What physicians need to know about management services organizations

How MSOs pierce the corporate (practice of medicine) veil.

States throughout the US have passed a variety of laws to prevent what is known as the “corporate practice of medicine” (“CPOM”).The purpose of these laws is to ensure that physicians retain full and autonomous clinical decision-making authority over patients - regardless of any business or profit motive.CPOM laws have not kept businesses out of healthcare altogether. Legal structures, such as management services organizations (“MSOs”), were created to allow for non-physician investment into “non-clinical” aspects of healthcare.As MSOs grow in both size and influence, lines between clinical and non-clinical functions have been blurred.Plaintiff attorneys have taken notice.

MSOs and the CPOM

Despite the rapid proliferation of MSOs into the healthcare sector, plaintiff attorneys have historically left MSOs out of medical professional liability (MPL) lawsuits. Indeed, the very corporate practice of medicine concept that prevents MSOs from interfering with clinical decision-making has shielded them from MPL.

Colorado codified this concept into law.In Smith v. Surgery Center of Lone Tree, LLC (19CA0186), the Colorado Court of Appeals reminded a lower court of its law’s application: “See § 25-3-103.7(3), “Nothing in this section shall be construed to allow any health care facility that employs a physician to limit or otherwise exercise control over the physician’s independent professional judgment concerning the practice of medicine or diagnosis or treatment. And because a hospital may not dictate to a physician how he or she may practice medicine, it likewise may not be held liable for lapses in a physician’s professional judgment. Daly, 134 P.3d at 452-53.”

Although Colorado is in the minority of States that grant such broad legal protections, plaintiff attorneys have accepted that traditional MSOs are not appropriate parties in MPL actions, because they are not clinically involved. Some MSO’s have outgrown the traditional model though, and are increasingly influencing clinical decision-making in a variety of ways.By doing so, they create holes in their defenses and allow plaintiffs to penetrate their legal shields.These MSOs should take steps to protect themselves.

First, MSOs should understand the theories under which they may be sued.

Vicarious Liability:

Vicarious liability is not a direct claim against an entity.Rather, it is a rule that holds an employer jointly and severely liable for the acts of its employees.Medical practices that are physician-owned can be held vicariously liable for their employed physicians. Thanks to CPOM laws, MSOs generally cannot employ physicians - rendering vicarious liability a difficult theory under which plaintiff attorneys can sue MSOs.

Some MSOs are so large and controlling however, that both physicians and patients alike believe that the MSO in question is the employing entity.This opens MSOs up to a specific vicarious liability theory known as “apparent authority.”If a patient has a reasonable belief that the MSO is the entity providing the clinical services, that patient will likely have the right to sue the MSO.

The more MSOs exercise control over physicians, the more they open themselves up to direct liability as well. 

Direct Liability

Medical practices can be sued under direct theories of liability. For example, a practice can be liable if it fails to follow up with a patient after receiving a concerning test result.Practices can also be liable for negligently hiring physicians, or for setting certain policies and protocols deemed to have caused injury to a patient.

MSO Liability

Problems for MSOs surface when they encroach on clinical activities, such as providing:

  • Clinical guideline, policy and procedure and protocol development.
  • Utilization review.
  • Contractual incentives, or disincentives, to provide care.

Plaintiff attorneys have grown wise to these activities and are frequently demanding copies of agreements and policy and procedure manuals.They are also more deeply exploring the MSO-physician relationship through depositions.

Protecting an MSO

To avoid litigation, MSOs should consider the following:

  1. Make it clear to patients that the MSO does not employ physicians or provide clinical services (where applicable).
  2. Avoid appointing MSO-specific employees as directors of clinical activities.For example, a “director of utilization review” title should be reserved for a physician employee of the medical practice, not the MSO.
  3. Review agreements between the medical practices and the MSO.If the MSO is the entity mandating certain clinical activities, plaintiff attorneys will exploit these contractual provisions during litigation.
  4. Review MSO insurance coverage to confirm that emerging MPL lawsuits against MSOs are covered.

Conclusion

Plaintiff attorneys are increasingly looking to MSOs for recovery in medical professional liability lawsuits.Ironically, corporate practice of medicine laws can help insulate MSOs from liability, but only when they are followed.

Brian Kern, Esq. is a partner with Acadia Professional, a specialty healthcare risk brokerage, and Of Counsel with Frier & Levitt, LLC, a nationally renowned boutique health law firm.Daniel Frier, Esq. is a founder and managing partner of Frier & Levitt, LLC.