California Suit Takes Aim at Private Equity Engaging in Illegal Practice of Medicine by Owning Outsourced MD Practices

A new case in California, American Academy of Medicine Physician Group v. Envision Healthcare, aims at the heart of illegal manner in which private equity groups openly own and operate medical practices, mainly via owning companies that provide outsourced medical practices to hospitals, such as emergency room doctors, hospitalists, and ob/gyn specialists. Gretchen Morgenson has publicized the suit, which we’ve embedded at the end of this post. It’s clear and well written.

It is surprising that it has taken this long for private equity’s flagrant abuse of the prohibition against corporations and lay parties practicing medicine to be hauled into court. California prosecutors have for some time been looking into how to challenge it, but were stymied by the difficulty in finding doctors who’d be willing to act as lead plaintiffs. It’s even more surprising given that the two giants in this arena, KKR’s Envision Healthcare, targeted in this suit, and Blackstone’s TeamHealth, have succeeded in engaging in abusive practices like “surprise billing” to the degree that they’ve been a focus of Congressional hearings and now legislation. To give an idea of scale, Envision Healthcare has contracted with 540 health organizations in 45 states.

We’ve written about private equity’s lawbreaking via practicing medicine without a license before, in the case of Dr. Ming Lin, who was fired after whistleblowing at Blackstone’s TeamHealth over poor coronavirus care. We wrote in our our March 2020 post that the press astonishingly covered for Blackstone by failing to connect Dr. Lin’s hospital, St. Joseph Medical Center with real power powerTeamHealth, even after reporting that it was TeamHealth that lowered the axe on Dr. Lin! As we added:

However, the furor over the mistreatment of Dr. Lin did largely manage to skip over the question of how TeamHealth is even legally in the position to effectively provide hospital services when they are not licensed to do so. Several groups protested Dr. Lin’s ouster and one, the American Academy of Emergency Medicine, focused squarely on this issue. From a position statement on its website (emphasis ours):

According to public statements, TeamHealth and PeaceHealth St. Joseph Medical Center have terminated Dr. Ming Lin. If this is so, AAEM condemns TeamHealth and PeaceHealth St. Joseph Medical Center for terminating Dr. Ming Lin an emergency physician who went public with his concerns over the safety of the hospital staff and his patients in this pandemic. It is an essential duty of a physician to advocate for the health of others. Dr. Lin, as a member of the medical staff, is entitled to full due process and a fair hearing from his peers on the medical staff. TeamHealth, a lay corporation owned by the private equity company the Blackstone Group, should not be the employer of Dr. Lin according to the laws of the state of Washington. Their hand in this termination is not only inexcusable but likely impermissible. We call on the WA state Attorney General and the State Board of Medicine to investigate this circumstance.

Needless to say, those clever private equity lawyers have tried to make the dubious and in some (many?) jurisdictions, illegal practices of having a non-licensed organization provide medical services work by keeping doctors-owned companies in the legal structure. The wee problem is that they are straws, devoid of any substance and authority. Eileen Appelbaum explained by e-mail:

TeamHealth is structured as a Management Services Organization (MSO) that doesn’t ‘own’ the doctors’ practices it provides services to. Each practice is ‘owned’ by a doctor or committee of doctors that establishes medical standards for the practice. Sometimes (not sure if this is true of TeamHealth), a single doctor is the owner of record for as many as 60 doctor practices.

The question of what ‘own” means in this context is a bit tricky. Rosemary Batt and I paid money for me to sit in on a webinar organized by a well-respected source of data and information on health care where private equity people experienced in acquiring doctor practices were instructing newbies in how to structure it. They practically snickered as the explained how the doctors that essentially sold their practices to a PE-owned company like TeamHealth were reassured by the fact that it would be doctors that ‘owned’ and ran the practices.

Of course, the deal required them to sell all their assets – building, equipment, supplies, receivables – to the TeamHealth-type organization. So, what does it mean that the doctors own the practice if the practice has no assets that can be sold, moved, used as collateral for a loan, etc.?

Yves here. I can pretty much guarantee that the lack of substance of ownership on the asset side is reflected by a services agreement that strips the nominal owners of any say. This could be pretty overt, or or it could be achieved by having the doctor sham-owners of a particular entity have no role in operating decisions and participate only in policy decisions via a committee where TeamHealth appointed other MDs that were guaranteed to vote the way Blackstone and TeamHealth bean-counters wanted.

Back to the present post. The details of this suit, filed by the very same American Academy of Emergency Medicine, confirms that Appelbaum’s intel and our surmised were correct.

The filing shows the multiple ways the organizational relations and contractual restrictions on doctors fall wildly afoul of the strong prohibitions in California law against non-doctors practicing medicine or owning physicians’ practices. Note that most states have similar strong statutes. It also details typical legal structure of an Envision Healthcare operated hospital practice, with the focus here an emergency room group that demonstrates methods used systematically across Envision Healthcare.

This suit revolves around the displacement of a proper physician’s group providing emergency room services at Placentia Linda Hospital by Envision Healthcare. American Academy of Medicine Physician Group, a non-profit, had provided billing and other administrative services to the ER group.

The litany of misconduct described in this short filing is impressive. Envision Healthcare has one straw acting as the MD in charge of each physicians’ group. He’s not licensed in or living in California. And it’s the same guy, calling into question how much he does besides rent out his license. Non-doctors have signed and filed virtually all key corporate documents. The MD-straw allegedly has very limited rights over his shares (he can’t transfer them, pay himself dividends, etc), meaning his ownership is effectively a legal fiction. The doctors who join these practices also have their rights restricted, including their ability to exercise clinical judgment. They are subject to all sorts of guidelines and restrictions set by non-MDs.

And then we have the financial frauds. The doctors in these practices have to agree to let Envision Healthcare bill under their license numbers. The suit alleges that Envision Healthcare inflated these charges and retains the excess, which is illegal sharing of medical fees with non-physicians (as well as Medicare and Medicaid fraud for Medicare/Medicaid patients…I would assume these attorneys also filed qui tam suits). They also gave kickbacks to the hospital, here in the form of a sweetheart deal on an anesthesia group.

This case has the potential to blow open this entire field of illegal practices across the US, since as this case details, the private equity groups’ efforts at complying with the law don’t even rise to the level of being a fig leaf.

Please read the filing in full. As Morgenson wrote:

When Envision took over the emergency practice at the Placentia hospital, it did so by acquiring a medical group, the suit contends, and then creating a separate legal entity to control the group of physicians. That is Envision’s business model, the suit alleges, and the entities are managed and operated by people who are employed by or connected to Envision.

“A medical director of the physician entity is appointed, and the choice is made by Envision,” the suit says. “Decisions are not made by the medical directors.”

Private equity-owned Envision offers remuneration to hospitals in exchange for contracts, the lawsuit alleges, shutting out “legally operating medical groups,” such as those partnering with AAEM.

Envision’s control over the physicians in the practices it acquires is “profound and pervasive,” the suit alleges. For example, Envision decides how many and which physicians are hired, their compensation and their work schedules, and it also sets other terms of employment, staffing levels and numbers of patient encounters. Envision controls coding decisions and bills patients and/or insurers for such services without telling physicians what has been billed, the suit says.

Needless to say, in many areas of the country there aren’t a lot of hospital groups. So a doctor who is unhappy with how Envision Health is running an emergency room is at risk of being fired or harassed, like given the worst imaginable hours at a hospital a long drive from his home…which is what TeamHealth did to Dr. Lin when it graciously offered him another posting after he was canned….which as we pointed out would have been tantamount to a demotion by virtue of a more difficult commute.

So pass the popcorn. This ought to be fun.

00 AAEMPG vs EnvisionC Complaint-FINAL122021
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  1. DorothyT

    Grateful to the women leading the way to expose private equity horrors: Gretchen Morgenson, Anne Applebaum, Yves Smith.

      1. Matthew G. Saroff

        Yes. Anne Applebaum is the walking conflict of interest married to Radosław Sikorski, a Polish politician who has been that country’s foreign and defense ministers while writing extensively about Russia, the former Russian republics, and former Warsaw Pact nations.

        In contrast, Eileen Appelbaum is a journalist.

    1. Carolinian

      But surely it’s not just private equity who are the bad actors. What about all those physicians acting as fig leafs? Are physician’s licenses to be like taxi medallions (albeit acquired via years of training) that can be bought and sold? Long ago Dean Baker of Beat the Press was talking about how the licensing system works as much to protect physician incomes as to protect the public. Of course doctors do deserve to be well compensated but with so much money involved it isn’t that surprising that grifters enter the picture for some legalized highway robbery. Perhaps, as suggested above, we need a look at the entire US health care system which in some cases saves lives while taking away the means by which to live them. Build up a medical debt and the hospital collection teams will be sure to be treating the patients as grifters for getting sick. And it’s likely that any physicians wanting to act outside the system will get a lot more scrutiny than those private equity owned groups.

      1. Kris Alman

        As pointed out in yesterday’s post, Crash Course: Injured Patients Who Sign ‘Letters of Protection’ May Face Huge Medical Bills and Risks.

        “The Aventura Surgery Center, co-owned by Miami personal injury attorney Sagi Shaked, billed nearly $100,000 for the operation, court records show. Two other Shaked-affiliated companies billed more than $35,000 for surgical supplies and anesthesia, according to the court records.”

  2. Larry

    Hopefully they land a strong blow against this rentier set up. I would argue we need to protect entire swaths of society that should be in the public interest from private equity.

  3. Tom Stone

    Other than a few typo’s,a well drafted complaint.
    Of course, if Physicians had some sort of Guild,Association or Union representing their interests and the interests of the public as a whole this situation would never have arisen in the first place.

  4. allan

    Are there similar laws related to illegal practice of veterinary medicine?
    Here is a repeat of a link I posted a few days ago about a takeover of animal hospitals by PE:

    Workers at local animal hospital pursue a union

    The article focuses on how it has affected the workers, but it’s not hard to Envision it
    having also affected care and billing practices.

      1. wilroncanada

        Also optometrists and opticians. See Matt Stoler’s many articles on the increasing monopolism of everything, including cheerleading, for G-d’s sake. Read the first novella in Cory Doctorow’s book , Radicalized, when everything is rented, nothing is owned.
        Plutocrats have for years been setting up their manufacturing corporations to make products, from widgets to autos, to self-destruct on a time frame which ensures repeat sales. We would rather blame either the Japanese first, and now the Chinese, for the decisions of our plutocrats to cheapen products.
        The Insurance industry is also part of the scam. Two examples: homeowners are being forced, in the local area, to replace hot water heaters every FIVE in order to purchase insurance. Our immediate neighbour bought home insurance on the proviso that she replace the roof in 2022. It was getting older, but was still serviceable. Once she had forked over the money she was advised, “you have 30 days to replace your roof.”

  5. flora

    Thanks for this post.

    an aside: Speaking of surprise billing, the LA Times had a good article earlier this month. Look at the image of the bill and its clear text charge/cost formula computing the final charge.

    “Seemingly arbitrary price markups are a defining characteristic of the U.S. healthcare system. But to see price hikes of as much as 675% being imposed in real time, automatically, by a hospital’s computer system is still shocking

  6. antidlc
    Dec. 20, 2021, 4:00 AM CST / Updated Dec. 20, 2021, 7:55 AM CST
    By Gretchen Morgenson

    ‘Get that money!’ Dermatologist says patient care suffered after private equity-backed firm bought her practice
    A former doctor at a private equity-owned dermatology chain alleges lost biopsies, overbooking and questionable quality control in the company-owned lab.

  7. antidlc
    Israel to offer fourth Covid vaccine dose in bid to outpace omicron

    Israel is to offer a fourth dose of a Covid-19 vaccine to people older than 60 or with compromised immune systems, and to health workers, as part of a drive to ramp up the shots and outpace the spread of the omicron variant.

    A health ministry expert panel — whose findings have yet to be implemented — recommended Tuesday that those eligible receive the fourth shot at least four months after receiving their third.

  8. cnchal

    > So pass the popcorn. This ought to be fun.

    Careful of what you wish for.

    Doesn’t Pirate Equity get a lot of it’s investment dollars from public sector pension funds?

    If Pirate Equity can’t financially rape all customers coming through the door how are those pensions ever going to be paid? My guess is that if they can’t rape you at the hospital door, you will be raped going out the front door of your abode in the form of greatly increased property and sales taxes to make the public sector pensioners whole.

    One way or another, it’s about financial rape.

  9. James KOSS, MD, FAAEM (ret)

    Up billing was a common practice uncontrolled by the initial treating physician. When I worked with such companies I never knew what was billed. Using the commercial EMR programs which were pre-written to claim done a lot of what was not done during the exam the billing could be increased. Liability for the doctor increased as the preprogrammed exam details may not, most often did not, indicate the true extent of the exam. Before this type of program one listed what one did. It took time but was real, true and indicated the extent of the exam performed. These programs were faster, just push the button to detail the exam, but full work ups were claimed when one did not erase all which the program listed as done. It was easier to not do so. It made more money for the company. A complete Internal Medicine exam cannot be performed on every patient. Not every patient needed such thoroughness if their problem were not complex or extended. Most were not. A runny nose and cough did not need such thoroughness. A heart attack or diabetic problems did. If an item not done were listed as done and later caused problems it was the doctor, not the company who suffered the consequences. PROFIT, NOT CARE SHOULD BE THEIR MOTTO.

  10. Greg Taylor

    I suspect the PE abuses get far worse after the 2nd and 3rd PE owners take over. Hard to believe there’d be any legitimate profit opportunities after the first PE owner exits.

  11. sd

    What would happen if Americans just stop going to the doctor, say, for a year. Patients essentially go on strike.

    1. LAS

      Cannot be done b/c people would die. A substantial portion of the US population is unhealthy, with chronic conditions that advance until major organ damage occurs. Such people need regular checkups several times a year.

      But people could choose FQHC (federally qualified health centers) over privateers – if there are any where they live.

  12. Robert Hahl

    I once asked a doctor in Florida why ordinary businesses are permitted to control a doctor’s medical decisions. He said that is called “the corporate practice of medicine,” and it is permitted in Florida. I assume it is also permitted in many US states.

  13. Susan the other

    Clinic and hospital billing practices are done by code. The code for billing is subdivided like the code of law – except the code for billing can be subdivided into things as petty as some doctor having to stop and tie his shoelaces adding several minutes to your bill. Especially if he drops your chart and your papers go flying across the hall and all his pens fall out of his pocket. Maybe that goes under “miscellaneous”. Well, maybe not that bad – but certainly far worse than simple billing that is inclusive for the procedure being done. I’d just submit that billing for medical procedures should be inclusive, by law. They can be itemized, but not billed separately. So naturally when it comes to professional services being parsed by unnamed corporate interests, which themselves may or may not be legal, it gets complicated and expensive and unethical. I’d bet PE saw what a gold mine it could be way back in the 80s, when prices started to go up. They’ve just managed to do hospitals one better and like good predators they wisely chose emergency rooms as their target. We really do need to do M4A and get profit out of it altogether. Doctors and nurses and techs need to be paid well and not subjected to these abuses. I’m glad to see the AAEM taking a stand.

  14. Eclair

    “Private equity” sounds so ….. unthreatening and white shoe. Like “Private Banker,” and “Private Prison.” The latter sounding like a place you might want to send your wayward nephew for a few months of ‘rehabilitation’ to cure him of his unfortunate predilection for diddling 12 year olds. Not a corporation that makes its profits from imprisoning humans.

    We need a new label, one that is truthful: what do you call rapacious and greedy cabals of men (mostly), having access to unlimited piles of cash (And, BTW,why is there so much cash floating around? Something about ‘easing?’Or, ‘bailouts?’) Cabals that are rapidly buying up everything. From real estate to hospitals and medical practices to water rights. It’s conquest, not by means of guns and bombs, but by cash. One morning, we’ll wake up and a small group of very unpleasant people will own the planet.

    They’re freakin’ terrorists. Next to this mob, Vlad the Impaler is a pussycat.

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