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Legal Steps for Functional Medicine Practices

Michael H. Cohen, JD, MBA

Michael H. Cohen, JD, MBA, talks about what inspires him to support the human journey of health and wellness. Michael's legal module is part of the Practice Implementation Program, "My Practice Plan."

Functional Medicine practices can benefit from some basic guidance about legal strategy issues that arise when setting up operations. We talk about three key areas below: establishing a professional medical corporation instead of operating as a sole proprietor; getting clear advice on insurance to cover potential liability exposure; and understanding and managing the landscape of third-party reimbursement.

1. Establish a Professional Medical Corporation

When starting a practice or drafting a business plan, the clinician may give some thought to the choice of entity. However, they often fail to realize that the law sees a difference between a general corporation or LLC and a professional corporation. Most lawyers focus on the choice of an “S” corporation vs. a “C” corporation vs. an LLC, which raises a different set of questions altogether. In this article, our concern is about the choice of entity for a professional, clinical practice.

In many states, clinical practice can only occur through a professional corporation (PC), sometimes known as a professional medical corporation, and sometimes as a professional limited liability corporation (PLLC, as in the case of New York).

In some states, a professional medical corporation is not required. For example, Arizona law provides: “A domestic or foreign professional corporation may render professional services in this state only through individuals licensed in this state to render the services.” In other words, the law does not prohibit a licensee (for example, a medical doctor) from rendering professional services through a general corporation.

Using a professional medical corporation has several advantages. First, operating through a legal entity is meant, in general, to provide liability protection against personal exposure such as liability for slips and falls or for breach of contract. It’s the corporation that faces liability, not the person.

Some exceptions for professional services do exist. For instance, a negligent practitioner can be personally liable for malpractice and is not necessarily protected by the corporation. There is also a more common legal exception known as “piercing the corporate veil.” Veil-piercing is relatively uncommon and typically limited to situations in which the entity is undercapitalized at the time of incorporation, fraudulently created to escape creditors, or used as a shell in which corporate and personal assets are intermingled. In general, a legal entity such as a corporation is meant to provide a liability shield.

A second advantage of a professional medical corporation, whether or not required by law, is to help buttress the physician against corporate practice of medicine concerns. In a nutshell, the law prohibits non-licensed persons from practicing “medicine.” Similarly, general corporations cannot practice medicine.

If the practice of medicine is housed within a professional medical corporation, this helps create a clearer separation between the clinical/medical care on one hand, and administrative, management, and marketing functions on the other. Those business functions often are done by a management services organization (MSO). The MSO has to be careful not to engage in “corporate practice of medicine.”  How to benefit from an MSO is a much larger topic; the main point here is that having a professional medical corporation can help with some essential compliance concerns, especially as the practice grows and outsources its business functions such as book-keeping, billing, and staffing/human resources.

2. Make Sure You Cover the Bases In Terms of Insurance

In other articles, we discuss some risk management basics such as addressing standard of care issues and having robust informed consent forms.  These are things the clinician should know about and implement.  Another aspect of risk management is insurance.

It is critical to contact a knowledgeable insurance broker to get recommended coverage to handle your insurance needs. For example, insurance needs can include several different areas:

  • professional liability insurance
  • premises liability insurance
  • general umbrella liability coverage
  • cyber-liability coverage (for HIPAA and data breach issues)

A good insurance broker can help the clinician navigate different policies and understand the full range of what they need to provide coverage against potential losses.

3. Clarify Issues Relating to Third-Party Reimbursement

Also included in our usual checklist of risk management and practice implementation items is the need to clarify issues relating to third-party (or commercial) reimbursement. If you’re already employed within a hospital or medical group or in another medical setting, an important step is to research the existing arrangements regarding contracts with third-party reimbursement carriers.

For example:

  • Are you in-network and bound by existing insurance contracts as a participating clinician?
  • Do those contracts require that the insurance company consent before you bill outside those arrangements?
  • Are you bound to submit all claims through the insurer, whether services are delivered onsite with your employer or elsewhere? Can you break away? Do the contracts follow you personally, your NPI, or your employer?
  • Is permission from your employer required?

Sometimes our law firm advises clients to write to the insurance company and/or head of department to announce what the clinician plans to do in his or her new practice; to assert that the clinician is not bound in that practice by existing insurance arrangements with the employer; and to ask that the insurer write within 30 days if it disputes this assertion, on the theory that silence constitutes acquiescence.

These are some basic legal risk management steps that can help ground a Functional Medicine practice so the clinician-owners have less liability exposure, more peace of mind, and can successfully grow their practices.

About Michael H. Cohen

You can learn more from Michael H. Cohen, JD, MBA, about legal issues inside the Legal Module of “My Practice Plan,” a 16-week, online business management course specifically designed for Functional Medicine practitioners to build, grow, or reinvent their practice. Students of this course will come away with a personalized business plan based on their desired business model, as well as insights into legal matters including telemedicine, informed consent, HIPAA/privacy, and other laws, and how these laws can affect a Functional Medicine practice.

Learn More About My Practice Plan

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