Raising Your Bottom Line Without Crossing the Line
By Connor Jackson
After two years of COVID-induced uncertainty and strained revenue streams, private practice owners are looking at ways to stabilize their practice operations and income. Before setting out on a new business venture or profit-generating plan, consider the laws that govern licensed professionals and weigh the risks against the benefits. Below, I discuss a few of the questions I hear most frequently from private practice physical therapists.
Someone is interested in investing in my practice or becoming a co-owner. They’re not a physical therapist. That’s OK, right? All the big chains are surely owned by non-physical therapists!
As a broad rule — it varies by state — physical therapists are prohibited from owning healthcare practices with unlicensed people or splitting fees with them. The full or partial ownership of a health care practice by a non-licensed person is called the corporate practice of medicine (CPOM). Essentially, CPOM rules prohibit unlicensed people from practicing licensed health professions — and “practicing” includes holding an ownership stake in the practice. These often overlap or intersect with prohibitions on fee-splitting.
Comparing yourself with the physical therapy chains
It’s true that many of the large chains are owned by non-physical therapists, but some of them are publicly traded companies with far more complex corporate structures than a typical private practice. To truly understand what the big chains are doing, one needs to dig deep into their filings with the U.S. Securities and Exchange Commission (SEC). Publicly traded companies need to make investors aware of potential risks, and U.S. Physical Therapy, Inc. included the following disclosure in their recent SEC filings:
We believe that our current and planned activities do not constitute fee-splitting or the unlawful corporate practice of medicine as contemplated by these state laws. However, there can be no assurance that future interpretations of such laws will not require structural and organizational modification of our existing relationships with the practices. If a court or regulatory body determines that we have violated these laws or if new laws are introduced that would render our arrangements illegal, we could be subject to civil or criminal penalties, our contracts could be found legally invalid and unenforceable (in whole or in part), or we could be required to restructure our contractual arrangements with our affiliated physicians and other licensed providers.1
What this all means is that even if it appears that the big chains are “getting away with it” while small practices are given less leeway, this is far from true. They are under exceptional scrutiny and likely have a legal team dedicated to ensuring that their operations are compliant.
Considering your state
Each state takes a different approach towards CPOM and fee-splitting, so it’s important to familiarize yourself with the laws governing your practice. It’s also another reason to avoid comparing your operations to those of other practices; they may be subject to very different legal standards.
For example, in New York, licensed professionals are prohibited from splitting or sharing their fees with those who are not licensed to provide those services.2 Physical therapists cannot split any fees with non-physical therapists and this prohibition extends to business entities or corporations.3 Physical therapists are also prohibited from paying non-licensed workers based on a percentage of revenue earned by the practice.4 New York’s penalties include heavy fines, license revocation or suspension, and criminal prosecution.
In contrast, California generally prohibits licensed professionals from splitting fees in exchange for the referral of patients to the practice.5 However, there is an exception: licensees can split fees with unlicensed people if the unlicensed person’s “split” is not based on the volume or value of patients that they refer to the practice. California’s requirements are more focused on referrals, whereas New York’s prohibitions are very broadly concerned with fee-splitting.
If you violate your state’s CPOM rules, it can result in heavy fines, license suspension or revocation, board disciplinary action, and even criminal charges. Co-owning a physical therapy practice with a non-physical therapist could find you charged with aiding and abetting the unlicensed practice of physical therapy, while the non-physical therapist may be charged with engaging in the unlicensed practice of physical therapy.
Before you accept an infusion of cash from a prospective co-owner who is not a physical therapist, be sure that business relationship is allowed under your state laws. Also carefully evaluate how that non-physical therapist ill be compensated. If the non-physical therapist will be paid for bringing patients into the practice (i.e., through a new marketing initiative), their compensation structure must comply with state laws and a bevy of federal waste, fraud, and abuse laws, including the Anti-Kickback Statute (AKS).6 All of these rules apply even if the non-licensed co-owner is your spouse — a common arrangement that often runs afoul of these requirements.
I’ve been invited to participate in a business relationship that feels a bit “you scratch my back, I’ll scratch yours.” But I do believe it will be clinically beneficial to my patients (while generating revenue for my practice). Should I enter into it?
It’s not uncommon for a physical therapist to be approached and invited into a new business referral opportunity, especially with the rise of referral-based networking groups. When evaluating the legality of these arrangements, it’s crucial to consider the AKS, which generally prohibits a physical therapist from knowingly and willfully receiving or giving something of value in exchange for a referral of a patient whose care will be covered by a federal payer.7
A few examples of arrangements that might violate the AKS:
A physical therapist offers chiropractors or physicians who are in a position to make referrals to the physical therapist’s practice an opportunity to buy into the physical therapy practice at a favorable rate. (The physical therapist is offering the favorable buy-in rate in anticipation of the other providers’ referrals to the practice.)
A physical therapy practice’s employees are paid bonuses based upon the volume of patients whom they treat or whom they bring into the practice.
A physical therapist offers a doctor something like below-market rental space or cash payments in exchange for regular referrals to the physical therapist’s practice.
If your plan to increase revenues depends upon referrals you anticipate receiving from others, it’s crucial that those arrangements be carefully scrutinized to ensure they don’t violate the AKS.
I’ve heard that cash-only physical therapists don’t have to follow all of these laws because they don’t take Medicare or insurance. Is this true?
If you can practice without concern for all of the laws that regulate the flow of money into and out of a health care practice, that would remove the considerable expenses for compliance and legal support. Many “cash physical therapy” practices rely on cash payments alone and are not enrolled in Medicare, Tricare, or Medicaid. While AKS only applies to services reimbursable by government payers, cash physical therapists aren’t able to treat Medicare beneficiaries without violating the Mandatory Claim Submission Rule, so this practice model eliminates the PT’s access to a large population of potential patients.
It’s also important to remember that cash-only PTs are still obligated to follow all state CPOM and fee-splitting laws. Most states broadly apply these laws, regardless of whether a provider files claims with insurance or accepts only cash, with the primary focus of avoiding any illegal kickbacks and ensuring that physical therapists maintain independent clinical judgment.
Operating a cash physical therapy practice can have many benefits, but it’s not the antidote for avoiding government regulation that many hope it to be. If you decide to go down this path, be sure that you don’t run afoul of Medicare rules or state laws.
Is there any way to partner with non-physical therapy practices or unlicensed persons to grow my practice?
A structure called a management service organization (MSO) may offer an opportunity for someone who isn’t licensed (e.g., a venture capitalist), or for someone who is differently licensed (e.g., a psychologist) to play a role in practice management.
MSOs are management entities that provide management and administrative services for health care entities. They allow non-licensed people to get involved in, and profit from, health care. Common services offered by an MSO include claims management, financial management, HR and operational issues, credentialing, and contracting.
Most states, because of CPOM rules, do not allow unlicensed people to have any ownership in a licensed entity like a physical therapy clinic. An MSO is a separate company and can be owned by an unlicensed person and can offer all of a practice’s services except those involving clinical judgment and decision-making. In many states, an MSO cannot be paid based on practice revenues and is instead paid based on a flat-fee or cost-plus model for their services.
To establish an MSO, the management organization (owned by the venture capitalist or psychologist, following the examples above) will enter into a contract with your physical therapy practice. This contract is called a Management Services Agreement (MSA). This agreement must demonstrate compliance with fee-splitting and CPOM laws, but it does allow an unlicensed person to assist with and have an ownership interest in the operation of physical therapy clinics. The compensation schemes are complex to establish and analyze, but once created, these arrangements can be very profitable for the clinicians. Essentially, it allows a physical therapist to outsource all nonclinical elements of their practice. Plus, it may feel like an infusion of capital if the MSO’s owner is streamlining the costs of practice management and taking them on for a fixed fee. This allows the practice to grow without necessarily paying more in operational costs (at least until the MSO contract fee is up for renegotiation).
Consider establishing an MSO if your focus is on clinical care and you’d like some distance from the administrative and management elements of your practice. In this arrangement, you still retain control over all clinical decisions, including the hiring of clinicians, but the MSO handles everything else. Because you cannot fee-split with an unlicensed person or entity (i.e., the MSO), this may free up your time to focus exclusively on patient care, treat more patients, and drive up practice revenues. At the same time, you’re paying the MSO a fee for its services, so you get the benefit of devoting more time to patient care. Furthermore, investors can contribute capital to the MSO even when they cannot contribute the same to your practice. Ultimately, once the relationship is properly established, this arrangement can provide you with more flexibility and control over your practice’s growth.
It can seem like there are more restrictions and limitations on your practice growth than there are opportunities. They can feel overwhelming and stifling, making it hard for a small private practice to grow and thrive.
Commonly, regulation is what differentiates licensed professionals from unlicensed persons. It can feel unfair that personal trainers or coaches, for example, are able practice across state lines and without any of this regulation. But a review of state professional discipline records reveals that they are not operating without oversight; they are frequently subjected to fines and penalties for straying into licensed practitioners’ scopes of practice or for misleading marketing tactics.
For all professionals, following regulations and maintaining ethical business and financial processes helps your practice, not just legally, but in demonstrating to your clients that you are a trustworthy partner on their journeys to better health.
1US Physical Therapy Inc. Form 10-k https://www.usph.com/wp-content/uploads/2021/03/AS-FILED-U-S-PHYSICAL-THERAPY-INC-NV-FY-2020.pdf. Published March 1, 2021.
2Find Law. New York Consolidated Laws, Education Law. https://codes.findlaw.com/ny/education-law/edn-sect-6509-a.html. Updated January 1, 2021.
3New York Department of Health. Business Laws & Corporate Practice of Medicine (CPOM): Issues and Considerations. https://www.health.ny.gov/health_care/medicaid/redesign/dsrip/docs/2015-11-10_reg_impact_vbp_issue_business.pdf
4NYSED. 8 NYCRR 29.1(b)(4). http://www.op.nysed.gov/title8/part29.htm. Published October 5, 2011.
5Find Law. BPC § 650. https://codes.findlaw.com/ca/business-and-professions-code/bpc-sect-650.html. Updated January 1, 2019.
642 USC 1320a-7b(b).
742 USC 1320a-7b(1-2).
Connor Jackson is a founding partner of Jackson LLP Healthcare Lawyers, where he focuses his practice on the business side of health care law. Connor is licensed in New York, Illinois, Texas, Michgan, and Wisconsin. He can be reached at Connor@JacksonLLP.com.