Corporate Practice of Medicine
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.