Happy New Year To California’s Rural Hospitals: New Corporate Practice Of Medicine Exception Effective January 1, 2017

Effective January 1, 2017, certain rural hospitals joined the list of providers specifically exempted from the Corporate Practice of Medicine (“CPM”) ban in California, which otherwise prohibits the employment of physicians and other medical professionals by corporations and other artificial legal entities. By signing AB 2024 on September 23, 2016, Governor Jerry Brown amended California Business and Professions Code Section 2401, allowing applicable hospitals to directly employ physicians and bill for their services. According to the bill’s lead author, Assemblymember Jim Wood, the exception purports to create a pathway and incentive for physicians to practice in underserved rural communities.

California’s CPM ban represents a key bastion in an otherwise fading national effort to prevent unlicensed persons from interfering or influencing a physician’s professional judgment. Many states’ views on the CPM doctrine have progressed alongside a changing healthcare landscape, as more than half of states now allow hospitals to employ physicians, and nearly all states allow for some type of physician employment by corporations. However, where many state policies have evolved, California has demonstrated reluctance. Although California has carved out limited exceptions to the CPM ban, including exceptions for public and teaching hospitals, the state remains widely regarded as the most restrictive when it comes to hospital employment of physicians.

Proponents of the new exception contend that it will increase rural hospitals’ abilities to attract, hire, and retain medical professionals, citing physician shortages that have long plagued rural California’s medically underserved areas. Implicit in that premise is an assumption that many physicians today–particularly younger ones–desire more economic security through a salaried position, which may encourage certain physicians to choose a rural community over an urban one when deciding where to practice medicine.

The new law specifically limits the new CPM exception to “Critical Access Hospitals” (CAHs), a federal designation created in 1997 in response to the financial troubles faced by rural hospitals. To qualify for the CAH designation, a hospital generally must: (1) possess no more than 25 inpatient beds, (2) offer 24/7 emergency care, (3) be located in a rural area at least a 35-mile drive away from any other hospital (or 15 miles across secondary roads to account for difficult terrain), and (4) maintain an annual average length of stay of 96 hours or less for acute care patients (for additional criteria, see CMS’s “Critical Access Hospital” guidance). Currently, 34 CAH’s exist in California.

To qualify for the new exception, a CAH must comply with two requirements:

The CAH must obtain an affirmative vote from medical staff, confirming that physician employment is in the best interest of the communities the hospital serves; and
The CAH must not interfere with, control, or otherwise direct a physician’s professional judgment in a manner prohibited by California Business and Professions Code Section 2400 or any other law.

Any advantages that flow from this amendment must work quickly, as the new CPM exception sunsets on January 1, 2024. Whether the exception achieves the goals of its advocates remains to be seen; what is certain is that California remains faithful to its longstanding CPM ban. Although the new exception indicates a continued willingness poke holes in the doctrine, its limited applicability also demonstrates that, for now, California is committed to prohibiting physician employment by corporations and other similar entities.