December 22, 2021
A physician group’s lawsuit against Envision Healthcare will test the limits of California’s ban on the corporate practice of medicine.
The American Academy of Emergency Medicine Physician Group argues that Envision’s emergency department contract with Placentia-Linda Hospital in Placentia violates state law because it takes too much decision-making power away from doctors—something the state law seeks to prevent—and places it with Envision, which is owned by the private equity firm Kravis, Kohlberg and Roberts.
The lawsuit seeks to test Envision’s use of a so-called “front” professional association, which they claim is the employing entity, said Dr. Robert McNamara, AAEM-PG’s chief medical officer.
“We believe that it’s Envision that’s in charge and we’ll be able to show that professional association structure is just a sham to thwart the corporate practice of medicine law,” he said.
In its complaint filed Monday in California state court, the physician group says that after Envision acquires practices, it exercises “profound and pervasive” control over physicians’ practice of medicine, diminishing their independence and violating the law. For example, the lawsuit alleges Envision decides how many and which doctors will be hired, their compensation and work schedules. It also controls advertising for doctor vacancies, terms of employment, staffing levels and number of patient encounters, according to the complaint.
Envision said it does not comment on pending litigation. KKR bought the company in 2018 for $9.9 billion.
In states like California with corporate practice of medicine bans, hospitals and other companies that own physician groups structure them as foundations to abide by the law. Sutter Health, for example, has the Palo Alto Medical Foundation.
“It’s ubiquitous in the state; you find it all over,” said Richard Scheffler, professor of health economics and public policy at the University of California, Berkeley.
Envision is trying to do something similar, except it’s a private equity-owned corporation and not a not-for-profit health system, Scheffler said. The former has to make money for its investors, so the court will have to decide if Envision’s workaround takes pushes the limits too far, he said.
“This could be a landmark case,” he said. “It’s the first major pushback.”
Paul Giancola, a partner with Snell & Wilmer in Phoenix who has worked on corporate practice of medicine transactions, said in his opinion, it shouldn’t make a difference whether the corporate entity is private equity owned or a not-for-profit organization, although California’s law could have some distinction.
Giancola said such arrangements can be helpful because they allow physicians to focus on patient care and not the operational end of things, like reimbursement and benefits. But it’s a problem if they interfere with patient care, such as requiring that they see a certain number of patients within a specific time frame. Even so, the contracts are not dissimilar from a hospital’s practice guidelines, which might suggest that all patients over 65 who present with certain conditions get CT scans, for example.
“You see that tension all the time, whether you’re employed by a hospital, a corporation or a practice group, people have different practice patterns and they try to come up with recommendations that people can follow that make sense,” Giancola said.
AAEM-PG isn’t asking for monetary damages. Instead, it’s asking the court to prevent Envision from continuing to practice in the state under its current structures, which it alleges include captive medical groups, restrictive covenants in physician contracts, payment of consideration to acquire emergency department contracts and control over staffing and billing contracts.
The complaint accuses Envision of providing consideration to hospitals in exchange for exclusive emergency department contracts. In this case, the complaint says it offered the hospital’s owner, Tenet Healthcare, anesthesia services and hospitalist services without subsidies at its hospitals nationwide in exchange for Tenet granting it exclusive emergency department contracts. Subsidies are stipends hospitals provide to certain hospital-based physicians as an incentive to practice at a hospital. For-profit Tenet allegedly agreed. The company did not return a request for comment.
“Plaintiff is informed and believes this kickback scheme is one of its standard methods of acquiring new contracts and maintaining existing ones,” the complaint said.
AAEM-PG used to have a contract with the physician corporation that formerly practiced at Placentia-Linda Hospital, but it was canceled when the hospital decided to work with Envision instead. McNamara said this lawsuit isn’t about getting reinstated at the hospital.
“We’re not doing this to get back into Placentia-Linda,” he said. “We’re trying to get the court to enforce the patient protections inherent in California’s prohibition on the corporate practice of medicine. This is all about who controls the care of the patient.”
Tim Greaney, a visiting professor in the University of California, Hastings College of Law, said the complaint exposes “a wide range of concerns” about how companies are approaching California’s law. That includes the question of whether Envision’s contracts preclude the physician groups from affiliating with multiple hospitals, which would limit competition, he said.
“I’ve wondered for years how these controlled professional corporations were able to prosper and get away with it, I guess, because I understand it’s pretty common,” Greaney said.