Pending Oregon Law Undermines Traditional Physician Practice Structure

ABOUT THE LAW

Oregon House Bill 4130 (the Act) is a comprehensive bill that includes specific restrictions related to domestic and foreign professional entities and enforcement mechanisms. Primarily, the Act prohibits several relationships and control structures, which would materially constrain the typical PPM structure utilized by hospitals, private equity sponsors, virtual care providers, managed care companies and others to create a more integrated approach to care delivery, to take advantage of efficiencies and, in many instances, simply to operate. As of now, the Act excludes hospitals, physician-majority owned management service organization structures and practices that provide telemedicine without a physical presence in the state, among others. We expect the provisions to continue to evolve.

PPM structures, at their core, are ways to create business stability across multiple practices. Without this stability, sophisticated management companies may be wary about making significant investment in certain practices. In some instances, such as in virtual practices, which often rely on complex technological prowess developed by lay entities and are married with quality clinical care, there would be very little ability to execute on the organization’s mission.

THE ACT’S LIMITATIONS

The Act’s restrictions are broadly crafted to limit the various levers of alignment that physicians and management companies have traditionally deployed. Importantly, the limitations apply across a broad spectrum of practices, such as those that include different types of licensed professionals practicing together, and organizational structures, including limited liability companies (all of which are referred to as “professional corporations” in this article). Specifically, the Act provides the following restrictions and limitations:

• Limitation on Agreements for Control. The Act prohibits any professional corporation from relinquishing control over its “assets, business operations, clinical practices or decisions or the clinical practices or decisions of a physician. . .” The Act broadly describes methods by which this restriction might otherwise be accomplished:
  • Selling, issuing or restricting transfers of shares
  • Entering noncompetition, nondisclosure or non-disparagement agreements (as otherwise described in the Act)
  • Determining employment matters (e.g., hiring and firing, setting compensation and staffing levels)
  • Entering third-party contracts (including payor arrangements)
  • Controlling diagnostic coding decisions and establishing billing and collection policies
  • Limiting physician access to physician rates or charges

While many of these limitations are features of current PPM structures, such as the restrictions on a management services company influencing clinical decisions, others are common features of PPM structures designed to ensure a long-term relationship and place control over non-clinical administrative functions in the hands of management services organizations. Absent these features, many of the large medical organizations currently serving Oregon’s population may be forced to either cease operations within the state or divest all holdings. Additionally, as restrictions on the transference of shares or the sale of assets are common covenants included in credit agreements, these limitations would (perhaps unintentionally) hinder the ability of Oregon physician practices to utilize secured debt.

Significantly, this limitation does not apply to telemedicine practices with no physical location within the state, Program of All-Inclusive Care for the Elderly (PACE) organizations, hospital affiliates or licensed behavioral health services providers. Additionally, a majority of Oregon licensed clinicians can provide for such control provisions via a shareholder agreement for the benefit of many shareholders who are licensed clinicians.

• Cross-Ownership Management Limitation. The Act prohibits any shareholder, director, or officer of a professional corporation from owning shares; being a director, officer, employee, or independent contractor; or participating in the management of a management services organization under contract with the professional corporation. The Act also prohibits a “back door” by further prohibiting shareholders of professional corporations who are also shareholders, directors, members, officers or employees of the associated management company from granting a proxy to vote their shares.

The same exclusions apply here (other than the proxy provisions) as for the above.

• Removal Limitation. The Act requires at least a majority of shareholders and directors and all officers (other than the secretary and treasurer) to be Oregon licensed physicians and prohibits the removal of any director or officer except by such licensed practitioners (with some exceptions for bad actors).
• Noncompetition Limitation. The Act makes any noncompetition agreement that prohibits an Oregon licensed physician from providing “products, processes or services” that are similar to those offered by the counterparty void. This prohibition is not applicable when a clinician sells their practice or when the clinician has an ownership interest in the counterparty.
• Nondisclosure and Non-Disparagement Limitation. The Act makes any nondisclosure or non-disparagement agreement between an Oregon licensed physician and a management services organization unenforceable. Both nondisclosure and non-disparagement agreements are simply defined, but the definitions are quite broad:
  • A non-disparagement agreement prohibits a licensed physician from making a statement that “causes or threatens to cause harm to the other party’s or person’s reputation, business relations or other economic interests.”
  • A nondisclosure agreement prohibits a licensed physician from disclosing:
    • A policy, practice, process or technique that the licensed physician was required to use in patient care
    • A policy, practice, process or other information regarding the licensed physician’s employment, including compensation amounts or rates
    • Any other information that the licensed physician had access to by virtue of their employment or other relationship with the counterparty.

In addition to prohibiting the effectiveness of these agreements, the Act also prohibits the counterparty from taking other retaliatory action against the licensed physician for breaches of these agreements.

• Potentially Expansive Reach. The Act defines “management services organizations” to include any entity that provides, pursuant to a written agreement for compensation, any administrative or business service that does not constitute the practice of medicine, including (but not limited) to payroll support, human resources, employee screening or employee relations. Accordingly, the Act captures a broad host or arrangements that physicians may wish to establish without the involvement of financial sponsors, including physician investment in vendors providing services to any practice in which they own or providing medical services.

ADDITIONAL PROVISIONS

The Act empowers the US secretary of state to investigate any complaint from the Oregon Health Authority or any other person about a violation of these restrictions and may administratively dissolve or revoke the foreign qualification of offending organizations. Additionally, the Oregon Health Authority may refer to the US attorney general any merger or acquisition that it believes violates these provisions. The attorney general may then prohibit the transaction or enter a settlement agreement to permit the transaction.

The Act includes additional provisions around professional corporation ownership reporting and nurse practitioner employment limitations, among others, but the core of the Act’s impact is in the restrictions enumerated above.

While the Act is still in development, it is difficult to see a passage of even a highly modified version, which would not have a significant impact on PPM structures within Oregon.