What You Need to Know About Corporate Medicine: Part I

Here are some tips on navigating the statutory maze of doctor-vendor relationships.

BY MATTHEW ZIFRONY

Editor's note: This is the first in a three-part series that seeks to help ophthalmologists who may be considering entering into the world of corporate medicine. Part 1 discusses how doctor-vendor relationships vary depending on the state in which you conduct business; part 2 discusses the ins and outs of corporate practice of medicine statutes and the reasons why ophthalmologists should not ignore these issues as they relate to doctor-vendor relationships; part 3 outlines steps that ophthalmologists can take to mitigate mistakes in complying with statutory regulations and ensure they are properly managing their relationships with vendors and management companies.

Most state legislatures have created departments of health in order to protect the public through licensure of ophthalmologists and to discipline those who fail to follow their rules. More often than not, these rules are difficult to understand and even more challenging to follow. As a result, ophthalmologists are often left in a precarious position: Assuming that they are conducting their business in a proper manner, they may be making unintentional regulatory "mistakes."

There are primarily two types of relationships that an ophthalmologist can have with a company that is not owned by doctors (which type depends on what the state laws permit): In this article, I refer to them as professional-services arrangements and management-services arrangements. Many challenges exist for an ophthalmologist attempting to comply with the underlying laws of these two arrangements. This article will provide an overview of state laws governing these relationships. It is important for the reader to understand, however, that we intentionally avoid describing how specific laws may work, as these details are more intricate and should be studied more carefully than would be allowed within the context of an article.

Professional-Services Arrangements

When the state permits a professional-service arrangement, also known as an independent contractor relationship, the company does everything except perform medical services, and the ophthalmologist is hired by the company as an independent contractor for that single purpose. In a typical professional-services arrangement, the company will open an office from which the ophthalmologist will work, purchase the necessary medical supplies and equipment and hire and provide for all of the non-medical support and services. The company sets prices for procedures and collects these fees from patients, while handling all of the marketing, management, accounting and legal needs of the location, as well as everything else that is needed to properly and effectively conduct business from the location. In return for providing medical services, the ophthalmologist receives a fixed amount based on the medical services provided.

In the most basic professional-services arrangements, the ophthalmologist's involvement with the company is limited to providing medical services at the company location, once the ophthalmologist is comfortable that the proper medical supplies and equipment are present. In more advanced professional-services arrangements, the ophthalmologist might also assist the company in its marketing efforts, oversee the medical services provided by other ophthalmologists through a role as a medical adviser or otherwise involve himself in some of the management functions of the company. Regardless of the ophthalmologist's involvement, all professional-services arrangements share one thing in common: The company does not have any control over the professional judgment or the medical decisions that the ophthalmologist makes, nor can the company require the ophthalmologist to provide medical services to any particular patient or in any particular way.

Because of the lack of regulatory restrictions, states that permit professional-services arrangements are the most favorable to ophthalmologists and run the least risk of a regulatory problem.

Management-Services Arrangements

In a management-services arrangement, an ophthalmologist cannot be employed by a company as an independent contractor. Rather, the ophthalmologist must hire the company to provide all of the non-medical services that the ophthalmologist would otherwise have to perform on his own.

In a typical management-services arrangement, the company will still open the office from which the ophthalmologist works, purchase the necessary medical supplies and equipment and hire and provide for all of the non-medical support and services. Likewise, the company would still handle all of the marketing, management, accounting and legal needs of the location, as well as everything else that was needed to properly and effectively conduct business from the location. The company would also collect payments from the patients for the medical services that the ophthalmologist rendered.

The primary difference is that in a management-services arrangement, the ophthalmologist would set the price that the patients are charged, pay the company for all of the non-medical services that the company provides and reimburse the company for all of the expenses that the company incurs when providing the non-medical services. The ophthalmologist would then keep the balance that is collected from the patients as his own fee.

Differences in Arrangements

The best way to illustrate the differences between a professional-services arrangement and a management-services arrangement is through an example. Let's assume that a patient pays $5,000 for the medical services that he or she receives. In both arrangements, this amount would be paid to the company. Let's further assume that the ophthalmologist working under a professional-services arrangement is entitled to receive $1,000 for performing these services, while the company, under the management-services arrangement, is entitled to receive $4,000 for providing the non-medical services. Under a professional-services arrangement, the company would pay the ophthalmologist $1,000 and keep the remainder. Under a management-services arrangement, the company would deduct its $4,000 fee and pay the remainder to the ophthalmologist.

So what's the real difference between these two arrangements? In a perfect world, the money that would be left to pay the ophthalmologist under the management-services arrangement would be the same as the fee that the ophthalmologist would be paid by the company under a professional-services arrangement. Unfortunately, our world is not perfect. That means that the ophthalmologist, in a management-services arrangement, is forced to take the risk that there's enough money left over to pay himself. The ophthalmologist in a professional-services arrangement does not have to take this risk. As a result, a management-services arrangement causes a tremendous amount of uncertainty for the ophthalmologist.

Can an ophthalmologist structure a management-services arrangement to minimize the risk of not knowing how much he or she will make? Although there are provisions that an ophthalmologist can include in a contract with a company that would accomplish this objective, the greater the protection that the ophthalmologist contractually receives, the better the chance that a regulator will find that the arrangement violates the applicable law. Hence, states that require management-services arrangements are less favorable to ophthalmologists and run the greater risk of a regulatory problem.

Although these categories may seem fairly simple and straightforward, another challenge occurs when trying to understand which category applies to which state. Unlike this article, state laws rarely, if ever, include the phrases "professional-services arrangement" or "management-services arrangement." Instead, they outline what ophthalmologists can or cannot do while referring to the corporate practice of medicine, ambulatory surgical center licenses, certificates of need and other like terms. This leaves the ophthalmologist to determine (and in many instances to guess) which type of arrangement he or she must have with a company. To make matters worse, one regulator may interpret a state's statute in one way, while a second regulator from the same state may subsequently interpret the statute entirely differently. Because of this, ophthalmologists who have entered into a professional-services arrangement to guarantee their income may have unknowingly violated a state law that requires the use of a management services arrangement instead.

The world of Department of Health regulations is confusing. The penalties for failing to comply with the rules can often be high. Ophthalmologists should bear this in mind when determining how they conduct their business. Although ignorance of the law is not a defense, a proactive attempt at compliance could go a long way toward preserving one's license to practice his/her profession. OM

Next Month: The corporate practice of medicine: Do I need to worry about it?

Matthew Zifrony is a partner with the law firm of Tripp Scott, P.A. in Fort Lauderdale, Fla. He serves as outside general counsel to a national LASIK surgery company and has overseen the legal needs of ophthalmologists and optometrists throughout a good part of his legal career. He can be reached via e-mail at mzz@trippscott.com.