Washington State’s Corporate Practice of Medicine Doctrine: A Minefield for Ketamine Management Services Organizations


Many ketamine clinics enter into management agreements with management services organizations (“MSO”). The MSO provides a litany of services to the professional entities (“PE”) that are owned by healthcare providers, including billing and collections, financial and accounting services, providing space to the clinic through a lease, strategic planning, marketing, and many other types of management and administrative services.

Given the corporate practice of medicine doctrine (“CPOM”), an entity owned by medical providers must be careful when entering into a management services agreement (“MSA”) with an MSO. In general, CPOM, which varies from state to state, prohibits laypersons from employing and/or co-owing a clinical entity with healthcare providers. The underlying premise is that a layperson should not dictate medical decisions by healthcare providers– which makes sense. No one would want their healthcare providers driven by one goal– profits. Among other things, this could sacrifice the quality of care.

While CPOM varies from state to state, some states have extremely strict CPOM doctrines. Washington is one such state. In fact, in our experience, Washington may be the strictest CPOM state. New York and California likewise have strict CPOM doctrines, but they pale in comparison to Washington state.

Washington’s CPOM doctrine has been developed through case law over a long period of time. Below, we provide a summary of some of the more onerous restrictions under Washington law.

Summary of Washington’s CPOM

Washington’s courts will scrutinize the effect and purpose of an MSA and will not be bound by the terms of the MSA. Moreover, Washington courts will also consider (1) the extent to which the MSO exercises control over the PE’s operations, and (2) the nature of the payment scheme between the PE and the MSO. Washington courts have found that work performed by office managers, office secretaries and bookkeepers, though possibly essential to the profitability of a practice, does not constitute the practice of medicine. Thus, an MSO could undertake those tasks. However, the courts will not permit an MSO to be directly involved in patient or clinical care, which is typical in most jurisdictions.

Specific Examples of CPOM Restrictions in Washington

Generally, the following type of activities by an MSO in Washington are prohibited. However, like most jurisdictions, any analysis by a court would be fact-intensive, and no one can predict which of the below factors (either alone or in combination with others) would result in a finding of a CPOM violation. Traditionally, courts in other states have analyzed these relationships holistically to determine if there has been a CPOM violation. While there is a long list of CPOM restrictions for Washington, we only discuss a few of the more prohibitive factors.

  1. An MSO cannot be responsible for the development, management, and overall operations of a PE. Specifically, an MSO cannot be responsible for any of the following: capital improvements and expansion, marketing and advertising, setting patient fees and collection policies, establishing and maintaining contractual relationships with other providers and third-party payors, strategic planning, capital expenditures, patient concerns and claims, workplace health and safety, and approving or disapproving any merger with or acquisition of another practice.
  2. Courts have also found issues with the following services provided by an MSO: office facilities and equipment, personnel and payroll, business systems, procedures, and forms, purchasing and inventory control, accounting services and financial reporting, legal services, marketing assistance, planning for the opening of offices in new locations, billing services, payment and disbursement of funds, and recordkeeping.
  3. An MSO cannot enter into leases for a PE’s practice.
  4. An MSA between the MSO and PE cannot have an excessively long term (e.g., 40 years would be too long). Moreover, the MSA cannot require a healthcare professional to find a replacement for that healthcare professional upon the termination of the professional’s employment with the PE.
  5. The MSA cannot share in the profits of the PE (Washington has a fee-splitting prohibition for physicians. Ultimately, the fees paid to the MSO must be fair market value (“FMV”).). In other markets, compensation that is based upon a “cost plus” reimbursement model has been adopted by MSOs. Retaining an appraiser or valuation expert is the gold standard for determining FMV.
  6. An MSO cannot require a physician to sell her practice upon the termination of the MSA. Nor can the MSO receive a portion of the net sales proceeds from a sale. Such profit-sharing provisions would give the MSO an impermissible financial interest in the PE’s practice.
  7. The PE should not transfer and/or sell its tangible assets, leasehold interests, personal goodwill, and referral source contracts to the MSO.

Conclusion

CPOM doctrines are complicated and nuanced. Failure to abide by a state’s CPOM restrictions can lead to severe consequences. Among other things, a physician could be subject to medical board disciplinary action and the MSO could be subject to an action for aiding and abetting the unauthorized practice of medicine. And there are other consequences as well.

Washington state’s CPOM doctrine is unique in a lot of ways. This is the first state we have analyzed where the MSO cannot enter into leases with the PE or buy the hard assets from the PE. Those are two examples of very commonplace deal points in most other states.

Given the severe penalties for failing to observe the CPOM restrictions, MSOs and PEs in Washington state must pay very close attention to the case law and any other published guidance.



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