SB 5387 Seeks to Implement Restrictive Corporate Practice of Healthcare Prohibition in Washington

BACKGROUND

Washington state does not currently maintain an explicit CPOM statute, relying instead on court and agency interpretations of its prohibition on the practice of medicine by unlicensed persons to include business entities. The current interpretation of the doctrine has enabled Washington stakeholders to operate healthcare entities under industry standard models, including the “affiliated practice” model (e.g., physician practice management structures with stock transfer restriction agreements). SB 5387 seeks to codify and expand upon agency interpretations in a manner that would prohibit certain critical elements of these models.

SB 5387 Provisions

Prohibitions on Ownership

If enacted, SB 5387 would prohibit unlicensed individuals or entities, including corporations and partnerships, from:

• Owning a healthcare practice
• Employing licensed healthcare providers
• Otherwise engaging in a licensed healthcare profession, unless specifically permitted under state laws.

For professional service corporations organized for the purpose of establishing a healthcare practice, SB 5387 would institute certain ownership and governance requirements. Specifically, licensed healthcare providers would be required to:

• Hold the majority of each class of shares entitled to vote
• Represent a majority of the directors
• Hold all officer positions other than the secretary and treasurer.

If enacted, SB 5387 would institute an active practice requirement, under which shareholders who are healthcare providers licensed in Washington must be substantially engaged in delivering care or managing the practice. In prior iterations of the bill, SB 5387 included a requirement for shareholders to be physically present in Washington. Such in-state presence requirement would significantly curtail the ability of operators of multistate telehealth offerings to function in Washington state.

Prohibitions on Certain Arrangements by Shareholders, Directors, and Officers

SB 5387 aims to prohibit certain actions and financial arrangements by the shareholders, directors, and officers of a healthcare practice through prohibitions of “dual ownership” and “dual employment.” While these structures have been used in the past to promote financial alignment between physicians and investors in affiliated practice models, critics have posited that the dual nature of such offerings might indirectly impact a clinician’s independent professional judgment. SB 5387 would prohibit shareholders, directors, and officers from:

• Owning or controlling shares in a management services organization (MSO) with which the healthcare practice has a contract (contracted MSO)
• Serving as a director or officer of a contracted MSO
• Being an employee of or an independent contractor with a contracted MSO
• Otherwise participating in managing both the healthcare practice and a contracted MSO
• Receiving substantial compensation or remuneration from an MSO in return for ownership or management of the healthcare practice
• Transferring or relinquishing control over the sale, the restriction of the sale, or the encumbrance of the sale of the healthcare practice’s shares or assets
• Transferring or relinquishing control over the issuing of shares of stock in the healthcare practice, a subsidiary of the healthcare practice, or an entity affiliated with the healthcare practice, or over the paying of dividends
• Entering into any financial arrangement in violation of the rebating prohibition.

Shareholders who are licensed healthcare providers of the health practice (licensed shareholders) also would be prohibited from transferring or relinquishing control over any of the healthcare practice’s administrative, business, or clinical operations that may affect clinical decision-making or the nature or quality of care that the healthcare practice delivers, whether:

• By means of a contract or other agreement or arrangement
• By providing for such control in the healthcare practice’s articles of incorporation or bylaws
• By forming a subsidiary or affiliated entity
• By other means.

SB 5387 clarifies that a licensed shareholder may still consult or collaborate with other persons on the development of policies or decisions that affect clinical decision-making or the nature or quality of care, as long as the licensed shareholder makes the ultimate decision.

Prohibited Activities by Various Other Entities

The prohibitions discussed above would not apply to:

• Hospitals licensed in Washington or any other state
• Any entity controlled by a hospital licensed in Washington or any other state
• Private establishments (as defined under Washington law)
• Nursing homes
• Ambulatory surgical facilities
• Birthing centers
• In-home service agencies
• Federally qualified health centers
• Telemedicine-exclusive medical groups.

Instead, SB 5387 addresses such entities separately. The bill includes certain limitations on the actions of unlicensed persons employed by, contracted with, or affiliated with these entities. If passed, SB 5387 would prohibit unlicensed persons from interfering with, controlling, or otherwise directing the professional judgment or clinical decisions of a licensed healthcare provider providing care within their scope of practice to a patient at the facility.

This proposed prohibition includes, but is not limited to, use of policy, discipline, punishment, threats, adverse employment actions, coercion, retaliation, or excessive pressure to control any of the following:

• The period of time a provider may spend with a patient
• The period of time within which a healthcare provider must discharge a patient
• The clinical status of the patient, including decisions on admission, observation status, care and referrals
• The diagnoses, diagnostic terminology, or codes that are entered into the medical record by the healthcare provider
• The range of clinical orders available to a healthcare provider.

This prohibition would not preclude any policies requiring that a healthcare provider comply with laws. If passed, SB 5387 would permit healthcare provider policies regarding compliance with coding guidelines, third-party payor requirements, and credentialing guidelines. Further, SB 5387 would permit healthcare provider policies regarding privilege requirements, quality improvement standards, peer review, quality incentive programs, co-management arrangements, or value-based care initiatives.

ENFORCEMENT

SB 5387 would empower the Washington state secretary of health to investigate complaints, hold hearings, and issue subpoenas in connection with violations of the CPOM prohibitions. The secretary may further issue cease-and-desist letters and impose financial penalties.

Upon application for a license or license renewal, a healthcare provider would be required to attest, in a form and manner determined by the Washington medical commission, that the healthcare provider is aware of Washington’s CPOM prohibitions.

KEY DEFINITIONS

• “Management services organization” means any organization or entity that contracts with a professional service corporation to perform management or administrative services relating to, supporting, or facilitating the provision of healthcare services.

• “Telemedicine-exclusive medical group” means an entity that engages with patients exclusively through telemedicine and does not offer in-person healthcare services.

• “Telemedicine” means the delivery of healthcare services through the use of interactive audio and video technology, permitting real-time communication between the patient at the originating site and the provider, for the purpose of diagnosis, consultation, or treatment. “Telemedicine” includes audio-only telemedicine but does not include facsimile or email.

ANALYSIS

The CPOM prohibition has been active in Washington for decades.   SB 5387 seeks to implement a far more restrictive CPOM prohibition than is currently in place. If passed, SB 5387 would significantly restrict current and future transaction structures that utilize certain financial arrangements, such as equity transfer restriction agreements, common to the industry and considered necessary for lay investment in healthcare entities.

McDermott will continue to monitor the bill’s progression through the state legislature and provide updates.

KEY TAKEAWAYS

If SB 5387 is passed:

• The CPOM doctrine will be codified and significantly expanded such that unlicensed persons and entities would not be able to own a healthcare practice, employ licensed healthcare providers, or otherwise engage in a licensed healthcare profession.

• Shareholders, directors, and officers of professional healthcare entities would be prohibited from owning shares; being a director, officer, employee, or independent contractor of; or participating in the management of an MSO under contract with the healthcare practice, except under limited circumstances.

• Equity transfer restriction agreements between professional healthcare entities and MSOs would be significantly limited.