Corporate Practice of Medicine

The Problem

Medical practices across the country — specialty care clinics, pharmacies, dental practices, and others — are being bought up by distant investors looking to profit from the high costs of healthcare in the United States, but with little concern for the quality of care that patients receive. These investors might be large, established healthcare systems or private equity investors looking to cut costs and maximize billing. In either case, ownership of more and more of American healthcare is falling into the hands of profit-seeking businesspeople rather than healthcare professionals concerned with the well-being of the patients entrusted to them.

Corporate practice of medicine (CPOM) laws require that certain types of medical practices be owned and operated by licensed medical professionals. These laws were meant to avoid the commercialization of medical care, to prevent the conflict of interest between corporate profits and medical professionals’ obligations to their patients, and to prevent management from interfering with healthcare professionals’ medical judgment.[1] Most states have CPOM laws to prohibit corporate ownership, but a near-universal set of exceptions provides loopholes that allow investors to circumvent these regulations.

Most notably, private equity funds often make their healthcare investments through a physician management company (PMC) or management services organization (MSO). This typically means having a “friendly physician” remain as the legal owner of the medical practice, while a separate, corporate-owned MSO receives all the excess compensation in return for management “services.”[2] While this in effect is nearly indistinguishable from private equity ownership, this arrangement is legal in most states.

The Solution

States can implement and strengthen CPOM laws to close these loopholes, which have allowed private equity and others to acquire medical practices. States should be careful to close the common loopholes used to circumvent these laws by, for example, having a physician owner in name only. This would protect healthcare and medical practices from predatory private equity investors and ensure that doctors can maintain professional and health-centered relationships with their patients.

Notes

[1] American Medical Association Advocacy Resource Center, “Issue brief: Corporate practice of medicine,” 2015, https://www.ama-assn.org/media/7661/download.

[2] For an example of corporate guidance for circumventing these laws, see Matt Wilmot, Wes Scott, and Ethan Rosenfield, “Corporate Practice of Medicine Doctrine: Increased Enforcement on the Horizon?” Nelson Mullins, January 17, 2023, https://www.nelsonmullins.com/idea_exchange/blogs/healthcare_essentials/enforcement/corporate-practice-of-medicine-doctrine-increased-enforcement-on-the-horizon.

The Problem

Private equity firms, a category of investors known for aggressively slashing costs and increasing prices to increase the short-term value of the companies they manage, have been investing heavily in healthcare in recent years. From hospitals[1] to nursing homes[2], private equity’s influence on healthcare is clear from the many documented instances of chronic understaffing, poor patient outcomes, bankruptcies, and sky-high profits for investors. While not all private equity is harmful by nature, private equity and similar investors present serious risks to the quality of care that patients can expect.

The Solution

States can pass laws prohibiting private equity investors from acquiring or transferring ownership of healthcare investments without the approval of the state government, to ensure that the investment or transfer does not harm the quality of care, the availability of services, or present risks of consolidation.

Model Legislation

California’s proposed SB-977 would prevent private equity funds from acquiring healthcare systems without approval from the state attorney general.[3]

Notes

[1] Peter Elkind and Doris Burke, “Investors Extracted $400 Million From a Hospital Chain That Sometimes Couldn’t Pay for Medical Supplies or Gas for Ambulances,” ProPublica, September 30, 2020, https://www.propublica.org/article/investors-extracted-400-million-from-a-hospital-chain-that-sometimes-couldnt-pay-for-medical-supplies-or-gas-for-ambulances.

[2] Yasmin Rafiei, “When Private Equity Takes Over a Nursing Home,” The New Yorker, August 25, 2022, https://www.newyorker.com/news/dispatch/when-private-equity-takes-over-a-nursing-home.

[3] California SB-997 (2020), https://leginfo.legislature.ca.gov/faces/billTextClient.xhtml?bill_id=201920200SB977.

The Problem

The landscape of pharmacies in the United States has shifted in the past generation, as healthcare giants like CVS and Walgreens have mostly displaced local, independent pharmacies. This occurred with the assistance of some unfair advantages, and many of these large healthcare conglomerates continue to use a series of unfair tactics to push independent pharmacies out of the market, including:

• Using their own PBM to under-reimburse pharmacies;
• Using their PBM to steer patients away from independent pharmacies and toward their own; and
• Clawing back reimbursements paid to independent pharmacies.

Nor are the large chain pharmacies necessarily effective at providing care. During the rollout of the Covid-19 vaccine, West Virginia was the only state to opt out of a federal partnership with CVS and Walgreens to distribute the vaccine. The state instead relied on existing relationships with a network of independent pharmacies and outpaced the rest of the country in vaccinating residents of long-term care facilities.[1]

The Solution

State lawmakers could reverse this trend by requiring that pharmacies be locally owned by a registered pharmacist. Such a law would put control of pharmaceutical care in the hands of a licensed healthcare professional rather than a distant corporation.

Model Legislation

North Dakota has required local pharmacy ownership since 1963, and requires that only registered pharmacists may own and operate pharmacies within the state.[2] The sole proprietor of a pharmacy in North Dakota must be a registered pharmacist. As a result of this law, there are no chain pharmacies in North Dakota today.

Notes

[1] Yuki Noguchi, “Why West Virginia’s Winning the Race the Get COVID-19 Vaccine Into Arms,” NPR, January 7, 2021, https://www.npr.org/sections/health-shots/2021/01/07/954409347/why-west-virginias-winning-the-race-to-get-covid-19-vaccine-into-arms.

[2] North Dakota State Board of Pharmacy, https://www.nodakpharmacy.com/pdfs/Lawbook41316.pdf.