Opening a New Medical Practice - Avoid the Corporate Practice of Medicine

In California, professional medical corporations are subject to strict ownership and operational regulations to ensure that medical practices remain under the control of qualified, licensed professionals. According to Corporations Code section 13401.5, professional medical corporations must be owned by one or more physicians who are licensed to practice medicine in California. These physician licensees must collectively own at least 51% of the shares of the corporation. Additionally, the number of physician shareholders must always exceed the number of other types of licensed professionals (e.g., podiatrists, psychologists, or other allied health professionals) who are permitted to hold shares in the corporation. This ensures that physicians maintain majority control over the corporation’s governance.

Non-physicians (commonly referred to as "lay people") and healthcare providers who are not licensed in California are strictly prohibited from owning any portion of a professional medical corporation. This restriction is designed to prevent unlicensed individuals or out-of-state providers from influencing or controlling medical practices, thereby safeguarding the integrity of patient care and ensuring compliance with California’s medical practice laws.

Healthcare Decision-Making Authority

All clinical and healthcare-related decisions within a professional medical corporation must be made exclusively by physician owner(s) or other authorized licensed medical staff, such as employed or contracted physicians or other qualified healthcare providers licensed in California. These decisions include, but are not limited to:

• Ordering and interpreting diagnostic tests (e.g., lab work, imaging, or other medical evaluations);
• Making referrals to specialists or other healthcare providers;
• Providing consultations to patients or other practitioners;
• Determining a physician’s workload, including patient volume and scheduling; and
• Overseeing the overall care of patients, including treatment plans and follow-up care.

Unlicensed individuals, such as business managers, investors, or administrative staff, are strictly prohibited from making any of these clinical decisions. Allowing unlicensed persons to influence or control these activities constitutes the unlicensed practice of medicine, which is a violation of California law and may result in disciplinary action by the Medical Board of California, civil penalties, or criminal charges.

Business and Management Decisions

In addition to clinical decisions, certain business and management decisions that affect the control or operation of a medical practice must also be made by licensed physicians. These decisions are critical to maintaining the autonomy of the medical practice and ensuring that patient care remains the primary focus. Examples of such decisions include:

• Control over patient medical records, including decisions about storage, access, and compliance with privacy laws such as the Health Insurance Portability and Accountability Act (HIPAA) and California’s Confidentiality of Medical Information Act (CMIA);
• Hiring or firing of clinical staff, including physicians, nurses, and other licensed healthcare providers;
• Billing procedures, including setting fee schedules, coding practices, and interactions with insurance providers or government programs like Medicare and Medi-Cal;
• Selection of medical equipment and supplies, such as diagnostic tools, surgical instruments, or electronic health record systems, which directly impact patient care; and
• Establishing policies and protocols for the delivery of medical services, such as clinical guidelines or quality assurance measures.

Unlicensed individuals, including corporate entities, management companies, or non-physician investors, may not exert control over these decisions. Arrangements where unlicensed persons or entities indirectly influence these areas—such as through management service organizations (MSOs) that overstep their administrative role—may be scrutinized by the Medical Board of California for violating the corporate practice of medicine doctrine. This doctrine prohibits corporations or unlicensed individuals from practicing medicine or controlling medical practices, except as permitted by law.

Restrictions on Business Structures

Physicians in California are further restricted in the types of business entities they may use to practice medicine. Specifically, physicians may not use a limited liability company (LLC) or a general corporation to operate a medical practice. Instead, they must form a professional medical corporation under the Moscone-Knox Professional Corporation Act (Corporations Code sections 13400 et seq.). This type of corporation is specifically designed for licensed professionals and includes safeguards to ensure compliance with licensing and ownership requirements.

The prohibition on LLCs and general corporations stems from the need to maintain professional accountability and prevent the use of business structures that could allow non-physicians to exert undue influence over medical practices. For example, LLCs typically offer more flexible ownership and management structures, which could potentially allow non-physicians to gain control, violating California’s medical practice laws.

Practical Considerations and Legal Counsel

Navigating the legal requirements for professional medical corporations in California can be complex, particularly given the interplay between state corporate law, medical licensing regulations, and federal healthcare laws. The Medical Board of California strongly encourages physicians and other licensees to seek guidance from knowledgeable legal counsel who specialize in healthcare law and medical practice compliance. These professionals can assist with:

• Structuring a professional medical corporation to comply with ownership and control requirements;
• Drafting shareholder agreements, bylaws, and employment contracts to ensure physician control;
• Reviewing management service agreements with MSOs or other third-party entities to avoid violations of the corporate practice of medicine doctrine;
• Ensuring compliance with billing, privacy, and anti-kickback laws, such as the federal Stark Law and California’s anti-kickback statutes; and
• Advising on mergers, acquisitions, or partnerships involving medical practices.

Physicians should also stay informed about updates to California’s medical and corporate laws, as well as enforcement actions by the Medical Board of California, which may provide further guidance on permissible practices. Failure to comply with these regulations can result in severe consequences, including loss of licensure, fines, or legal liability for the corporation and its shareholders.

Additional Context

The regulations outlined above are rooted in California’s commitment to protecting patients by ensuring that medical decisions are made by qualified professionals free from external pressures. The Medical Board of California enforces these rules to prevent scenarios where profit-driven entities or unqualified individuals compromise patient care. For example, improper arrangements with management companies or non-physician investors have historically led to issues such as overutilization of diagnostic tests, inappropriate referrals, or substandard care, prompting stricter oversight.

Physicians interested in forming or operating a professional medical corporation should also consult resources provided by the Medical Board of California, such as its Guide to the Laws Governing the Practice of Medicine by Physicians and Surgeons, as well as relevant sections of the Business and Professions Code (e.g., sections 2400 et seq., which address the corporate practice of medicine).

By adhering to these regulations and seeking appropriate legal advice, physicians can establish and maintain medical practices that comply with California law while delivering high-quality patient care.