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Arizona Court of Appeals Addresses Non-Physician Ownership of Health Care Clinics

Health Law Update Christine Cassetta

The Bottom Line

In Midtown Medical Group, Inc. v. State Farm Mutual Automobile Insurance Co., Ariz. Ct. App., No. 1 CA-CV 07-0501 (December 23, 2008), the Arizona Court of Appeals found that the State's statutory and regulatory scheme for outpatient treatment centers expressly permits a general corporation to hold the center's license. In other words, the clinic need not be owned by a professional corporation or an individual with a separate license to practice medicine in the related health field. The decision is narrow and did not modify previous Corporate Practice of Medicine cases or make any pronouncements as to the general vitality of the Corporate Practice of Medicine doctrine.

Background of This Case

State Farm and other insurance companies refused to pay for treatment provided to patients at Midtown Medical Group ("Midtown"), claiming Midtown was not legally licensed under Arizona law. Midtown operates as an outpatient treatment center and employs, on a part-time basis, doctors and chiropractors. Licensed practitioners provide all medical and chiropractic services at Midtown, which is a general Arizona corporation owned solely by an engineer who is not licensed to practice medicine or chiropractic. State Farm argued that the statutory licensing scheme for physicians and chiropractors prohibited lay persons from owning an "outpatient treatment center" and, thus, it claimed Midtown was practicing medicine in violation of the Corporate Practice of Medicine doctrine.

Law Authorizes Non-Physicians to Operate Health Care Clinics

The Court emphasized that the statutory and regulatory scheme of the Arizona Department of Health Services authorizes a corporation to be licensed as an outpatient treatment center.[1] The statutes and rule do not require that a natural person hold a professional license to obtain a license for an outpatient treatment center. The Court reasoned that the Legislature specifically intended to permit ownership of such "institutions" by persons who do not hold medical or other health care licenses because it exempted private offices and clinics of health care providers from licensure as a health care institution. See A.R.S. § 36-402(A)(3). The "inescapable conclusion" of this statutory structure is that the Legislature's intent was to expressly regulate and permit what the insurers seek to preclude: the ownership of a health care institution by persons (individuals or corporations) who themselves do not hold a license to practice in the medical or health field for which medical services are provided.

Corporate Practice of Medicine Doctrine Distinguished

Two Arizona Supreme Court cases established the Corporate Practice of Medicine Doctrine ("Doctrine") in Arizona. The Doctrine prohibits business corporations from practicing medicine or employing physicians to provide professional services.[2] The first Arizona case held that a corporation that was ineligible for a license to practice optometry could not practice optometry by employing an optometrist and subjecting him to their direction and control.[3] The second Arizona case held that an arrangement whereby an optometrist leased space in a Sears store was acceptable because Sears did not employ the optometrist and exercised no control over him.[4] The Court in Midtown noted that, in both of these cases, it was the State licensing authority that sought to label the conduct illegal. However, in Midtown, the State had specifically allowed the conduct by granting Midtown a license to operate an outpatient treatment center.

The Court noted that it was bound to follow the State Supreme Court's earlier Corporate Practice of Medicine pronouncements, but because the Legislature modified the statutory structure upon which the pronouncement is based, the Court's duty was to follow the law as newly determined by the Legislature. The statutory structure specifically provides that the Director of the Arizona Department of Health Services classify health care institutions and issue licenses to health care institutions. Similarly, the rules promulgated by the Director provide that an outpatient treatment center is a health care institution. The legislative scheme and the rules themselves specifically provide for a corporation to provide medical services "by physicians." The Court also found nothing in the professional licensing statutes that prohibits a doctor from being employed by a layperson or corporation.

The Court also noted that, unlike the earlier Corporate Practice of Medicine cases, where a licensing authority sought to label the conduct illegal, in this instance it was an insurer that did not want to pay the costs of the medical or chiropractic services provided.

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For more details, or if you have any questions, please contact Christine Cassetta at 602-229-5258 or your Quarles & Brady LLP attorney.

[1] A.R.S. § § 1-215(29) and 36-405; and A.A.C. R9-10-101(39), R9-10-101(43), and R9-10-102(A)(16).

[2] Generally, hospitals and physician formed corporations through which the shareholder physicians provide medical services are exempt from the doctrine

[3] Funk Jewelry Co. v. State ex rel. La Prade, 50 P.2d 945 (Ariz. 1935).

[4] State ex rel. Board of Optometry v. Sears, Roebuck & Co., 427 P.2d 126 (Ariz. 1967).