Many states prohibit what is commonly known as the “corporate practice of medicine” (CPM). The CPM doctrine generally prohibits a business corporation from practicing medicine or employing a physician to provide professional medical services. Some states, including New York, New Jersey, Colorado, and Illinois, have carved out certain corporate employers as exceptions to the CPM prohibition, such as hospitals, health maintenance organizations, and of course, professional corporations.
The CPM prohibition manifests itself in a variety of state laws, regulations, and court opinions addressing ownership or control of healthcare providers by individuals or corporations that cannot directly provide healthcare services. Some states merely prohibit the practice of medicine without a license or the sharing of fees between licensed and unlicensed individuals, while other states flatly prohibit the ownership of medical practices or employment of professionals by nonprofessionals.
The rationale behind the CPM is rooted largely in considerations of public policy. Corporate employment of a licensed professional has been prohibited on the grounds that such a relationship “tends to the commercialization and debasement of those professions” (Barton v. Codington Country, 2 N.W. 2d 337, 343 (S.D. 1942)); undermines the physician-patient relationship and the physician’s exercise of independent medical judgment in the sole interest of the patient (See Garcia v. Texas State Bd. of Med. Exam’rs, 348 F. Supp. 435, 437 (W.D. Tex. 1974) and causes the general intrusion into the practice of medicine by corporate entities that are not licensed and therefore not subject to the same professional standards or regulatory control as licensed entities. See, e.g., State v. Boren, 219 P.2d 566, 568-69 (Wash. 1950); Funk Jewelry Co. v. State ex rel. La Prade, 50 P.2d 945, 945-47 (Ariz. 1935).
Nevertheless, even in the most restrictive of CPM states, there are a number of exceptions to the rule. For example, in New York, where the CPM doctrine is of long standing, a medical school may hire physicians and treat patients as part of its mission to promote medical science and instruction. Albany Med. Coll. v. McShane, 104 A.D.2d 119 (N.Y. App. Div. 1984); aff’d 489 N.E.2d 1278 (N.Y. 1985). School health programs constitute another exception to the CPM bar. N.Y. Educ. Law §§ 901 et seq. In addition, physicians may practice medicine through partnerships, professional corporations, professional service limited liability companies and registered limited liability partnerships comprised exclusively of physicians and certain other licensed professionals, and share fees and profits among themselves. N.Y. Educ. Law § 6531.
This “exception,” however, which exists in all CPM states, actually functions as more of a complement to, rather than a departure from the CPM doctrine, because it also is concerned with (and therefore prohibits) lay ownership of healthcare entities. Finally, hospitals (and other licensed medical facilities) in New York may employ physicians to render medical services to the hospital’s patients without violating the CPM prohibition. People v. John H. Woodbury Dermatological Instit., 192 N.Y. 454 (N.Y. 1908).
While it may seem like common sense for hospitals to be able to employ physicians (and many CPM states have in fact carved out such an exception (See, e.g., Berlin v. Sarah Bush Lincoln Health Ctr., 688 N.E.2d 106, 114 (Ill. 1997) (finding that a “duly-licensed hospital possesses legislative authority to practice medicine by means of its staff of licensed physicians and is excepted from the operation of the corporate practice of medicine doctrine”); St. Francis Reg'l Med. Ctr. v. Weiss, 869 P.2d 606, 618 (Kan. 1994) (holding that physicians may be employed by hospitals because such employment does not violate the public health, safety or welfare); MI Op. Att’y Gen. No. 6770 (Sept. 17, 1993) (stating that nonprofit corporations, including hospitals, may employ physicians to provide medical services)), a few states, such as California, Iowa, and Texas, have declined to create such an exception. (Among these states there also are exceptions: Iowa hospitals may employ pathologists and radiologists, and Texas public hospitals and California teaching hospitals may employ physicians).
Excerpt from Nili Yolin, The Corporate Practice of Medicine Prohibition and the Hospital-Captive PC Relationship—Can They Coexist? (American Health Lawyers Association Business Law and Governance Practice Group Executive Summary Sept. 2010).