Dear Friend,
The “friendly physician.” Boy, is that a term of art or, perhaps better said, of artifice.
That was the subject of Monday's blog post, “I Thought They Loved Me!” Is No Defense For the Spurned and Burned “Friendly Physician”. You can follow the link to read the post online, or just keep reading.
“Friendly physician” is the name of a model often employed by PE, hospitals, and other investors to structure an end run around a state’s prohibitions on the corporate practice of medicine.
Here’s a simple example of how the model is used, although there are other applications for it.
Drs. Alpha and Beta own a large medical practice (“Alpha Beta PC”) with other employed physicians and a significant staff. They’re approached by Last PE Firm Before Freeway (“Last PE”), which wants to buy the entire practice, employ Drs. Alpha, Beta, and the practice’s other physicians, as well as the rest of the staff.
However, due to the state’s prohibition on the corporate practice of medicine, Last PE can’t own Alpha Beta PC.
To get around the restriction, Last PE forms a management services organization, i.e., “MSO”, entity, “A.B. Management Co.”, which buys all of Alpha Beta PC’s assets other than the bare medical practice, which remains with Alpha Beta PC. Moving forward, Alpha Beta PC employs the physicians and A.B. Management Co. provides, by way of a management agreement, the physical space and all of the other services and employees required to operate the practice.
But that leaves us with the question of the friendly physician: A physician, it could be one of Drs. Alpha or Beta, will, as a part of the overall arrangement, remain or become the owner of the stripped down medical practice entity, Alpha Beta PC.
However, and here’s the rub, the physician is dubbed a “friendly physician” because he or she serves at the will of A.B. Management Co., which can force him or her to sell to a designated replacement, i.e., to a new (or friendlier) friendly physician. Similarly, the management entity can prevent the friendly physician from selling his or her ownership interest in the practice entity to anyone the MSO doesn’t approve.
What could go wrong?
Maybe nothing. Maybe everything. Let’s explore a few points further; note that this is by no means exhaustive.
Conflicts and Liability
By its nature, the friendly physician (and the practice) and the management entity are tied together at the hip. If the management entity fails, or doesn’t devote enough resources to those items required in the professional judgment of the friendly physician, the overall business of the practice could fail and, worse, quality of care can suffer. The friendly physician and his/her license are at risk.
Of course, the friendly physician can huff and puff and say that this and that must be done to protect patient care, but remember that he or she can be replaced at the whim of the investors. Dr. Friendly might be under significant financial pressure not to complain due to his compensation package for serving as the friendly physician, or, even more troubling, out of concern that he might not receive some or all of the remaining purchase price due to him that was financed through a seller’s note or by way of an earnout.
Conflict of interest, anyone? Fuel for the fire that will be lit by medical malpractice lawyers, medical board investigators, and state prosecutors, alike?
You need to be very careful, with the devil being in the details of the sales documents, the management services agreement between the management company and the practice entity, the agreement governing the relationship between the friendly physician and the practice, and the agreement governing transfer rights as to his or her shares.
Compliance and Liability
There are too many compliance points to cover in less than a short book. Let’s look at two.
First, the relationship between the medical practice entity, here, Alpha Beta PC, and the management entity, A.B. Management Co., raises concerns under the federal Anti-Kickback Statute and the Stark Law (as well as state law counterparts). So, too, would any arrangement whereby the management company is providing additional compensation to the friendly physician, say by way of a consulting agreement providing for an additional stream of income to him or her.
What are the purposes of those payments – the real purposes? What are the amounts of those payments and are they within fair market value? Significant questions abound. So, too, does the issue of availability of safe harbors, whether permissive under the AKS or mandatory under Stark.
Second, although you, as the friendly physician, might exercise diligent supervision of the professional entity, by definition you have given up significant control under the management services arrangement/the global deal. Promises in a contract are just ink (if they are actually printed out!), and it would be foolish to assume, without checking on a regular basis, that the overall business is operating in a compliant manner. I’ve seen physicians prosecuted for felonies as a result of forgetting this simple step.
As former President Ronald Reagan said, “trust but verify.” After all, you wouldn’t be the first or, likely, the 501st, physician to discover that your lay investor partners are paying kickbacks to third parties for referrals of patients or running phony or even nonexistent patients through the practice.
Note that I am not saying that every friendly physician deal is an illegal deal. But I am saying that every friendly physician deal is a complicated deal, whether or not you believe it is. Get help with it. The amount of money that you think you might save by not getting professional help up front will be dwarfed by the money you will spend to defend yourself later on.
