Healthcare Transactions With Licensed Healthcare Professionals Trigger Corporate Practice Issues In California

This second transactions series installment involves consideration of professional licensing issues that arise in certain healthcare transactions with licensed professionals (including physicians), or so-called “corporate practice” issues. This series responds to the active transactional market for 2021 and the forecast for robust activity due to the interest of venture capital and private equity funds in healthcare investments.

Healthcare transactions where a so-called “lay” entity (one that is not professionally licensed) is purchasing a business from a licensed healthcare professional will generally require consideration of the California prohibitions on the corporate practice of medicine (or other profession) where at least one component of the selling business is the delivery of professional services.

The following are examples of businesses that would have varying degrees of professional services that would warrant a corporate practice analysis when sold to a lay entity:

  1. A clinic that provides mental health services that will be sold to a lay entity;
  2. A physician-owned imaging center that provides both the technical and professional components of radiology services;
  3. A technology platform that provides, as a component of its services, physician or midlevel services;
  4. A men’s health clinic that is staffed by a registered nurse, a midlevel, and on a part-time basis, a physician; or
  5. An inpatient and outpatient drug rehabilitation facility that includes the direct delivery of psychiatric drug management services.

The most frequently discussed corporate practice prohibition applies to licensed physicians (or “CPM”), but corporate practice concerns should be analyzed for any healthcare professional licensed under the California Business & Professions Code, including osteopaths, psychologists, nurses, physician assistants, licensed clinical social workers, and marriage and family therapists. Each has its own regulatory scheme and licensing board which views business arrangements with such professionals differently.

Corporate practice rules govern the relationship that the post-closing operator may have with the licensed professional and also the technical ownership of the essential business itself. While a lay entity may lawfully provide management services, space, equipment and supplies to a professional entity, in some instances, such as medicine, the medical business itself must be owned by a licensed physician. When this is the case, care must be taken to structure the professional relationship in line with legal restrictions. In the case of a physician relationship, this could include a variety of structural requirements including:

Requiring the physician approval of capital and operating budgets;
Ensuring that the lay and professional parties to the arrangement do not have a technical split of profits for the venture; and
Ensuring that any public representations regarding the professional aspects of the business are identified as associated with the professional business.

Penalties for violating the corporate practice rules can include sanction by the licensing body of the licensed professional, and also financial penalties for aiding and abetting the unlicensed practice of medicine. Competitors may also recover damages for unfair business practices in some instances.

Parties to healthcare transactions involving the delivery of professional healthcare services are well advised to consider these issues.