Top 10 Things Physicians Must Know Before Starting a Friendly PC

Executive Summary

Starting a friendly physician corporation (Friendly PC) is a strategic way for physicians to own a medical practice while leveraging a Friendly PC structure that aligns with corporate practice of medicine laws. This mini-whitepaper outlines how to start a Friendly PC successfully – covering the MSO model (management services organization), legal and compliance essentials for a physician-owned medical practice, actionable steps to launch, and common pitfalls to avoid. It provides an authoritative guide for physicians considering entrepreneurship in healthcare, ensuring they build a compliant and thriving practice from day one.

Top 10 Things Physicians Must Know Before Starting a Friendly PC

1. Understand Corporate Practice of Medicine (CPOM) Laws: Many states have CPOM laws prohibiting non-physicians from owning or controlling medical practices. These laws exist to keep clinical decisions focused on patient care rather than corporate interests  . Before starting a Friendly PC, physicians must research their state’s CPOM rules – some states strictly require physician ownership of the practice, while others have more lenient regulations. This foundational knowledge will tell you whether a Friendly PC model is necessary in your state and guide how you structure your practice.

2. Form a Physician-Owned Professional Corporation (PC): In CPOM states, the clinical entity must be a physician-owned medical practice – usually a Professional Corporation or Professional LLC owned 100% (or at least majority) by licensed physician(s) in that state  . This means you’ll need to incorporate a PC in the state where you will practice, and you must hold an active medical license in that state to be an owner  . Ensure all incorporation paperwork (e.g., articles of incorporation, bylaws) is filed and that the PC remains exclusively physician-owned to comply with state law. Setting up the PC correctly is the first step toward a compliant Friendly PC structure.

3. Leverage an MSO Model for Administration: A Management Services Organization (MSO) is a separate entity that handles all non-clinical operations of the practice. Under a Friendly PC structure, the physician’s PC delivers medical services, while the MSO (owned by business partners or investors, if any) provides management services like billing, scheduling, HR, marketing, and office administration  . This MSO model lets physicians focus on patient care while the MSO runs the business side of the practice. It also allows non-physician partners to have an economic stake through the MSO without violating ownership laws. Physicians should set up or partner with a capable MSO that will manage operations efficiently and in compliance with healthcare regulations.

4. Draft a Comprehensive Management Services Agreement (MSA): The relationship between your PC and the MSO must be defined by a formal Management Services Agreement (MSA). This contract delineates the scope of services the MSO will provide (e.g. administration, staffing, tech support, revenue cycle management) and the fees the PC will pay for those services  . A well-crafted MSA also explicitly protects clinical autonomy – it should state that the PC (physician owners) retains sole responsibility for all clinical decisions, and the MSO will not interfere in medical judgment  . Key terms like the duration, termination conditions, and performance expectations of the MSO should be included. Work with a healthcare attorney to tailor the MSA to your specific arrangement and state laws, as this document is critical for both compliance and smooth operations.

5. Set Fair Market Value Management Fees (Avoid Fee-Splitting): How the MSO gets paid is a crucial point. The fee for management services must be structured at fair market value (FMV) for the services provided – not as a percentage of the practice’s medical revenues or referrals  . Paying the MSO via a fixed fee or flat cost-based fee structure helps avoid violating federal Anti-Kickback or Stark Law and state anti-fee-splitting rules, which prohibit payments that reward referrals    . Physicians should determine the MSO fee based on the value of legitimate services (you may need a valuation or benchmarking for this) and document how that fee was decided  . By keeping the fee reasonable and independent of patient volume, you reduce legal risk and ensure the Friendly PC model remains compliant.

6. Maintain Clinical Autonomy and Compliance: One hallmark of a Friendly PC is that clinical control stays with the physicians. Be vigilant that all medical decisions – patient treatment plans, prescriptions, referrals, hiring or firing clinical staff – are made by the physician owners or medical director of the PC, not by the MSO  . If an MSO were to exert undue influence over clinical operations, it could be seen as the unlicensed practice of medicine. In fact, states like New Jersey and New York even allow insurers to deny reimbursements if an MSO is effectively controlling clinical care  . Action point: set up governance policies that clearly separate clinical decisions (PC’s domain) from business decisions (MSO’s domain). This might include having a physician board or lead physician making care-related policies and ensuring any advice from the MSO on operations never crosses into directing medical care. Preserving this separation safeguards patient welfare and keeps your physician-owned practice on the right side of the law.

7. Protect Patient Data and Ensure HIPAA Compliance: In a physician-owned practice using an MSO, sensitive patient health information will likely be shared between the PC and MSO (for billing, scheduling, etc.). It’s essential to maintain strict HIPAA compliance in this arrangement. The PC should enter into a Business Associate Agreement (BAA) with the MSO, which contractually requires the MSO to safeguard protected health information and follow HIPAA regulations  . Additionally, verify if your state has any healthcare data privacy laws that go beyond HIPAA and ensure compliance with those as well  . Put in place proper data security measures (encryption, access controls) and train MSO staff on patient privacy. By treating the MSO as a trusted business associate under HIPAA, you protect your patients’ data and avoid costly privacy breaches as you start your Friendly PC.

8. Plan for Financial Sustainability and Capital Needs: Launching a friendly physician corporation is not just a clinical endeavor but also a business venture – it requires solid financial planning. Determine how you will finance start-up costs like office space, equipment, staff salaries, and insurance. In many Friendly PC arrangements, the MSO (especially if backed by investors or private equity) can provide working capital loans or funding to the PC to cover operating expenses and physician compensation initially  . However, those funds must be paid back from the practice’s revenue, so ensure the business model is sustainable  . Develop a pro forma budget: forecast your expected patient volume, reimbursement rates, and expenses to confirm that the practice can generate enough revenue to pay the MSO fee and still compensate physicians appropriately. Understand the MSO’s expectations for return on investment – they will depend on the PC’s profitability to recoup any capital outlay  . The key is to balance patient care with efficiency: control overhead costs, negotiate fair supplier contracts (through the MSO), and perhaps start modestly before scaling up. A clear financial plan will set your Friendly PC up for long-term viability.

9. Establish an Ownership Succession Plan: Plan for the “what-ifs” before you even launch. If you as the physician owner become incapacitated, retire, lose your license, or simply decide to exit, what happens to the practice? Both you and any MSO partners will want continuity of the business and patient care. It’s common to sign a Transfer Restriction Agreement (TRA) or similar continuity contract giving the MSO some rights to help find a new physician owner in certain events (death, disability, etc.)  . However, don’t rely solely on the MSO’s actions – you should proactively identify a potential successor or have a plan for a fellow physician to take over if needed  . For example, you might bring on a second physician co-owner who could step up, or outline that a particular trusted colleague could purchase the PC shares under predefined terms. By agreeing on successor owners early and documenting a transition process, you prevent chaos or legal disputes down the line  . This foresight protects your staff and patients and keeps the practice stable through unforeseen changes.

10. Seek Expert Legal Counsel and Build a Trusted Partnership: Standing up a Friendly PC is a complex undertaking at the intersection of medicine and law – don’t go it alone. Engage experienced healthcare legal counsel from the start to help navigate state laws, draft agreements, and structure your Friendly PC properly  . A lawyer well-versed in physician practice arrangements can ensure you meet all regulatory requirements (CPOM, Stark, anti-kickback, etc.) and avoid provisions that could raise red flags. Likewise, consult with healthcare accountants or advisors on tax and financial setup if needed. Beyond formal advisors, pay attention to the human element: choose your MSO partners or co-founders carefully. Trust and alignment between the physician owner and MSO management are vital – both parties should share the vision for a compliant, patient-centric practice  . Open communication and mutual respect will help resolve issues as they arise. In summary, assemble the right team of professionals and partners. This support network will not only help you start your Friendly PC on solid ground but also continue to guide the practice as it grows.

Checklist for New Friendly PC Owners

• Research State Laws: Verify your state’s CPOM regulations and professional entity requirements (PC, PLLC, etc.) for a physician-owned practice.

• Form Your PC: Register a professional corporation in the state where you will practice. Ensure it’s physician-owned and that you hold any necessary state medical licenses.

• Establish the MSO: Set up or partner with a Management Services Organization to handle business operations. Define the MSO’s ownership (e.g. your business partners or investors) and incorporate it as a separate entity.

• Draft Key Agreements: Work with a healthcare attorney to create a Management Services Agreement outlining services and fees, a Business Associate Agreement (HIPAA), and any Transfer Restriction or continuity agreements for succession.

• Secure Financing & Insurance: Arrange funding for startup costs – whether through personal investment, MSO-provided capital, or loans – and obtain malpractice insurance for the PC and liability coverage for the MSO.

• Staff Your Practice: Hire clinical staff under the PC (or contract physicians as needed) and hire/administer non-clinical staff through the MSO. Clearly communicate roles so everyone knows who the employer is and who manages them.

• Implement Compliance Protocols: Put in place compliance programs from day one – e.g. HIPAA privacy training, billing compliance checks, and policies ensuring clinical decisions are made by the physicians. Schedule regular audits or reviews to stay on track.

• Plan Go-Live and Monitoring: Set a launch date and ensure all systems (EMR, billing software, etc.) are ready. After opening, hold regular meetings with your MSO team to review financial performance, clinical quality metrics, and any operational issues.

Red Flags to Watch For

Even with careful planning, certain warning signs may indicate your Friendly PC arrangement is veering into risky territory. Be on guard for these red flags:

• MSO Overreach: The MSO attempts to dictate clinical matters (hiring or firing clinicians, influencing medical protocols, etc.), which violates the physician control required by CPOM  . If non-physician managers are encroaching on patient care decisions, your structure needs correction immediately.

• Improper Fee Structures: The management fee is based on a percentage of revenue or referrals rather than a flat or fair market value fee. Such arrangements can be seen as illegal fee-splitting or kickbacks  . If an MSO proposes “profit-sharing” from medical fees, consider it a big red flag.

• Lack of Formal Agreements: You’re operating without detailed written contracts (MSA, BAA, etc.), or using templates not reviewed by a knowledgeable attorney. An informal or vague agreement can lead to compliance violations or disputes – never rely on handshake deals in a Friendly PC.

• Excessive Control Clauses: Continuity or shareholder agreements that give the MSO unilateral power to remove or replace the physician owner for any reason may run afoul of strict CPOM laws. (A recent California court decision suggested that an overly broad “continuity agreement” itself could violate state law  .) Be cautious if your contract heavily favors the MSO’s control over ownership without due safeguards.

• No Succession Plan: There’s no clear plan for what happens if you (the physician owner) can’t continue. If neither you nor the MSO has identified who would take over the practice in an emergency, the entire operation is at risk. Lack of a succession plan is a red flag signaling poor preparation.

• Compliance Indifference: Your partner or MSO downplays compliance requirements – for example, saying “Don’t worry, everyone skirts these rules.” If you encounter an attitude that ignores legal or ethical standards, walk away. A successful Friendly PC must prioritize compliance and patient care above short-term convenience.

By being mindful of these red flags and following the guidelines above, physicians can confidently pursue the friendly physician corporation route. A well-structured Friendly PC, aligned with a robust MSO model, enables you to build a thriving, physician-led practice that stays compliant, delivers quality care, and achieves your entrepreneurial goals in healthcare    . Remember that due diligence and good partnerships are key – when in doubt, consult experts and err on the side of caution as you embark on how to start a Friendly PC in today’s complex medical business environment.