Piggybacking off my June 28, 2026 post on Carbon Health’s Corporate Practice of Medicine settlement (https://thebrookslawblog.com/california-attorney-general-goes-after-corporate-practice-of-medicine-cpom/), did you know that Corporate Practice of Medicine (CPOM) violations could result in liability under state and federal False Claims Acts? The reality is that any state or federal regulatory violation can result in False Claims Act (FCA) liability, but the violation must be “material.” This means that the government payor must have the authority, ability, and inclination to deny payment to the entity submitting claims. In this context, the relevant entities are medical practices submitting reimbursement claims to the Centers for Medicare & Medicaid Services (CMS) or other government payors.
The Precedent
The prior post describes CPOM violations in great detail. But in a nutshell, at least 30 states prohibit lay corporations and unlicensed investors from owning medical practices or employing physicians directly. This doctrine ensures that only licensed medical professionals make clinical and treatment decisions. The statutes and case law impose various requirements, with many states scrutinizing and targeting arrangements that provide investors from exercising functional control over medical decision-making even if the physicians retain authority on paper.
Have there actually been FCA cases brought based on this predicate violation? Yes, at least in part. For example, Ebeid v. Lungwitz is a seminal Ninth Circuit FCA case where — among other issues — the court explored whether Arizona’s CPOM prohibition could serve as a predicate for FCA liability. Ultimately, the court established that relators must specifically point to a statute, rule, or contract where government reimbursement is strictly conditioned on that state CPOM compliance.[1] But this was before the United States Supreme Court revamped the FCA’s falsity and materiality requirements in 2016 in Universal Health Svcs. v. Escobar. Today, a payor still must have the ability to deny payment as a result of the violation, but compliance with CPOM provisions specifically does not need to be an express condition of payment.
Several New York cases bolster the case for CPOM violations resulting in FCA liability in New York and similar states.
In Andrew Carothers, M.D., P.C. v. Progressive Insurance Company (the “Carothers case”), New York’s highest court held that medical practices that cede too much financial and operational control to MSOs, are “fraudulently incorporated” under New York’s CPOM prohibitions found in N.Y. Bus. Corp. Law § 1507) and N.Y. Educ. Law § 6529, and thus ineligible to be reimbursed by no-fault automobile insurers.[2] In reaching this conclusion, the Court relied on its prior decision in State Farm v. Mallela, in which it held that (1) insurance carriers may withhold reimbursement for no-fault claims that were “provided by fraudulently incorporated enterprises to which patients have assigned their claims, and (2) medical provider that is not solely owned and controlled by a physician may not charge insurance carriers for no-fault insurance reimbursements.[3] In Carothers, the Court then concluded that a party “in material breach of the foundational rule for professional corporation licensure—namely that it be controlled by licensed professionals—[is] enough to render [that party] ineligible for reimbursement.”[4]
Are these Violations Material Today?
While the above cases concern no fault auto-insurance, there is likely the necessary tie-in that would also allow New York Medicaid to deny reimbursement to companies violating New York’s CPOM provisions. Under 18 NYCRR 504.1 and NY Social Services Law § 367-a, all rendering providers must be actively enrolled in the eMedNY Provider Enrollment system. Companies must file ownership and control interest disclosures within 15 days of any change. Fraudulent misrepresentation of ownership violates licensing and enrollment requirements, and failure to meet licensing and enrollment requirements legally prohibits payment. These and similar provisions would likely allow Medicaid to deny payment. That is the first step for materiality for New York and states with similar provisions. But it is just the first step. Materiality requires inclination to deny payment as well. So how is this second step established?
Well, actual payment denials of claims based on CPOM violations are the best evidence of materiality, but they are not always required under the Escobar materiality framework. Courts also look to other government action showing that the government takes these kinds of claims seriously. There are increasing levels of enforcement of CPOM violations as detailed here: https://thebrookslawblog.com/california-attorney-general-goes-after-corporate-practice-of-medicine-cpom/ Additionally, government and governing body guidance documents make findings of materiality more likely under the FCA. By way of select examples in this regard, the Medical Board of California publishes a Corporate Practice of Medicine FAQ that outlines permissible versus impermissible activities for Management Services Organizations (MSOs);[5] North Carolina’s Medical Board maintains a formal Corporate Practice of Medicine Policy Statement;[6] and the Texas Medical Board has published a white paper on the issue.[7] Similarly, the AMA vigorously defends CPOM prohibitions, often publishing policy resolutions and issue briefs on the effects of corporate ownership on the physician-patient relationship, such as in their Corporate Practice of Medicine Policy.[8]
Moreover, if CPOM is a factor in causing more traditional and longstanding FCA violations — such as submitting claims for medical services that aren’t reasonable and necessary or upcoding/improper coding — that is an additional “plus factor” and element of “sex appeal” that could pique government interest and make government intervention and pursuit more likely. Especially if there is a case to be made that this caused patient harm.
What You Should Do
Per the above analysis, there is a distinct possibility that state governments or creative qui tam relators pursue FCA cases based on CPOM violations. So, what should you do if you are an MSO or a medical practice with private equity investors? Well, you should consult a qualified legal professional to review your Master Services Agreement provisions, including the following:
- Financing arrangements, with an eye towards eliminating exclusive and above-market financing that could be perceived as a control mechanism.
- Succession provisions, such as security interests in PC shares, assignable options, and stock transfer rights. Provisions giving the MSO unfettered authority to replace the physician-owner or limit the physician-owner’s ability to exit without forfeiting the practice should be viewed with suspicion.
- Equity and buyout terms, such as nominal purchase prices for the physician’s interest, which can create a perception that the practice is “captive” to and functionally controlled by the MSO.
Also be aware of representations to consumers involving advertising, billing, and informing patients of the identity of the PC that owns and operates the practice.
Contact me at my law firm Kleinbard (jbrooks@kleinbard.com) if you need a compliance review on this issue or general compliance review.
FOOTNOTES
[1] https://caselaw.findlaw.com/court/us-9th-circuit/1534318.html
[2] —N.E.3d—, 2019 N.Y. Slip Op. 04643 (June 11, 2019). “Slip op.” pin citations refer to this slip opinion provided at the following URL: http://www.nycourts.gov/ctapps/Decisions/2019/Jun19/39opn19-Decision.pdf.
[3] State Farm Mut. Auto. Ins. Co. v. Mallela, 4 N.Y.3d 313, 319, 322 (2005).
[4] Slip op. at 18.
[5] https://www.youtube.com/watch?v=Qj2dCfM-zVo&t=373s
[6] https://www.ncmedboard.org/resources-information/professional-resources/laws-rules-position-statements/position-statements/corporate-practice-of-medicine
[7] https://www.texmed.org/CPMwhitepaper/
[8] https://www.ama-assn.org/system/files/i23-ppps-resolution-1.pdf
