Your Medical Practice Can Suddenly Become Illegal!

Michael Igel, Joel Bronstein and Tom Smith

It was totally unexpected.  Dr. Jones – not yet in his sixties – was working out at his favorite gym when he suddenly keeled over and died. A massive heart blockage when he was doing a bench press. He dropped the weights and it crushed his chest.

A stickler for good health, he and Dr. Smith, his best friend since their residency days, had built up a large following in their medical practice.

Like many good friends, the doctors worked together on a handshake and trust. When they started their practice some three decades ago, they had had their lawyers scratch out some basic agreements, including a right of the continuing physician to acquire the ownership interest of the deceased partner at death. Their accountant advised them that it would take a few months to collect all the outstanding receivables and value the practice, so the agreement gives Dr. Smith 90 days to finalize his buyout from Dr. Jones’s estate. The doctors were comfortable with that arrangement.

But something unforeseen happened between the time the doctors drew up their agreements and the day Dr. Jones died. The culprit? Florida’s Health Care Clinic Act (the “Act”).

Nestled among the Act’s provisions is the requirement that any medical practice not 100% owned by physicians must register as a Clinic with the state of Florida. If it fails to register, the medical practice cannot bill an insurance company, Medicare or Medicaid for its services. If it does, it has committed a crime. The registration has to be completed within 5 days, and there is no exception or extension of time to accommodate the tragedy of death. Five days is barely a long enough time period for the family to arrange a meaningful funeral. In no way is it enough time to finalize necessary buyout arrangements. Nevertheless, it is the law.

Whether a solo practitioner, a sole owner of a practice that employs physicians or part of a group of physicians owners, in the event of a physician’s death, the Act can rear its head and force the immediate closure of the practice. A group, no matter the size and continuity, loses its exemption as soon as the deceased physician’s estate takes over his shares.  The Act also adversely impacts solo practitioners who intend to pass the operation of the practice to a spouse or child following the physician’s death.

Insurance companies are aware of the Act, and have used it to avoid paying practices for services. As 2016 approaches, New Year’s resolutions should include a review of existing personal and corporate documents to address these challenges.

The Law

The prime purpose of the Act is not directed at protecting patients or the physicians who treat them. Rather, the Act’s intended purpose is to benefit the interests of insurance companies and other third party payors. The Act has been interpreted by the State of Florida as not applying to a medical facility that charges a “cash only” patient fee, such as weight loss clinics that operate without insurer or other third-party reimbursement. Medical practices that are owned only by licensed physicians (and defined family members) are exempt from the Act’s licensure requirements.

Qualifying as a Clinic takes time and preparation. The licensure requirement for a Clinic under the Act require the owners to file a formal application with the state of Florida; undergo an intensive screening and inspection process, be finger printed, prove the financial ability to operate the clinic; and have the clinic employ a medical director who agrees to specific duties designed to “ensure” compliance with the Act’s requirements.

Penalties are significant. Unlicensed activity is a third degree felony and each day of unlicensed activity is a separate offense. The law also provides for administrative fines of up to $5,000 per day for violations of the Act. Moreover, any patient charge by an unlicensed Clinic is unlawful and unenforceable, and insurers have successfully sued unlicensed Clinics for refunds of fees paid for professional services.

The Act states that when a medical practice or other health care clinic is not 100% owned by a licensed physician or group of physicians, the clinic and can no longer bill third party payors without a license. In other words, even if Dr. Jones’s patients would be comfortable seeing Dr. Smith, Dr. Smith will not be permitted to bill insurance companies, Medicare or Medicaid until Dr. Jones’s ownership interest is purchased by Dr. Smith, or until the practice obtains a Clinic license.

Dr. Jones’s practice would suffer the same fate if he was the sole owner of his practice, and had intended to leave the practice to his wife or children to hire a new physician, and operate the practice or ultimately sell it. The practice loses its exemption as soon as Dr. Jones dies and the ownership passes to his estate or his non-physician beneficiaries.

When a physician dies, if his ownership interest is not immediately sold to another licensed physician, his estate or his non-physician beneficiaries become the owner of his or her shares in the Clinic. Of course, the estate is not a licensed physician. In these cases, the practice can no longer bill for services rendered unless the Clinic applies for a license. Regulations issued by Florida’s Agency for Health Care Administration (“AHCA”) state that when a change to the exempt status of a Clinic changes, an application must be submitted within five days of the change. Failure to adhere to these timelines will subject the Clinic and its owners to sanction under the statute. To make matters worse, AHCA has stated in informal discussions that the Clinic is not permitted to bill third party payors until a license is issued.

The Act’s impact on a medical practice can be catastrophic. In the only case examining the Act’s treatment of the death of a physician, a physician/practice owner died and his estate became the successor owner of the Clinic. The personal representative caused the Clinic to employ the services of another physician to continue patient care. The personal representative did not recognize the exemption was lost when the physician/practice owner died, and the estate did not apply for a license within the required five-day time period. State Farm Insurance refused to pay fees to the Clinic for services that were rendered after the death, claiming the Clinic could not bill for professional services since it had no license. The court held for State Farm Insurance, observing that the Act “does not seem to contemplate the sudden and unexpected death of an owner/licensed supervising healthcare professional.”

What Can I Do?

Fortunately, whether a group practice or a solo practitioner, advance measures can be taken to minimize risk of the issues created by the Act. Existing documents should be reviewed as soon as possible to ensure compliance.

Group Practices – Corporate documents, including operating agreements, buy-sell agreements, and articles of incorporation or articles of organization should be amended to provide for the immediate, automatic, redemption or purchase of the shares of stock or membership interest of a deceased practitioner.

Solo Practitioners and Practices Owned by One Physician – If the practice is owned by only one physician, but has a physician employee or employees who are not  owners, a “buy-sell” agreement can provide for an immediate and automatic sale of the practice upon death. If financial viability of the employed physician(s) is a concern, or if the practice does not employ any other physicians, the practice should consider obtaining a Clinic license, with ownership comprised of the physician and at least one of the physician’s family members. As a licensed Clinic, in the event of the physician’s death, rather than immediately shutting down the practice due to the loss of exemption from the Act, the remaining owner(s) can instead continue to operate the practice. The Clinic will need to notify AHCA within 21 calendar days of the death of the physician and of the resulting shift in ownership percentage from the physician’s estate to his or her remaining family members.

In this instance, careful personal estate planning must also be addressed in order to take into account that the ownership interest properly shifts from the deceased physician to the other owner(s). Presuming the deceased physician served as the Clinic’s medical director, the practice should also make arrangements in advance with a licensed physician who will serve as the Clinic’s medical director upon the death of the owner/physician.