Texas Legislature Passes Medical School Exception
to the Corporate Practice of Medicine Doctrine

By Elaine A. Lisko, Health Law & Policy Institute

Both houses of the Texas Legislature recently passed a bill (HB 1491) that allows private medical schools to employ physicians to provide medical services in fulfillment of the school’s mission. The bill also allows private medical schools to retain all or a portion of the professional fees generated by the physician’s provision of services on the school’s behalf. HB 1491 is significant because it carves out the first express statutory exception to the corporate practice of medicine doctrine in Texas. The corporate practice of medicine doctrine is a long standing legal doctrine that is founded upon two basic tenets: 1) lay organizations cannot employ physicians; and 2) lay organizations cannot share in physicians’ fees.

From its inception, the corporate practice of medicine doctrine has been based upon public policy concerns about the potential dangers of lay control over professional medical judgment, commercialization of the medical profession, a division of a physician’s loyalty between the patient and the physician’s employer, and lay interference with the confidential and personal nature of the physician-patient relationship. The corporate practice of medicine doctrine is primarily a court-made rule. Only two states (i.e., Colorado and South Dakota) have express statutory prohibitions against the corporate practice of medicine. See Colo. Rev. Stat. § 12-36-134(7) (1998); S.D. Codified Laws Ann. § 36-4-8.1 (Supp. 1998). Interestingly, these statutory provisions are more permissive than restrictive in nature. The very statutory provisions that profess to adhere to a general prohibition against the corporate practice of medicine contain express exceptions to that prohibition.

Colorado statutory law provides that, with the exception of professional service corporations, "corporations shall not practice medicine." It provides further, however, that a hospital’s employment of a physician does not constitute the corporate practice of medicine, provided the hospital does not restrict the exercise of the physician’s independent medical judgment and does not require the physician to make referrals exclusively to the hospital or its employed physicians. Colo. Rev. Stat. §§ 12-36-134(7) & 25-3-103.7. South Dakota statutory law provides that, "it is the public policy of this state that a corporation may not practice medicine or osteopathy." It provides further, however, that a corporation is not considered to be engaged in the practice of medicine when it enters into an employment arrangement with a physician, provided the arrangement does not restrict the exercise of the physician’s independent medical judgment, does not result in profit to the corporation from the practice of medicine itself, and is limited in terms of time (i.e., 3 years). S.D. Codified Laws Ann. § 36-4-8.1.

In the past, a majority of the states adhered to the corporate practice of medicine doctrine. In more recent times, the doctrine has come under attack resulting in a narrower application of the corporate practice prohibition. Many states have carved out express statutory exceptions to the doctrine. Among the more common exceptions are professional service corporations, non-profit corporations, hospitals, and health maintenance organizations. Even where exceptions have been carved out, a continuing concern with at least some of the underlying public policy considerations remains. The provisos contained in the Colorado and South Dakota statutes allowing certain corporate arrangements constitute just two examples of this continuing concern.

Medical school employment of physicians is another recognized, though less well defined exception to the corporate practice of medicine doctrine. In large part, state statutory provisions that authorize medical school employment of physicians do so impliedly rather than expressly. Examples of implied statutory exceptions are found in Alabama, South Carolina, and Wisconsin. See Ala. Code § 40-12-126 (1992); S.C. Code Ann. § 59-101-195 (West Supp. 1998); Wisc. Stat. Ann. § 448.08(5) (West Supp. 1998).

Notwithstanding the weakening of the corporate practice of medicine doctrine and the narrowing of its application, the doctrine continues to have a few strong adherents, including Texas, California, Illinois, Iowa, Kansas, and West Virginia. Like Texas, Illinois is considering carving out certain exceptions to the doctrine. Unlike Texas, however, Illinois is acting broadly. Its legislature currently has before it a bill (HB 2143) that allows multiple forms of physician employment arrangements. The Illinois bill is more than likely an attempt to codify and respond to the Illinois Supreme Court’s recent recognition of certain exceptions to the corporate practice of medicine doctrine. See Berlin v. Sarah Bush Lincoln Health Center, 688 N.E.2d 106 (Ill. 1997). Importantly, in order to qualify for an exception under the Illinois bill, the physician arrangement must be structured so the employer does not "restrict or interfere with medically appropriate diagnostic or treatment decisions." Ill. H.B. 2143, 91st Gen. Assembly (introduced Feb. 19, 1999).

The Texas bill is unique because it expressly authorizes and is specifically limited to a single form of corporate employment of physicians that falls outside of the more commonly recognized exceptions. Such an express, specific provision for medical school employment of physicians is a much smaller step than that being contemplated by Illinois. Given Texas’ continued strong adherence to the corporate practice of medicine doctrine and the absence of any recent state supreme court decision recognizing an exception, the state legislature may have viewed this approach as a better first step. Moreover, the limited nature of the HB 1491 may have made it more likely to pass and may make it less subject to abuse once enacted into law.

Regardless of which approach is taken, in deciding whether to recognize a statutory exception, a state legislature should consider the following questions: (i) does the arrangement threaten the exercise of physician autonomy over medical treatment decisions?; (ii) does the arrangement seek to commercially exploit the physician-patient relationship?; (iii) does the arrangement threaten the loyalty a physician owes to the patient and jeopardize the quality of care the patient receives?; (iv) does the arrangement seek to interpose a third party in the personal physician-patient relationship and destroy the trust needed to maintain the relationship?

Where the answer to these questions is yes, the exception should not be allowed. Where the answer to these questions is no, the exception should be allowed. In this way, the dangers that the corporate practice of medicine doctrine seeks to avoid will be eliminated while the benefits that modern health care delivery arrangements seek to achieve will be realized.

05/20/99