Corporate practice of medicine seen as ancient approach

March 1, 2007

The Illinois Supreme Court recently confirmed that the corporate practice of medicine doctrine is still alive and well in the state of Illinois. In Vine Street Clinic, et al. v. HealthLink Inc., the court concluded that percentage-based fees charged by the owner of a healthcare provider network were illegal under the state's medical practices act.

The prohibition of the corporate practice of medicine began in the early 1900s. It was viewed as an ethical restriction on the types of relationships in which physicians could engage.

The concern was that business interests would too heavily influence the practice of medicine, and thereby inappropriately affect medical judgment, patient treatment and outcomes.

Primarily a law based on case law precedent, this doctrine prohibits lay corporations from engaging in the practice of medicine through physician-employees or sharing in the profits of physician practices by contract.

While the courts have found some support for their rulings in state medical practice acts (which were often a stretch), the doctrine is largely based on the courts' public policy concerns. Of the various rationales articulated by the courts, the most common reason was the belief that physicians should avoid any influence over the exercise of their professional judgment. In other words, diagnosis and treatment of patients should be based on medical judgment and not be affected by outside business objectives.

The Illinois case involved a class action brought by providers that participated in a PPO network against the proprietor of the network. The plaintiffs sought to strike down a relatively common PPO practice: (1) providers would provide services to insured persons and send their claims to the network for repricing before payment by the insurer, and (2) the network would deduct its administrative fee, which was a percentage of the providers' charges, from the amount ultimately paid to the providers. This arrangement was agreed to up front by the providers pursuant to their participation agreements.

Relying on a statute that was more specific than exists in most states, the Illinois court found that a fee based on a percentage of charges constituted an improper sharing of fees derived from the provision of professional services, and declared the arrangement void. It declined, however, to strike down another contract which required the providers to compensate the network on a flat fee-per-claim basis.

It also declined to require the network to repay the improper fees it had charged, concluding that the providers knew what they were doing when they entered into their participation agreements.

It is hard to imagine how the professional judgment of these plaintiffs was adversely affected under the arrangement in question. The providers were independent contractors, and the network exercised no influence of any kind on the diagnosis and treatment of their patients.

The corporate practice relic is a barrier to continued modernization.

Barry Senterfitt is a partner in the insurance industry practice of Akin Gump Strauss Hauer & Feld LLP in the firm's Austin, Texas, office.

This column is written for informational purposes only and should not be construed as legal advice.