.org/media/7661/download (last visited Aug. 30, 2024).
In Nevada, the CPOM Doctrine is not expressly provided for in caselaw or statute, but instead stems from three Attorney General Opinions (each an “AGO”) from 1977, 2002, and 2010. See Op. Nev. Att’y Gen. No. 219 (1977); see also Op. Nev. Att’y Gen. No. 10 (2002); see also Op. Nev. Att’y Gen. No. 1 (2010). In at least two instances since the 2010 AGO, Nevada legislators have attempted to codify portions of the CPOM Doctrine into law. The most recent attempt was vetoed by Governor Lombardo in 2023. See AB. 11, 82d Leg. (2023), https://www.leg.state.nv.us/App/NELIS/REL/82nd2023/Bill/9536/Text (last visited Sept. 3, 2024). The 2023 bill’s proponents wanted to accomplish two purposes: (1) confirming the AGO determination that hospitals cannot employ physicians, and (2) providing a carveout from such prohibition for not-for-profit medical schools. See Assemb. Comm. Health and Human Services Corporate Practice of Medicine Doctrine, https://www.leg.state.nv.us/Session/82nd2023/Exhibits/Senate/HHS/SHHS1069L.pdf (last visited Sept. 3, 2024).
In addition to the Nevada CPOM Doctrine, certain providers of health care, though not all, are also subject to NRS Section 89. See NRS 629.03. Under Section 89, certain professionals, including physicians and mental health professionals, as well as lawyers and architects, must organize and incorporate as professional entities (e.g., professional corporations, limited liability companies, or partnerships), and such professional entities must be owned only by the applicable professionals. See NRS 89 (2023). In addition, certain providers of healthcare which were explicitly discussed in the 1977 AGO, such as dentists, have statutes analogous to the CPOM Doctrine codified into law. See NRS 631 (2023) (providing a scheme for control over dentistry practice with non-dentist ownership and permitting dentists to organize under NRS 89); see also Op. Nev. Att’y Gen. No. 219 (1977). Other providers of healthcare, such as nurses, have no such limitations in their statutory schemes and are not expressly authorized to form a professional corporation. See NRS 89, 632 (2023). However, due to Nevada CPOM, it is generally advisable, to the extent a business employs nurses to furnish healthcare, that the owners of such businesses are licensed in the practice of medicine as well.
In response to the CPOM Doctrine, many healthcare businesses (i.e., “professional entities”, known colloquially as “PCs”) enter into relationships with companies called Management Services Organizations (aka MSOs) that furnish management, administrative, and other non-healthcare services to healthcare companies. The arrangements between PCs and MSOs,—oftentimes memorialized in a “Management Services Agreement,”—vary based on some key terms, including the length of the term, management fee, and amount of control the MSO has over the PC. MSOs generally provide substantial management and administrative services in exchange for a portion of the profits, with the purpose of increasing the efficiency of the non-medical functions by bringing in business minded operators and allowing healthcare providers to focus exclusively on medicine. This is similar to arrangements made with billing and medical coding vendors. Sometimes, often in private equity driven regional or national “roll-ups”, MSOs are vehicles for acquisition strategies wherein PC owners are paid large lump-sum payouts in exchange for management fees that constitute most or even all of the PC’s profits (aka a “sweep”). In such cases, the sellers generally remain as owners and employees of the PC—but are subject to strict and broad non-competes, earn-outs, and buy-out provisions.
Though an MSO can take many forms, the transaction usually involves (1) an analysis of the management fee, which may require a determination of fair market value under some circumstances; and (2) compliance with limitations on the MSO’s ability to control medical decision making, which is strictly prohibited. Notwithstanding such prohibition, certain structures, such as the “Friendly PC Model” (which is utilized when the MSO has made a substantial investment in the PC), can permit the MSO to retain a certain level of control over the healthcare business by its right to force the PC owner to sell the PC to the MSO’s designated healthcare professional. Under the Friendly PC Model MSO, the Management Services Agreement with the PC can be up to 20 years (even though the seller may no longer own or practice for the PC). While the Friendly PC Model can provide a certain level of certainty to the MSO, it must be carefully crafted to avoid permitting the business goals of the enterprise to influence medical decision-making of the healthcare professionals and to comply with other applicable law.
About the author
Michael Roitman is the managing attorney of Roitman Legal, a boutique corporate law firm located in Nevada. Michael advises his clients—companies, entrepreneurs, and professionals—on various commercial transactions (including real estate, mergers & acquisitions, and other business contracts), corporate and legal strategy, and regulatory compliance. Michael has experience with healthcare mergers & acquisitions and compliance, including the Nevada and Federal fraud and abuse regulations, such as Anti-Kickback Statute and Stark Law, and the Corporate Practice of Medicine Doctrine.
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This article was originally published in the Communiqué (Oct. 2024), the official publication of the Clark County Bar Association. See https://clarkcountybar.org/about/member-benefits/communique-2024/communique-oct-2024/.
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