The Decay of California's Prohibition of the Corporate Practice of Medicine
| Jurisdiction | United States,Federal,California |
| Author | Craig B. Garner |
| Citation | Vol. 2015 No. 2 |
| Publication year | 2015 |
Craig B. Garner
Craig Garner is an attorney and health care consultant, specializing in issues surrounding modern American health care in its current climate of reform. Between 2002 and 2011, Craig was the Chief Executive Officer at Coast Plaza Hospital. Craig is also a Fellow with the American College of Healthcare Executives.
"There is nothing worse than a sharp image of a fuzzy concept."1
In the 1990s, dentists in North Carolina began to whiten teeth.2 A decade later, nondentists across the state began to provide the same services, but at a lower price.3 In 2006, the North Carolina State Board of Dental Examiners (the "N.C. Dental Board") responded by issuing more than 47 cease-and-desist letters to parties whitening teeth without degrees in dentistry, and in 2007 the N.C. Dental Board enlisted the aid of the North Carolina Board of Cosmetic Art Examiners to issue similar warnings, specifically to cosmetologists.4 Their combined efforts were successful, and North Carolina nondentists soon stopped offering teeth whitening services.5
The United States Federal Trade Commission (the "FTC") took exception to the actions by the N.C. Dental Board, and in 2010 the FTC filed an administrative complaint alleging that the N.C. Dental Board acted deliberately for the benefit of North Carolina dentists and to the detriment of North Carolina nondentists.6 According to the FTC, these anticompetitive and unfair tactics violated the Federal Trade Commission Act, and in particular Section 5.7
After multiple hearings before an administrative law judge, followed by the FTC's internal oversight and a review by the Court of Appeals for the Fourth Circuit,8 in February 2015, the United States Supreme Court agreed with the FTC's 2010 allegations, namely that the anticompetitive conduct of the N.C. Dental Board violated antitrust law, and in particular the Sherman Act.9 The Supreme Court also held that sovereign immunity did not protect the actions of the N.C. Dental Board.10
In its 6-3 decision referring to the roles of dentists and nondentists in North Carolina, the Supreme Court reached a far greater audience than those concerned with tooth color in the Tar Heel state.11 In point of fact, the Court's ruling did much to undermine most, if not all, authority held by professional organizations in California, including in particular the Medical Board of California ("MBC").12 This article explores how and why such change came about.
California's prohibition on the corporate practice of medicine has been clear and well-defined13 since 1980.14 California Business and Professions Code section 2400 states:
Corporations and other artificial legal entities shall have no professional rights, privileges, or powers. However, the Division of Licensing may in its discretion, after such investigation and review of such documentary evidence as it may require, and under regulations adopted by it, grant approval of the employment of licensees on a salary basis by licensed charitable institutions, foundations, or clinics, if no charge for professional services rendered to patients is made by any such institution, foundation, or clinic.15
California has a "long-standing public policy against permitting lay persons to practice any of the medical arts or to exercise control over decisions made by healing arts practitioners."16 California also prohibits any person from practicing medicine in the state without a valid certificate of licensure,17 and a physician may not "lend" his or her professional license to a corporation without risk of disciplinary action or even license revocation.18 At its core, this prohibition on the corporate practice of medicine is "designed to protect the public from possible abuses stemming from the commercial exploitation of the practice of medicine."19 California's prohibition includes direct medical care as well as administrative services that directly influence clinical delivery.20
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Even though California's prohibition is one of the nation's strongest,21 practitioners and non-practitioners alike still enjoy certain options for engaging the services of a non-clinical manager. Statutory exemptions provide for establishing hospital clinics22 and outpatient settings operated by a nonprofit hospital,23 subject to applicable state and federal law. Management services organizations ("MSOs") present another way in which for-profit hospitals can manage one or more physician practices, provided the manager does not exceed the appropriate scope of authority.24
Should a manager overstep these boundaries, the MBC may receive a complaint or inquiry.25 Regulating the practice of medicine through the state's police power, the MBC is authorized to license, investigate, and discipline medical practitioners.26 Its basic authority is summed up as follows:
The Board's investigators have the status of peace officers [citation], and possess a wide range of investigative powers. In addition to interviewing and taking statements from witnesses, the Board's investigators are authorized to exercise delegated powers [citation] to "[i]nspect books and records" and to "[i]ssue subpoenas for the attendance of witnesses and the production of papers, books, accounts, documents and testimony in any inquiry [or] investigation . . . in any part of the state.27
As for its investigative prowess, the MBC has broad discretion and power to "[investigate] complaints from the public, from other licensees, from health care facilities, or from a division of the board that a physician and surgeon may be guilty of unprofessional conduct."28 The MBC also has "authority to discipline a physician for unprofessional conduct by restricting, suspending, or revoking the physician's license to practice medicine."29
The United States Supreme Court stated in 1958:
The Sherman Act was designed to be a comprehensive charter of economic liberty aimed at preserving free and unfettered competition as the rule of trade. It rests on the premise that the unrestrained interaction of competitive forces will yield the best allocation of our economic resources, the lowest prices, the highest quality, and the greatest material progress, while at the same time providing an environment conducive to the preservation of our democratic political and social institutions. But even were that premise open to question, the policy unequivocally laid down by the Act is competition.30
Historically, the health care industry retained anticompetitive elements that did not face regulatory scrutiny.31 Today, however, the Federal Government actively enforces antitrust laws in health care.32 In 1996, the FTC and the U.S. Department of Justice issued "Statements of Antitrust Enforcement Policy in Health Care," which focused on (1) mergers among hospitals, (2) hospital joint ventures involving high technology or other expensive health care equipment, (3) hospital joint ventures involving specialized clinical or other expensive health care services, (4) providers' collective provision of non-fee-related information to purchasers of health care services, (5) providers' collective provision of fee-related information to purchasers of health care services, (6) provider participation in exchange of price and cost information, (7) joint purchasing arrangements among health care providers, (8) physician network joint ventures, and (9) multiprovider networks.33 Since then, the FTC has issued additional publications in an effort to maintain transparency with respect to the transactions the agency may challenge.34
Recently, in Saint Alphonsus Medical Ctr. v. St. Luke's Health System, the U.S. Court of Appeals for the Ninth Circuit affirmed the district court's judgment in favor of the FTC, holding that the 2012 merger of St. Luke's Health Systems, Ltd. and Saltzer Medical Group, P.A. violated the Clayton Act as well as state law.35 St. Luke's had acquired the assets of Saltzer Medical Group while concurrently entering into a professional service agreement with the group's physicians. The district court noted that "St. Luke's and Saltzer genuinely intended to move toward a better health care system," yet the court still held that the "huge market share" of the post-merger entity "creates a substantial risk of anticompetitive price increases" in the applicable market.36 By ordering divestiture of the merger, the District Court rejected St. Luke's argument that "anticipated post-merger efficiencies excused the potential anticompetitive price effects."37
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The ninth circuit affirmed the lower court's decision, holding that "Section 7 [of the Clayton Act] does not require proof that a merger or other acquisition has caused higher prices in the affected market. All that is necessary is that the merger create an appreciable danger of such consequences in the future."38 In rejecting the efficiencies defense raised by St. Luke's, the ninth circuit opined that there must be a showing that a merger is not anticompetitive, and perhaps even proof of "extraordinary efficiencies" to "offset the anticompetitive concerns."39
In North Carolina State Board of Dental Examiners, the FTC "alleged that the [N.C. Dental Board's] concerted action to exclude nondentists from the market for teeth whitening services in North Carolina constituted an anticompetitive and unfair method of competition."40 In response to the action by the FTC, the N.C. Dental Board argued that it had immunity from prosecution, as "its members were invested by North Carolina with the power of the State and that, as a result, the Board's actions are cloaked with Parker immunity."41
The Supreme Court disagreed, explaining that a nonsovereign board like the N.C. Dental Board enjoys immunity under Parker only after satisfying two...
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