Don't Ban the Ban: TMA Works to Preserve Ban on Corporate Practice

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Law - January 2009  



Tex Med . 2009;105(1):23-26.  

By  Crystal Conde
Associate Editor  

If hospitals have their way, some Texas physicians may become their direct employees in some parts of the state. However, the Texas Medical Association is gearing up to prevent the passage of legislation that would wear away at the corporate practice of medicine prohibition and place a barrier between physicians and patients.

William Hinchey, MD, immediate past TMA president, testified on the association's behalf at a Senate Committee on State Affairs hearing in November that allowing hospitals or other corporations to employ physicians directly would weaken patient care. Dr. Hinchey and TMA believe that creating nonprofit health corporations (NPHCs) as a means of employing physicians is preferable to requiring physicians to answer directly to a corporate employer.

Formerly known as a 5.01(a), an NPHC is set up in such a way that physicians control all medical decisions and are employees of the nonprofit entity, not the corporate owner. Should hospitals and other corporations employ physicians outright, Dr. Hinchey says, a physician's duty could shift from the best interest of the patients to the interest of the employers.

Texas physicians largely agree with that assertion, according to preliminary data from the 2008 TMA Physician Survey. Seventy-four percent of respondents answered yes when asked whether the prohibition on the corporate practice of medicine should remain a high priority for TMA.

At the Senate committee hearing, the Texas Hospital Association (THA), the Texas Organization of Rural & Community Hospitals (TORCH), and rural hospital representatives argued that direct employment is essential to attracting physicians to medically underserved areas of the state. Representatives of each group testified that setting up an NPHC would be too costly for rural hospitals.

TMA recognizes that many rural areas of the state need medical professionals. It supports substantially increasing the state's debt repayment program to create more financial incentives for physicians to serve in rural areas with medical needs.

The association also advocates greater transparency of NPHCs' membership and operations. Dr. Hinchey testified at the hearing that TMA would like to work with the Texas Medical Board (TMB) to make easily available the information it collects on NPHCs, such as their corporate owners, the members of their boards of directors, and their memberships. Putting this information in an electronic database would allow physicians, corporations, and the legislature to remain abreast of NPHC presence in the state.

And, he said, TMA would like NPHCs to hold annual public meetings to engage physicians and the corporate owners in quality improvement initiatives. Such open forums would benefit physicians and patients by ensuring NPHCs are adhering to the highest standards of care. 


TMB regulates physicians and the practice of medicine under the Texas Medical Practice Act. That law, along with the Texas Occupations Code, prevents physicians from entering into partnerships, employee relationships, fee splitting, or other situations in which a nonphysician controls the practice of medicine.

The statute creating NPHCs, which passed in 1971, requires a physician board to preside over the NPHC's medical practice. However, the corporation may have what's known as a nonphysician member, such as a hospital, that can provide operational, administrative, and financial backing.

In some instances, physicians own NPHCs. HealthTexas Medical Group in San Antonio has a physician group and management company owned solely by physicians. Manuel Quiñones, MD, chair of HealthTexas' board of directors, says physician ownership has numerous benefits for health care professionals and the communities they serve. (See " Physician-Owned NPHC Works in Patients' Best Interests .")

Today, TMB estimates there are about 300 NPHCs in Texas, most of them formed by or affiliated with nonphysicians, such as hospital systems. Austin attorney Jerry A. Bell Jr., JD, says practically every private hospital in the state has at least one affiliated NPHC.

According to Sam Stone, JD, an attorney with Brown McCarroll, LLP, NPHCs originally served as mechanisms allowing physicians to meet the needs of underserved communities. The active participation of physicians on the boards of directors of NPHCs is pivotal to ensuring they function appropriately, he says.

TMB rules help guarantee physician control over medical decisions in NPHCs. TMB stipulates, for instance, that an NPHC's board of directors consists of licensed medical professionals actively engaged in the practice of medicine who have no restrictions on their Texas medical licenses.

In addition, an NPHC's physician board has sole authority to direct the medical, professional, and ethical aspects of the practice of medicine. And, only the board or its physician designee can terminate a physician.

In the 1990s, TMA began receiving complaints that some NPHCs owned by corporate entities were making decisions that should have been up to the physician boards of directors. Physicians alleged that some NPHC nonphysician members, either through the hospital administrator or other nonphysicians, were making medical policy decisions. Members of some physician boards complained they were allowed to order coffee but weren't part of substantive decision making. A review of the allegations and a hearing led TMB to formulate special provisions for NPHCs.

TMB's special requirements for NPHCs owned by nonphysicians specify that all credentialing, quality assurance, utilization review, and peer review policies be made exclusively by the physician board of directors. The corporate owner of the NPHC, however, possesses the right to approve or make financial decisions regarding capital and operating budgets, physician compensation and benefits, expenditures of monies, and managed care contracts in which the NPHC is at financial risk.

Albert Gros, MD, chair of TMA's Council on Legislation and an Austin obstetrician-gynecologist, says the corporate practice provisions have safeguarded patients in Texas by ensuring a physician's first duty is to patient care, not to an employer.

"TMA and physicians have long advocated that the physician should work for the patient. As a private physician for many years, I can tell you with certainty that the interests of hospitals are distinctly different from the interests of patients and physicians," he said. 

Fighting Direct Employment  

Protecting the prohibition on the corporate practice of medicine from erosion is one of TMA's legislative priorities in the 2009 Texas Legislature, which convenes Jan. 13. During the 2005 and 2007 legislative sessions, TMA blocked efforts to allow hospital districts and rural facilities to employ physicians directly.

At the Senate Committee on State Affairs hearing in November, Steve Shelton, executive director of the East Texas Area Health Education Center at The University of Texas Medical Branch in Galveston, gave the committee results of a survey his center conducted with the West Texas Area Health Education Center. The survey targeted internal medicine, pediatric, and family medicine residents. Seventy-five percent of the respondents indicated they prefer to be an employee of a hospital or other health facility, with salary and defined benefits, rather than operate their own practice.

The 2006 TMA Physician Survey indicated that young physicians prefer to be employed by large group practices when they're starting out. But they're more inclined to open a solo practice as they age.

The survey showed that physicians 35 or younger are more likely to be employees of group practices. Those who begin in large groups frequently move into their own solo or small groups in their 40s or 50s. Physicians older than 45 are more likely to be solo practitioners.

The survey also showed that the percentage of physicians choosing to operate a solo practice increased from 32 percent in 2000 to 44 percent by 2006.

Physician practice information for 2008 wasn't available.

Austin attorney Kevin Reed, JD, outside counsel for TORCH, says rural hospitals don't oppose physicians setting up solo practices. He says small facilities in underserved areas want to be able to employ physicians directly to avoid the high costs associated with setting up an NPHC.

Don McBeath, director of advocacy and communications at TORCH, testified at the hearing that the option of setting up an NPHC is ineffective in small, rural communities with two or three practicing physicians. He says the entities are too expensive for hospitals in those areas to set up because they require a separate accounting system, billing system, health insurance, and retirement plan for the medical practice within the NPHC.

Ivan Wood, JD, a partner with the Houston office of Strasburger & Price, LLP, has helped a handful of NPHCs in Texas. He says the cost outlay to a hospital or other nonphysician entity isn't that much.

TMB charges a $2,500 filing fee to review an entity's application to form an NPHC. The legal fee for setting up an NPHC is about $2,500, as well.

"For a total cost of $5,000, a nonphysician sponsor can form an NPHC. It's not that expensive to do," he said.

THA General Counsel Charles Bailey, JD, testified that the hospital association supports a change in the current statute that would allow hospitals to employ physicians directly.

"I'm not overly concerned that hospital administrators are going to tell physicians how to practice medicine," he said.

But Dr. Hinchey worries that would occur if THA, TORCH, and other groups are successful in chipping away at the prohibition on the corporate practice of medicine. He told the Senate committee that patient care and quality improvement have been well served by the tension that has always existed between a hospital's administration and its medical staff.

"That dynamic tension allows for a good, solid discussion of what's best for patient care in the hospital setting. If physicians were employees of the hospital … I'd be concerned about how that could affect decisions of committees and throughout the hospital medical staff system," he said.

According to the 2006 TMA Physician Survey, a majority of physicians agree with Dr. Hinchey that the relationship between a hospital and its medical staff is important in ensuring quality patient care.

The survey found that 69 percent of the respondents agree or strongly agree that the hospital and medical staff work together to solve patient safety problems. Nearly half agree the hospital takes efforts to address physician concerns, the working relationship is cooperative, and on-call physician coverage is available.

As a more appropriate set of solutions than direct employment of physicians by hospitals and other corporations, Dr. Hinchey outlined TMA's recommendations for maintaining the professional independence of physicians in caring for their patients. They include:

  • Contracting mechanisms with hospitals that could provide income guarantees for physicians to locate in rural areas;
  • Exploring with TMB and others ways to streamline the NPHC process to minimize administrative burdens to the organizers; and
  • Substantially increasing the state's debt repayment program to provide more financial incentives for service in rural, underserved areas. 

Repaying Loans  

Improved funding of Texas' Physician Education Loan Repayment program is part of TMA's legislative agenda. The program recruits and retains qualified primary care physicians to medically underserved areas of Texas and to certain state agencies. The association will work to increase annual loan repayment amounts to allow more physicians to benefit from the program and to provide a recruitment tool for medically underserved communities.

More than 900 primary care physicians have received help through Texas' loan repayment program in the past 10 years. The state currently pays up to $9,000 annually, for a total of $50,000 toward a primary care physician's educational debt. However, $50,000 covers only about one-third of the average debt accumulated over 11 or more years of education.

According to the Association of American Medical Colleges, the average educational debt incurred by 2007 medical school graduates was $139,517. That's an increase of 6.9 percent over the previous year.

Dr. Gros says making the loan repayment program more financially robust - along with protecting tort reform, enhancing graduate medical education funding initiatives, expanding medical school training, and improving reimbursement for physician services - is key to addressing recruitment issues in underserved regions of the state.

Crystal Conde can be reached by telephone at (800) 880-1300, ext. 1385, or (512) 370-1385; by fax at (512) 370-1629; or by email at  Crystal Conde.   



Physician-Owned NPHC Works in Patients' Best Interests

Manuel Quiñones, MD, a San Antonio family physician and Bexar County Medical Society president, is a strong supporter of nonprofit health corporations (NPHCs). He has been affiliated with HealthTexas Medical Group, an NPHC now owned entirely by physicians, for about 12 years.

HealthTexas is made up of a medical group, of which Dr. Quiñones is chair of the board of directors. Physicians also own a for-profit management company, governed by a board of trustees, that addresses business and property management issues.

Before HealthTexas became a physician-owned NPHC four years ago, Christus Santa Rosa Health Care owned it. Today, HealthTexas has grown to 11 clinics with 19 doctors and 10 midlevel practitioners.

"It's profitable as a stockholder and as a physician," Dr. Quiñones said.

Physician ownership of an NPHC is more favorable than corporate ownership, Dr. Quiñones says, because the doctors have complete control over the direction of the practice.

"The problem with being corporate owned is that even though you think you have financial backing and stability, the doctor is a small piece of the pie and oftentimes isn't part of big decisions," he said. "Doctors think if they're part of a hospital they have more job assurance, but they're expendable to an employer."

Dr. Quiñones says HealthTexas has been able to carve out a niche in San Antonio by focusing on serving elderly managed care patients. HealthTexas has set up a separate infrastructure to provide nutritional counseling, diabetic screening, stress management and weight loss classes, and spiritual counseling, and has hired an independent pharmacist who delivers prescriptions to patients free of charge. All HealthTexas practices have converted to electronic medical records (EMRs), as well.

HealthTexas' physician owners direct how they spend their profits and have used them to create a nonprofit foundation responsible for making charitable donations.

HealthTexas helped start Harper's Embrace Lifesaver Program in San Antonio to provide free cardiopulmonary resuscitation (CPR) classes to the public. HealthTexas assisted in setting up the nonprofit after a 3-year-old girl named Harper drowned in a swimming pool at a birthday party. The girl died because no one at the party knew how to perform CPR. Through the program, more than 3,000 people have been trained in CPR, and 10 lives have been saved. Some physicians who started it provided the seed money to get it off the ground.

"Because we all have an ownership stake in HealthTexas, we're able to have pet projects like Harper's Embrace Lifesaver Program," he said. "You have a little more financial risk as a physician owner, but you can make better decisions for your group and for the patient community."

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