How Private Equity Structures Ownership to Comply with CPOM Laws
New York and many other states continue to strengthen their corporate practice of medicine (CPOM) laws. This creates unique challenges for private equity companies working with physician practices. While many states permit private equity firms to have an owning or controlling interest in medical practices, New York’s laws are more complicated. Investors must carefully design their structures to ensure compliance, and must be even more thoughtful in order to arrive at a model that is both compliant and lucrative for investors.
The healthcare attorneys at Daniels, Porco & Lusardi, LLP are ready to help.
New York’s Corporate Practice of Medicine Rule
New York’s CPOM doctrine is rooted in state statutes and reinforced by guidance from the New York State Department of Health, the Office of Professional Medical Conduct, and the State Education Department. The core principle is simple: only licensed physicians may practice medicine, and only physicians or physician-owned professional entities may own or control a medical practice.
Under New York law:
- Only licensed physicians may own shares in a professional service corporation (PC) or membership interests in a professional limited liability company (PLLC).
- Non-physicians cannot control clinical decision-making, supervise physicians, or influence patient care.
- Management companies may provide administrative services, but cannot practice medicine or exercise control over medical judgment.
These restrictions require private equity firms to structure their investments in a way that separates clinical control from business operations.
The MSO Model: The Foundation of PE Healthcare Deals in New York
The most common structure used to comply with CPOM is the Management Services Organization (MSO) model. This model allows private equity to invest in the non-clinical aspects of a medical practice while leaving clinical ownership and decision-making in the hands of licensed physicians.
Key Components of the MSO Structure
1. Physician-Owned Professional Entity (PC or PLLC)
The clinical practice remains owned exclusively by licensed physicians. This entity employs the clinicians, holds the medical licenses, and is responsible for all clinical services.
2. Management Services Organization (MSO)
The MSO is typically owned by private equity and provides non-clinical services such as:
- Billing and collections
- Human resources and payroll
- IT and electronic health record support
- Marketing and patient scheduling
- Office space, equipment, and supplies
- Compliance and administrative support
The MSO does not employ physicians and does not provide medical care.
3. Long-Term Management Services Agreement (MSA)
The physician-owned entity and the MSO enter into a management services agreement that outlines the services the MSO provides and the fees it receives. In New York, these fees must be structured carefully to avoid being interpreted as sharing in medical revenue, which is prohibited.
Avoiding Fee-Splitting Violations
New York strictly prohibits fee-splitting arrangements between physicians and non-physicians. This means the MSO cannot receive a percentage of medical revenue or profits. Instead, MSO fees must be:
- Flat fees,
- Cost-plus arrangements, or
- Fair market value (FMV)-based service fees tied to the actual administrative services provided.
Preserving Physician Control
To comply with CPOM, private equity must avoid any arrangement that gives it direct or indirect control over clinical operations. This includes avoiding influence over:
- Hiring or firing physicians
- Clinical protocols or treatment decisions
- Medical record access
- Patient scheduling that affects clinical judgment
- Compensation models tied to clinical performance
In New York, even subtle forms of control such as veto rights over clinical decisions or pressure to increase productivity can raise compliance concerns.
Why Compliance Matters
New York aggressively enforces CPOM violations. Penalties can include:
- Fines
- License discipline for physicians
- Unwinding of transactions
- Civil liability
- Criminal exposure in extreme cases
For private equity firms, non-compliance can jeopardize the entire investment.
Invest While Complying With Corporate Practice of Medicine Laws
Private equity will continue to invest in the healthcare industry, and it can. While New York’s CPOM laws are very strict, the right guidance can ensure you stay safe while pursuing your financial goals. The attorneys at Daniels, Porco & Lusardi, LLP are ready to help. Contact us today for a consultation.