Case Study: Non-compliant Medical Spa Owner and the Corporate Practice of Medicine

Posted By Mike Meyer, Tuesday, November 7, 2023

a gavel and a stethoscope

By Bradford E. Adatto, JD, ByrdAdatto

Disclaimer: As with many client case studies, the names of the people have been changed to protect the attorney/client information. However, the facts and laws are real and should be considered accordingly.

In this case study article, we will discuss the real client example of “Mr. Hansel,” an Illinois-based medical spa owner, and “Dr. Zoolander,” a newly licensed plastic surgeon, who found themselves in violation of the corporate practice of medicine (CPOM) doctrine by entering into a medical director agreement. By examining this case, we aim to shed light on the legal implications that can arise when you are unaware of the potential risks related to health care laws and regulations, especially in states that enforce the CPOM doctrine.

Spotting the red flags

Among the many potential dangers and legal pitfalls that can occur within the health care industry are certain agreements and practices that can raise a major warning, or “red flag,” when they do not comply with state-specific laws and regulations. The term “red flag” holds immense significance in the story of Dr. Zoolander. Just as a red flag serves as a warning, certain phrases and situations can indicate potential dangers in the health care industry. Throughout this case study article, we will identify these red flags and explore their implications, inviting readers to take note and learn from Dr. Zoolander’s experience.

The case of Dr. Zoolander

Dr. Zoolander, a newly certified plastic surgeon, was offered the role of medical director at an upscale medical spa in Chicago, Illinois, owned by Mr. Hansel, a physician assistant. To formalize this partnership, the parties entered into a medical director agreement. Though on the surface, the proposition appeared to be mutually beneficial for both parties—Dr. Zoolander would have the chance to enhance his surgical practice’s visibility and concurrently oversee medical operations and administer weekly injectable treatments to the spa’s patients, while Mr. Hansel would secure a supervising physician for his establishment. A closer look at the situation would later reveal a host of legal repercussions.

Understanding the CPOM

Unfortunately, the parties failed to ensure that their medical director agreement complied with all applicable state laws and regulations. At the heart of their legal predicament was the CPOM doctrine, a law enforced by many states, including Illinois, which governs the relationship between physicians and corporate entities, such as the medical spa involved here. Although the scope of the CPOM doctrine varies from state to state, it generally prohibits corporations or non-physician entities from controlling or influencing the practice of medicine. This is because physicians are typically required to have ownership and control over these practices. Some states have caveats to this law that may allow a physician or certain medical provider to co-own the business with a non-medical provider. Other CPOM states may require that a medical provider have a certain level of involvement and oversight when medical services are provided by a business. The central reasoning behind the enforcement of the CPOM doctrine is to prevent the commercialization of the practice of medicine. In addition, this legal framework helps to ensure that medical practices are overseen by qualified professionals capable of upholding the standard of care for patients. When in the health care industry, it is essential to be familiar with CPOM laws, as violations of these laws can result in severe consequences such as fines, penalties and potential harm to patients.

The investigation

In Dr. Zoolander’s case, Illinois has strict regulations regarding the ownership and operation of businesses providing medical services. The state requires that either a physician or a physician-owned corporation be the sole owner of a facility that provides medical services within Illinois. Following Dr. Zoolander and Mr. Hansel’s agreement, a medical board investigator received a tip from Mr. Hansel’s competitor, who noticed the absence of a supervising physician at Mr. Hansel’s medical spa. Specifically, there was a brief period between the departure of Mr. Hansel’s previous supervising physician and the arrival of Dr. Zoolander when Mr. Hansel continued to operate the medical spa. The Illinois Department of Financial and Professional Regulation (IDFPR), which enforces the Illinois State Medical Board rules, launched an investigation. The IDFPR concluded that Mr. Hansel engaged in the unauthorized practice of medicine and Dr. Zoolander aided and abetted the unauthorized practice of medicine by being a medical director for a non-physician-owned entity. The case ended with a confidential settlement with Mr. Hansel, and with Dr. Zoolander entering into a $5,000 settlement.

Navigating the risks

Although the parties in this case were fortunate that no patient harm occurred, Dr. Zoolander’s case nonetheless serves as a cautionary tale for medical spa owners and health care practitioners who are considering medical director agreements. It underscores the importance of having a comprehensive understanding of CPOM laws and the risks that follow non-compliance of these laws. Medical director agreements are frequently used when medical services are offered to satisfy CPOM laws. However, these agreements alone may not always guarantee compliance with CPOM laws. Given the complexity of CPOM laws, as well as other state-specific laws and regulations, it is crucial to seek expert legal advice to confirm that your business structure aligns with the requirements of your state. Failing to do so can lead to significant legal and financial consequences.

Choose compliance

Dr. Zoolander’s story demonstrates the potential legal pitfalls when individuals fail to carefully structure medical director arrangements in compliance with state laws and regulations, and specifically the CPOM doctrine. Medical spas and health care organizations can gain a better understanding of health care regulations by being attentive to the red flags presented in this case and by taking steps towards ensuring legal compliance. Regularly consulting with legal experts can help minimize your risk of being non-compliant throughout the various stages of business. Taking action toward doing so is especially crucial when considering that health care laws and regulations are subject to change, and that their interpretations may vary. Conversely, consulting with legal counsel may be advisable if you believe you have been harmed by CPOM violations.

ByrdAdatto can help navigate health care compliance

If you find yourself in a situation similar to Dr. Zoolander’s, reach out to ByrdAdatto’s experienced team for professional guidance and tailored legal solutions. Remember, compliance is the key to protecting your practice and ensuring that your agreements and corporate structures follow all current state laws and regulations. ByrdAdatto helps clients navigate the intricate legal landscape of the health care industry.

Bradford E. Adatto, JD, has a background in regulatory, transactional and securities law. Having worked in health care law his entire career, he has an in-depth knowledge of the “dos and don’ts” of this heavily regulated industry. Adatto has worked with physicians, physician groups and other medical service providers in developing ambulatory surgical centers, in-office and freestanding ancillary service facilities, and other medical joint ventures. He regularly counsels clients with respect to federal and state health care regulations that impact investments, transactions and contract terms, including Medicare fraud and abuse, anti-trust, anti-kickback, anti-referral and private securities laws.

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