The Health Law Ticker

Almost two years ago, the American Academy of Emergency Medicine Physician Group (AAEM-PG) filed suit in the Superior Court of California against Envision Healthcare Corporation (Envision). The suit concerned Envision’s takeover of a contract to provide healthcare services at an emergency department at Placentia Linda Hospital from AAEM-PG.

In addition to the damages AAEM-PG is alleging resulted from the takeover, several issues are at stake in the litigation; most notably, the legality of the “Friendly PC Model” in California.

Envision’s Facts

Envision is a non-medical, lay entity that operates a national multispecialty physician group and healthcare management team with over 25,000 clinicians and 1,600 employees operating at over 780 hospitals.

The complaint, filed on December 20, 2021, alleges that Envision's business model includes the practice of purchasing, controlling, and/or creating a separate subsidiary legal entity for each physician entity it purchases. The physician entity subsidiaries are managed and operated by people who are employed by and directly connected to Envision. Further, Envision appoints a medical director to run the physician entity.

In 2021, Placentia Linda Hospital in Placentia, California, awarded its Emergency Department contract to one such physician entity owned by Envision. This resulted in the termination of AAEM-PG’s contract.

Timeline of Envision Case

What is the Friendly PC Model and Why is it Important?

In California, and many other states, there is the prohibition against the Corporate Practice of Medicine (CPOM). CPOM laws generally prohibit lay individuals and lay entities from owning or controlling professional entities engaged in the practice of medicine. The prohibition against the CPOM is designed to protect patients from nonmedical business corporations prioritizing other factors such as revenue over quality of care. California’s CPOM statutes can be found at California Business and Professions Code sections 2400 and 2052.

In order to avoid violating the CPOM, a business structure commonly referred to as the “Friendly PC Model” is created, allowing lay entities and individuals involvement in a medical practice. The Friendly PC Model is a marriage of two entities: the friendly professional corporation and an administrative entity. The friendly professional corporation is an entity owned and controlled by a physician that agrees to provide health care services while the administrative entity provides administrative support to the professional corporation.

Envision utilizes the Friendly PC Model: Envision creates a physician entity and appoints an affiliated medical director. Although the physician entity is not owned by Envision, because the medical director is affiliated with Envision, Envision has indirect control. This physician entity then receives administrative support services through another entity, also owned by Envision. By using this structure in this manner, AAEM-PG alleges, Envision is entirely controlling the physician entity, even if indirectly.

Although the Friendly PC Model has been generally allowed in California, AAEM-PG is alleging that Envision’s use of the model goes against California’s CPOM prohibition. So far, the Court has been open to hearing this argument. This case therefore represents the latest and possibly loudest attempt to undermine the widely used Friendly PC Model.

What’s Next?

Most recently, Envision filed for Chapter 11 bankruptcy in May 2023. Since AAEM-PG’s suit, at its heart, is challenging the legality of the Friendly PC Model in California, the lawsuit will continue despite the bankruptcy.

At issue here is whether or not Envision, as a lay entity, is truly controlling the subsidiary physician entities that are otherwise owned and operated by a licensed professional. How the Court tackles and analyzes this issue will decide whether or not the Friendly PC Model can continue in California and in what manner.

There are many stakeholders in this litigation. As shown in the timeline above, other physician organizations have filed amicus briefs. They, like AAEM-PG, believe the Friendly PC Model presents harm to patients. These organizations want to keep quality of care decisions in the hands of licensed professionals and believe this model is just a loophole for those that see business opportunities.

On the opposite side, the large number of Friendly PC Models in California may see their business structure fall out of compliance. If the model becomes illegal or the court creates a framework in which a Friendly PC Model can survive, these entities may have to restructure or risk being in violation of the CPOM.

Until this litigation is resolved, the Friendly PC Model can continue to operate in California, but those looking to start a professional health care entity should continue monitoring this case.