Back to Top

Health Law Pointers - Volume XVI, No. 1

The Dangers of Informality in Structuring Medical Practice Arrangements
By: Kinsey A. O’Brien, Associate (Pending Bar Admission)

            For my first Health Law Pointers article, I wanted to alert our subscribers to an easily avoidable issue that occasionally comes up in practice: the dangers of entering into informal agreements with other medical professionals. Medical practitioners often want to provide services to their patients in a collaborative and informal manner. Especially in communities as cordial as Western New York, the preference may be to keep things simple and not confirm the relationship through the use of legal documents. However, such informality often implicates a host of issues under New York State and federal law. This article discusses three critical problems created by informal relationships: improper entity structure, illegal fee splitting, and questionable referral practices in violation of federal and/or New York State law.

Improper Structure—New York’s Corporate Practice of Medicine Doctrine

            Under New York’s corporate practice of medicine doctrine, general business corporations are prohibited from providing or hiring individuals to provide medical services. Rather, entities providing such services must be structured as a professional service corporation (PC), professional service limited liability company (PLLC), or registered limited liability partnership (LLP). Even within these permissible organizational forms, the entity is generally limited to providing one type of professional service. Thus, no unrelated (business) activities may be provided through the professional entity.

            In light of these rules, it is all too easy for practitioners to violate the corporate practice of medicine doctrine when they enter into informal business arrangements with others. For instance, a social worker and psychologist or a psychologist and psychiatrist who form a practice together violate these rules because they are members of different professions, despite the fact that their professional services may seem complementary. Likewise, a practitioner is unable to render care to the public through an entity that provides practice management services. Finally, a practitioner who affiliates with a practice without knowing its corporate structure could find herself inadvertently practicing through a general business corporation or other improper entity.

Any of these violations would amount to professional misconduct. For these reasons, it is essential that practitioners perform a due diligence inquiry by asking questions about entity structure and ownership, and then insisting that the proposed arrangements are documented in writing before they begin working together.

Fee Splitting

            Connected with the corporate practice of medicine doctrine is New York’s prohibition on fee splitting. Under New York law, practitioners are prohibited from allowing any person or entity, other than a partner, employee, associate, or authorized subcontractor or trainee, to share in profits associated with providing professional services. This means professionals may not enter into any arrangement where the amount of payment to an “outsider” is determined, directly or indirectly, by the volume or value of the professional services rendered. For example, entering into a premises lease where rent payment is based on a medical practice’s income or number of patient visits would amount to illegal fee splitting. Similarly, an arrangement where a practitioner pays a practice management company a percentage of her net income, or per appointment or test, would violate the fee split rules.

A professional who enters into this type of agreement, even unknowingly, would be subject to professional misconduct charges. Ultimately, this could result in revocation or suspension of your professional license. Additionally, business owners that illegally share in profits from professional services may be viewed as engaging in the crime of unauthorized practice of medicine. Thus, it is important for practitioners to evaluate any informal arrangements or written agreements with entities outside their practice area for fee split issues.

Physician Self Referrals

            A third major issue often created by informal practitioner arrangements is improper physician referrals under federal law (Stark Law) or the New York State counterpart under the Public Health Law. Stark Law prohibits physicians from referring Medicaid and Medicare patients for designated health services (DHS) if those services are provided by any person or entity with which the physician has a financial relationship. Both “referral” and “financial relationship” are defined quite broadly and DHS includes a variety of services ranging from laboratory tests and therapy to certain medical equipment and prescription drugs  Further, while there are many exceptions to Stark Law, they are often intricate and narrow and sometimes require written documentation, making it difficult to comply.

            For these reasons, it is easy for informal arrangements among practitioners to violate the law. Take, for example, the Stark Law exception for premises leases, which allows one medical provider to lease space to another without the arrangement being deemed a “financial relationship” such that referrals would be prohibited. Under this exception, the lease must be in writing and for a fixed, fair market value. Thus, a doctor who agrees to share office space with another provider without executing a lease agreement would find herself in “financial relationship” territory. Any DHS referrals which she then makes to her office-mate would be a Stark Law violation. Further, even when where there is a written lease, the lease terms must comply with commercially acceptable standards. Practitioners who allow the lease to expire or set the term for so long that the rent no longer reflects fair market value may no longer be entitled to the protection provided by the statutory exception.

These examples show that it is quite easy for a practitioner to violate the Stark Law without any ill-intent or profit motive. Such violations can result in denial of Medicaid/Medicare payments, recovery of payments already made, and penalties from the Department of Health and Human Services. This is true even where the provider did not know that the arrangement constituted a referral or violated the law. Given these risks and the difficulty inherent in ensuring compliance, it is important that medical professionals carefully consider any proposed transactions and agreements to eliminate referral concerns.


            These are just three examples of the issues that abound when practitioners enter into informal or unstructured relationships. Accordingly, it is always wise to consult with a health law attorney before affiliating yourself or your practice with another person or entity. If you have any questions on business structure, fee splitting, Stark Law, or any other aspect of your medical practice, give us a call—we would be happy to discuss the matter with you!

What Do We Call Ourselves Now?
Renaming a PC Following Disassociation or Death

            It is no surprise to practitioners that rules governing the creation, naming, and operation of professional service corporations (PCs) are detailed and complex. There are specific rules on adopting a name, identifying owners, and filing the necessary documents. What practitioners might not be aware of, however, is their continuing responsibility to ensure that the name of their PC remains compliant with the law. Specifically, what obligations do the remaining owners of a PC have if the practitioner after whom the PC is named leaves the practice, retires, or dies?

            The purpose behind the stringent rules on naming PCs is meant to protect the public against deception and to allow consumers to easily identify the person with whom they are doing business. Accordingly, when a PC is named after a particular practitioner, the law generally requires that the practitioner be actively affiliated with the business. If the practitioner retires or otherwise withdraws from the practice, the PC is no longer permitted to utilize his or her name, regardless of whether the departing practitioner consents.

Indeed, the Division of Professional Licensing takes the position that use of the physician’s name in this instance is tantamount to deceptive advertising and a false representation. This would amount to professional misconduct and could result in penalties or licensure actions against the PC’s remaining owners. Accordingly, it is essential that practitioners reevaluate their PCs name when there is a major change in PC membership.

            The rules are a bit more forgiving when it comes to a practitioner’s death. New York’s Business Corporations Law provides that the name of a PC may not contain the name of a deceased person. However, there are two major exceptions to this rule. First, if the deceased person’s name was part of the PC’s name at the time of death, the PC may lawfully retain its name. Second, if the decedent’s name was part of a partnership in existence on his or her death and at least two-thirds of that partnership’s partners become shareholders of the PC, the PC may use the decedent’s name in its title. This means that when the actively affiliated practitioner whom the practice is named after dies, generally no amendment to the PC’s name is necessary.

            An exception to this generalization exists, however, when the death (or dissociation) renders a plural in the entity name to a singular, for example from multiple “Associates” to a sole “Associate.” In such cases—where an entity name contains an inappropriate plural—New York has indicated that a name change is required. Note that a change in entity name may also be required when a new practitioner takes an ownership interest in the practice, thus rendering a singular into a plural, such as “Associate” to “Associates” or “Physician” to “Physicians.”

            When a change to an entity’s formal legal name is required, the law requires that the Certificate of Incorporation or Articles of Incorporation be amended by the filing of a Certificate of Amendment. Note that for some entities, such as Licensed Home Care Service Agencies, departmental approval may be required from the Departments of Health, Education, or State. Because of the need to file this paperwork, it is important to act quickly when death or dissociation necessitates an amendment to the entity’s name.

            Of course, the foregoing applies to the legal name of the entity, but what about assumed names? Anytime a New York entity conducts business under a name other than its formal name, it must register for a “Doing Business As,” or “dba,” certificate. Where the certificate is filed depends on the type of entity at issue: the New York Department of State accepts dba certificates for corporations (including PCs), limited partnerships (LPs), and limited liability companies (LLCs), while the county clerk in the county where the entity conducts business accepts dba certificates for sole proprietorships, registered limited liability partnerships (LLPs or RLLPs), and professional service limited liability partnerships (PLLCs).

For example, a PC may choose to operate under a dba pursuant to a partnership agreement or another similar affiliation. When that partner, or any other person whose name appears in the assumed name, dies or dissociates, changes to the dba will be necessary. Because dba registration is meant to protect consumers, the state and individual counties require that a dba be discontinued or amended when one of the titular individuals is no longer associated with the practice. Additionally, a partnership agreement may state that upon a partner’s death or termination of the agreement, her name may no longer be used, necessitating discontinuance of a dba. Thus, changes in the membership and affiliations of a practice will likely require changes to any applicable dba.

            It is important that practitioners be aware of these rules and their responsibilities when a professional disassociates from a practice or dies. If you have any questions on professional service corporation formation or your responsibilities as a member, please give us a call.

Newsletter Sign-up
