The evolution of business forms for physicians’ practices has been limited by
state anticorporate practice of medicine of laws. [Mars, S. The corporate
practice of medicine: a call for action.
Health Matrix. 1997;7:1,241–300.]
These laws date back to the 1920s and 1930s. Interestingly, they evolved from
laws intended to prevent the practice of law by corporations. Their purpose
was to protect the independence of the professional’s judgment from the
pressures triggered by making money for the stockholders of a business. In a
quote that presages many current criticisms of the more aggressive MCOs, a
court in 1910 described the potential evils of allowing the corporate practice of
law:
The relation of attorney and client is that of master and servant in a
limited and dignified sense, and it involves the highest trust and
confidence. It cannot be delegated without consent and it cannot exist
between an attorney employed by a corporation to practice law for it,
and a client of the corporation, for he would be subject to the directions
of the corporation and not to the directions of the client. There would
be neither contract nor privity between him and the client, and he
would not owe even the duty of counsel to the actual litigant. The
corporation would control the litigation, the money earned would belong
to the corporation and the attorney would be responsible to the
corporation only. His master would not be the client but the corporation,
conducted it may be wholly by laymen, organized simply to make
money and not to aid in the administration of justice which is the
highest function of an attorney and counselor at law. The corporation
might not have a lawyer among its stockholders, directors or officers. Its
members might be without character, learning or standing. There would
be no remedy by attachment or disbarment to protect the public from
imposition or fraud, no stimulus to good conduct from the traditions of
an ancient and honorable profession, and no guide except the sordid
purpose to earn money for stockholders. The bar, which is an institution
of the highest usefulness and standing, would be degraded if even its
humblest member became subject to the orders of a money-making
corporation engaged not in conducting litigation for itself, but in the
business of conducting litigation for others. The degradation of the bar
is an injury to the state. [In re Co-operative Law Co., 92 N.E. 15, 16
(N.Y. 1910).]
Corporate practice of medicine laws apply to physicians only. Any business may
hire nurses or other nonphysician providers, subject to state law requirements
of physician supervision. These laws are still in force in most states, although
many states seem to have forgotten about their core purpose to protect
physician decision making and ignore corporate practice arrangements as long
as the physician technically works for a physician group that only contracts
with the corporation. Attempts to avoid the prohibitions of corporate practice
laws contribute to the complexity of the legal relationships between many
MCOs and their physicians.
The effect on physicians was to lock them into simple partnership style practice
arrangements, while the other players in the medical care market, especially
hospitals, became large, sophisticated corporations. This benefited physicians
by prolonging their hold on power in the medical care system. The most
important manifestation of this market power was that physicians controlled
the physician reimbursement standards for major insurers such as Blue Cross
and Blue Shield. When Medicare and Medicaid were originally formed, they
used the same physician- driven reimbursement system as the private insurers.
This reduced competitive pressures that might have constrained the rise in
medical care costs years earlier. It kept the market entry costs low for
physicians, which allowed new physician entrants to set up their own practices
or work their way into existing practices. In the last few years, it has allowed
some physicians to cash out by selling their practices to corporate providers
while nominally remaining independent practitioners.
The downside of prolonging these simple business structures beyond the point
where they made economic sense is that physicians were left unprepared for
the onslaught of MCOs. The medical societies focused on medical malpractice
reform—a small- practice issue—while MCOs were solidifying their legislative
and political position. Physicians never developed the major business entities
that could better negotiate with MCOs. The physicians who cashed out are now
finding that their corporate owners are starting to demand higher productivity
and threatening to close practices that fail to turn a profit.
