California Cracks Down on MSOs and Private Equity Influence: What Digital Health Companies Must Know
California Tightens Oversight of MSOs and Private Equity in Healthcare
This October, California (“CA”) Governor Gavin Newsom signed two bills into law (collectively, the “CA Bills”) further regulating management services organizations (“MSOs”) and private equity groups/hedge funds involved with health care practices.
The first bill (SB-351) prohibits:
A private equity group or hedge fund from interfering with the professional judgment of physicians or dentists (collectively, “Providers”) in making health care decisions and exercising power over certain related actions.
Contracts that would prevent any Provider from (1) competing with the relevant practice in the event of a termination or resignation; or (2) speaking openly about their experience with the relevant practice.
The second bill (AB-1415) requires:
The CA Office of Health Care Affordability (the “Office”) to (1) conduct ongoing research and evaluation on MSOs; and (2) require MSOs to submit data and other information as necessary to carry out the functions of the Office; and
A “noticing entity,” which includes MSOs, to provide the Office with written notice of agreements or transactions between the noticing entity and a health care entity (or MSO) that transfer material assets, or control of material assets, to other entities. Material transactions may be further defined in future regulation, but may include, for example, acquiring a controlling stake in a medical group or MSO. Penalties for non-compliance are likely to be enforced but are still evolving.
The notice requirement is an extension of the Office’s existing oversight under California’s Health Care Quality and Affordability Act. Generally, the Office is tasked with:
analyzing the health care market for cost trends and drivers of spending;
developing data-informed policies for lowering health care costs;
setting and enforcing cost targets; and
and creating a strategy for controlling health care costs and ensuring affordability.
Which Entities Are Affected by California’s New MSO Laws?
Over half the states in the US have enacted a corporate practice of medicine (“CPOM”) doctrine to prevent non-licensed individuals and non-professional entities, such as MSOs, private equity groups, and hedge funds, from influencing a licensed individual’s professional judgment (e.g., physicians, dentists, and other providers). States that enforce the CPOM doctrine prohibit these non-professional entities from hiring licensed individuals and providing health care services directly to consumers. This means that, in CPOM states, health care services may only be provided to consumers through professional entities such as professional corporations (“PCs”) or professional limited liability companies (“PLLCs”), which must typically be owned by a licensed provider. CA has long been known for taking a strict approach to the MSO-PC model and enforcing the CPOM doctrine.
Digital health companies implement the “MSO-PC” model to compliantly operate on a multi-jurisdictional basis. The MSO handles all management, administrative, and technology functions necessary to help support the PCs day-to-day operations, while the PCs focus on providing high quality clinical care to patients. To learn more about the MSO-PC model, read our blog post here.
What the California Bills Mean for MSOs and Private Equity
The Medical Board of CA provides the public with examples of types of behaviors that the CPOM doctrine aims to prevent. Only CA-licensed physicians may ultimately (among other actions):
make health care decisions (e.g., determining appropriate diagnostic tests for patients, determining referral needs, and how many hours a physician must work);
own a health care practice;
hire/fire physicians, allied health staff, and medical assistants;
set the parameters under which the physician will enter into contractual relationships with payers;
make decisions regarding coding and billing procedures for patient care services; and
approve of the selection of medical equipment and medical supplies for the medical practice.
The first CA Bill SB-351 is consistent with the corporate practice of medicine (“CPOM”) doctrine by further emphasizing that investors cannot interfere with or influence the professional judgment of licensed individuals – only licensed professionals can make decisions about patient care. We are also seeing an increased trend across the country whereby states are prohibiting hiring entities from restricting how Providers can proceed in their careers after terminating their professional relationship with a previous practice.
Interestingly, the second CA Bill AB-1415 introduces a new layer of oversight: transparency. MSOs must now report key transactions and provide relevant data to the Office to help the Office manage health care costs. It is unclear what such “data” will include and how the Office will enforce these provisions. Because CA is one of the strictest states in the nation as it relates to enforcing the CPOM doctrine, it is crucial that digital health enterprises operating in CA revisit their workflows and operational processes to ensure compliance and prepare for reporting.
Top Compliance Lessons for Digital Health Companies Using the MSO-PC Model in CA
CA Continues to Emphasize Preserving Independent Medical Judgment. Only licensed Providers can make clinical and operational decisions that directly affect patient care. Investors, MSOs, or other non-licensed entities that are involved with health care practices must structure relationships carefully so they do not control or influence how care is delivered.
Compliance Now Extends Beyond Control to Transparency. The second CA Bill expands the CPOM conversation from “who controls clinical judgment” to “who influences the health care market” by requiring MSOs to report data and material transactions to the Office.
Digital Health Companies Must Reassess Their Structures and Workflows. Because CA remains one of the strictest CPOM enforcement environments, digital health companies operating MSO-PC models in this state should revisit governance documents, workflows, and compensation models to ensure compliance and mitigate risk.
Is Your MSO-PC Structure Still Compliant? Navigating Evolving CPOM Rules
While states like CA are increasing their scrutiny over the MSO-PC model and non-professional entity involvement in health care practices, it is vital that digital health companies revisit their models and ensure they are complying with ever-changing state law. NLG has significant experience helping companies evaluate whether their structures and/or contracts could be impacted by updated CPOM state rules and assisting companies in restructuring their models as needed to comply. Our team advises digital health companies nationwide on structuring MSO-PC arrangements that meet complex state laws, including California’s heightened standards. Contact us to ensure that your current MSO-PC model remains in compliance with the evolving regulatory landscape.