Existing law establishes the State Department of Public Health to implement and administer various programs relating to public health. Existing law requires the department to develop a coordinated state strategy for addressing the health-related needs of women, including implementation of goals and objectives for womens health.

This bill would make a technical, nonsubstantive change to that provision.

SENATE COMMITTEE ON

Senator Anthony Portantino, Chair

2023 - 2024 Regular Session

SB 784 (Becker) - Health care districts: employment

Bill Summary:

SB 784 exempts health care district hospitals from the ban on the corporate practice of medicine (CPM), authorizing these hospitals to directly employ physicians, as specified.

Fiscal Impact:

Unknown fiscal impact to the Medical Board of California (MBC) and the Osteopathic Medical Board of California (OMBC) (Contingent Fund of the MBC and OMBC Contingent Fund).

It is unknown if there will be an increase in complaints and subsequent enforcement workload due to the additional exemptions to the CPM granted through this bill, as violations would be discovered and addressed through the normal course of enforcement review and complaint process for both the MBC and OMBC. For context, the MBC received 9,521 physician complaints in Fiscal Year 2022-23. The MBC intakes employment setting data, but does not aggregate or specifically track this data in the context of its complaint review.

To the extent that there is a significant increase in physician complaints, there may be a corresponding increase in enforcement workload. Actual costs to the MBC and OMBC related to enforcement workload will depend on the number of complaints received and the complexity of any subsequent investigations. However, this fiscal impact is indeterminate at this time.

The boards and bureaus within the Department of Consumer Affairs are special fund agencies whose activities are funded by regulatory and license fees and generally receive no support from the General Fund. New legislative mandates, even those modest in scope, may in totality create new cost pressures and impact the entity’s operating costs, future budget requests, or license fees.

Background:

The CPM is usually referred to in the context of a prohibition, banning hospitals from employing physicians directly. The ban on CPM evolved in the early 20th century when mining companies had to hire physicians directly to provide care for their employees in remote areas. However, problems arose when physicians' loyalty to the mining companies conflicted with patients' needs. Eventually, physicians, courts, and legislatures prohibited the CPM in an effort to preserve physicians’ autonomy and improve patient care. Since that time, California has created a number of exemptions to the ban on the CPM. Where exemptions do not exist, physicians and hospitals work together without creating employment relationships.

Proposed Law:

• Authorizes the following entities that own or control a general acute care hospital to employ licensees and charge for professional services rendered by those licensees:
  • Local health care districts organized under the Local Health Care District Law, as specified in Health and Safety Code §32000.
  • A nonprofit corporation with a health care district as its sole corporate member, as specified in Welfare and Institutions Code §14169.31.
• Prohibits a health care district from interfering with, controlling, or otherwise directing the professional judgement of a physician and surgeon.

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SENATE COMMITTEE ON HEALTH

Senator Dr. Susan Talamantes Eggman, Chair

BILL NO: SB 784

SUBJECT: Health care districts: employment

SUMMARY:

Exempts health care district hospitals from the ban on the corporate practice on medicine, enabling these hospitals to directly employ physicians.

Existing law:

1. Prohibits, within the Medical Practice Act, corporations and other artificial legal entities from having any professional rights, privileges, or powers. However, permits the Medical Board of California (MBC), in its discretion, to grant approval of the employment of physicians on a salary basis by licensed charitable institutions, foundation, or clinics, if no charge for professional services rendered to patients is made by any such institution, foundation, or clinic. This is known as the ban on the corporate practice of medicine (CPM). [BPC §2400]
2. Establishes certain exemptions from the ban on the CPM, including the following:
   1. Clinics operated primarily for the purpose of medical education by a public or private nonprofit university medical school, are permitted to charge for professional services rendered to teaching patients by licensed physicians who hold academic appointments on the faculty of the university, if the charges are approved by the physician in whose name the charges are made; [BPC §2401(a)]
   2. Certain nonprofit clinics organized and operated exclusively for scientific and charitable purposes, that have been conducting research since before 1982, and that meet other specified requirements, are permitted to employ physicians and charge for professional services, but are prohibited from interfering with or directing a physician’s professional judgment; [BPC §2401(b)]
   3. A narcotic treatment program regulated by the Department of Alcohol and Drug Programs is permitted to employ physicians and charge for professional services rendered by those physicians, but is prohibited from interfering with or directing a physician’s professional judgment; [BPC §2401(c)]
   4. A hospital that is owned and operated by a licensed charitable organization that offers only pediatric subspecialty care, and that employed physicians prior to January 1, 2013, is permitted to charge for professional services, under certain specified conditions; and, [BPC §2401(d)]
   5. Although not in statute, existing case law establishes an exemption from the ban on the CPM for county hospitals to employ physicians.
3. Exempts from the ban on the CPM, until January 1, 2024, a federally certified critical access hospital (CAH), to enable CAHs to employ physicians, provided the medical staff concur by an affirmative vote that the licensee’s employment is in the best interest of the communities served by the hospital, and the hospital does not interfere with, control, or otherwise direct a physician’s judgment. [BPC §2401(e)]
4. Requires the Department of Health Care Access and Information (HCAI) to provide a report to the Legislature by July 1, 2023, containing data about the impact of the CPM exemption for CAHs as described in 3) above on CAHs ability to recruit and retain physicians. Requires CAHs that are employing physicians to submit data on to HCAI as specified. [BPC §2401(e)]
5. Establishes “The Local Health Care District Law,” under which a local hospital district may be organized, incorporated and managed. Permits a district to include incorporated or unincorporated territory, or both, in any one or more counties. Requires health care districts to be governed by an elected board of five members, who are required to live within the healthcare district. [HSC §32000 et seq., §32001, §32100]
6. Provides local health care districts with certain powers, including establishing and operating health facilities or other health care programs, and to establish and operate, or provide assistance in the operation of, free clinics, diagnostic and testing centers, health education programs, wellness and prevention programs, rehabilitation, aftercare, and any other health care services providers, groups, and organizations that are necessary for the maintenance of good physical and mental health in the communities served by the district. [HSC §32121]

This bill:

1. Exempts from the ban on the CPM a health care district, as defined, or a nonprofit corporation with a health care district as its sole corporate member, as defined, that owns or controls a general acute care hospital, in order to permit the health care district to employ physicians and charge for professional services rendered by those physicians.
2. Prohibits a health care district from interfering with, controlling, or otherwise directing the professional judgment of a physician.

FISCAL EFFECT:

This bill has not been analyzed by a fiscal committee.

COMMENTS:

1. Author’s statement. According to the author, California’s public district hospitals serve some of California's most diverse and underserved populations, and are the most local form of public hospital. But despite being the sole or closest source of healthcare for many families and seniors, district hospitals are the only public hospitals not allowed to directly employ physicians. This hurts their ability to provide services to their largely underserved patients, as district hospitals are either rural and struggle to recruit physicians or in urban areas where high costs of living make it difficult to recruit and retain physicians. Direct employment provides a way to compete in or with larger labor markets to offer physicians benefits that make working at a public hospital more attractive. Allowing physicians to choose direct employment is particularly attractive to doctors coming out of residency or who are relocating from other states where direct employment of physicians is more common, and who would prefer to receive a set salary, benefits, and hours while still having their clinical autonomy as physicians respected. Absent this change, district hospitals must continue to rely solely on contracting with physician groups or individual doctors, making it increasingly difficult to ensure they can provide essential care to those who need it most.
   
2. Background on the CPM and California Research Bureau (CRB) reports. The ban on the CPM has historically prevented corporations from practicing medicine, which includes the employment of physicians. From the late 1920s, California courts have staunchly protected the right of physicians to practice without being subject to potential interference by corporate employers. Since that time, California has created a number of exemptions to the ban on the CPM. Where exemptions do not exist, physicians and hospitals work together without creating employment relationships.
   
   In 2007, the CRB published a report examining the status of the ban on the CPM, and it argued that exemptions had created a doctrine whose “power and meaning are now inconsistent.”  The CRB also raised the idea that the many exemptions to the ban may “signal a change in public opinion.” The CRB report noted that although the CPM doctrine is generally not believed to be extremely detrimental, its present utility seems limited, as the evolution and erosion of the CPM prohibition over many decades has resulted in a doctrine that is far removed from its origin and lacks coherence and relevance in today’s health care landscape.  On April 12, 2016 the CRB released a new report, "The Corporate Practice of Medicine in a Changing Healthcare Environment," which reviewed the current status of the ban in California and key policy issues associated with it.  In the 2016 report, the CRB pointed out that there are a variety of issues within the healthcare environment that cause conflicts of interest, though not necessarily wrongdoing, within the healthcare field, including self-referrals for office services and physician-owned centers, reimbursement models and bonuses, and pharmaceutical promotions and drug samples, among others. With respect to physician autonomy, the CRB states that recent survey research indicates that physicians’ status as salaried employees in large organizations is not associated with decreased reports by physicians of freedom in making clinical decisions. The CRB notes that as discussions about the ban on the CPM continue, it is important that public policy discussions consider it within the context of conflicts of interest and autonomy in the modern healthcare environment.
3. Overview of health care districts. The Local Hospital District Law was established in 1945 to authorize special districts to build and operate hospitals and other health care facilities in underserved areas. Legislation in 1994 renamed it the Local Health Care District Law to reflect the fact health care was increasingly being provided outside of the hospital setting. Health care districts are a form of special district. Special districts are local governments that are legally separate from counties and cities, and they have the authority to build public works projects and run programs, and the power to impose taxes to raise funds to pay for these services. Special districts have the ability to enter into contracts, purchase property, exercise eminent domain, issue debt, and hire staff. Each health care district is governed by a locally elected five-member board of directors, and are subject to state policies and regulations as applied by each county’s Local Agency Formation Commission.
   
   There are currently 77 health care districts, and most of these were established in the first two decades following enactment of the Local Hospital District Law. Of these, 33 own and operate hospitals, while a handful of others own either the hospital or the land and lease the hospital to another entity to operate the hospital. The remainder operate ambulance services, clinics, skilled nursing facilities, or do not provide any direct health services. Most health care districts receive a share of local property taxes, which varies among districts. Some health care districts have received two-thirds approval to levy special “parcel taxes,” such as Alameda Health Care District, which was formed in 2002 when voters approved a $298 annual parcel tax to assume operation of Alameda Hospital. Health care districts can also generate revenues from other resources, including property lease income and interest earnings from investments, or by creating debt to borrow money for capital projects.
4. Limited pilot project for some district hospitals from 2004-2010. SB 376 (Chesbro, Chapter 411, Statutes of 2003) created a limited exemption from the CPM for some district hospitals. Under this pilot program, a district hospital that was located in a county with less than 750,000 people, that had net losses in a previous year, and that served a high proportion of Medi-Cal and Medicare patients, could directly employ up to two physicians for a maximum of four years, with the maximum number of employed physicians statewide capped at 20. The pilot program required a report from the MBC to be provided to the Legislature by October 1, 2008, and sunset the pilot project on January 1, 2011. According to the MBC’s report, unexpectedly, only six physicians were hired by five eligible hospitals during the years the pilot was operational. The MBC stated that such a low number would not offer a significant, quantifiable improvement in access to healthcare nor would such a low number offer much information to MBC in preparing a valid and useful analysis of the pilot. Only four of the six participating physicians, and three of the five participating hospitals, responded for requests for input. The MBC stated that there may be justification to extend the pilot so that a better evaluation of the direct employment of physicians could be made. While several bills sought to either extend or expand the pilot project, these bills did not pass and the pilot project expired.
5. Pilot project for Critical Access Hospitals. AB 2024 (Wood, Chapter 496, Statutes of 2016) created a new pilot project that allowed federal certified Critical Access Hospitals (CAHs) to employ physicians until January 1, 2024. CAHs are licensed general acute care hospitals that are certified to receive cost-based reimbursement from Medicare in order to reduce hospital closures in rural areas. To be certified as a CAH, a hospital can have no more than 25 beds, must be located in a rural area, and cannot be close to another hospital. There are 36 federally certified CAHs in California. Unlike the pilot program for district hospitals created by SB 376 in 2003, the CAH exemption did not limit the number of physicians that a CAH could employ, and there is no statewide cap. AB 2024 requires HCAI to provide a report to the Legislature, by July 1, 2023, on this pilot program and CAHs ability to recruit and retain physicians between January 1, 2017 and January 1, 2023. While this report has not yet been submitted, HCAI has provided data on the number of physicians hired under the pilot program so far. According to HCAI, of the 36 CAHs, 18 have hired at least one physician, for a total of 123 physicians employed by CAHs at some point during the pilot program. One hospital (Tahoe Forest Hospital District in Truckee) employed the most at 54 physicians. Mark Twain Medical Center in San Andreas hired 16 physicians, Healdsburg Hospital hired ten physicians, and Ridgecrest Regional Hospital hired six physicians, with most of the remaining hospitals hiring one to two physicians. AB 242 (Wood) has been introduced this year to make this pilot program permanent (see Related Legislation).
6. Overlap of district hospitals and CAHs. A number of CAHs are also district hospitals, and so some district hospitals are already permitted to hire physicians under the AB 2024 pilot project for CAHs, and if AB 242 is enacted, will continue to be able to employ physicians indefinitely. According to the Association of California Healthcare Districts, 17 of the 33 district hospitals are CAHs, so this bill would only affect the remaining 16 district hospitals that are not certified as a CAH.
7. Double referral. This bill was heard in the Senate Business, Professions and Economic Development Committee on April 17, 2023, and passed on a 12-0 vote.
8. Related legislation. AB 242 (Wood) deletes the sunset date on a provision of law exempting critical access hospitals from the ban on the CPM, thereby making this exemption permanent, and deletes reporting requirements related to this exemption. AB 242 passed the Assembly Floor by a vote of 79-0 on April 17, 2023.
9. Prior legislation. AB 2024 (Wood, Chapter 496, Statutes of 2016) established an exemption, until January 1, 2024, from the prohibition on the CPM in order to allow federally certified critical access hospitals to employ physicians and charge for those services.
   
   SB 1274 (Wolk, Chapter 793, Statutes of 2012), permits a hospital that is owned and operated by a charitable organization and offers only pediatric subspecialty care to begin billing health carriers for physician services rendered, notwithstanding the prohibition in the CPM if specified conditions are met.
   
   AB 648 (Chesbro of 2009) would have established a demonstration project to permit rural hospitals, as defined, whose service area includes a medically underserved or federally designated shortage area and which meet certain specified requirements, to directly employ physicians and surgeons. AB 648 failed passage in the Senate Business, Professions and Economic Development Committee.
   
   AB 646 (Swanson of 2009) would have permitted health care districts and certain public hospitals, independent community nonprofit hospitals, and clinics, as specified, to directly employ physicians and surgeons. AB 646 failed passage in the Senate Business, Professions and Economic Development Committee.
   
   SB 726 (Ashburn of 2009) would have revised and extended the MBC pilot project that allows qualified district hospitals, as defined, to employ a physician, if the hospital does not interfere with, control, or otherwise direct the professional judgment of the physician. SB 726 failed passage in the Senate Business, Professions and Economic Development Committee.
   
   AB 1944 (Swanson of 2008) would have allowed health care districts to employ a physician. AB 1944 failed passage in the Senate Committee on Health.
   
   SB 1294 (Ducheny of 2008) would have expanded the pilot project enabling health care districts to directly employ physicians. SB 1294 failed passage in the Assembly Appropriations Committee.
   
   SB 376 (Chesbro, Chapter 411, Statutes of 2003) authorized, until January 1, 2011, a hospital owned and operated by a health care district meeting specified criteria to employ a physician, and to charge for professional services rendered by the physician if the physician approves the charges.
10. Support. This bill is co-sponsored by the Association of California Healthcare Districts (ACHD) and El Camino Health. According to ACHD, district hospitals are the only public hospitals that are not able to directly employ physicians. Of the 33 district hospitals, 17 already have access to this tool through their critical access designation, but the other 16 district hospitals must rely on contracting with physician groups or individual doctors to provide care. ACHD states that California is one of only five states that still have the ban on the corporate practice of medicine, and this is a modest and equitable approach to ensuring public district hospitals can recruit and retain physicians. ACHD states that district hospitals do not have the resources of larger systems but must compete in the same markets, while serving the highest portion of Medi-Cal and Medicare patients. In particular, ACHD states this bill allows districts to attract specialty providers that otherwise may not reach their communities through physician groups, including OB/GYN, cardiologists and behavioral health doctors. Employment or similar models are extremely attractive to graduates coming out of residency, and allowing district hospitals the opportunity to offer set salaries, generous benefits and set schedules will make serving in public settings more attractive. El Camino Health, a health care district in Santa Clara County, states that it operates two hospitals in Mountain View and Los Gatos, as well as urgent care, multi-specialty care, and primary clinic locations. According to El Camino Health, the high living costs of the Bay Area make it more difficult to recruit and retain primary care and other physicians who are coming out of residency or who are relocating from other states where direct employment of physicians is more common, and that some of these physicians would prefer the stability of employment while still having their clinical autonomy. This bill is about giving public district hospitals an option that other public hospitals currently enjoy, and offering physicians another employment choice for those who prefer direct employment. Washington Township Health Care District, the California Hospital Association, and the District Hospital Leadership Forum also support this bill for similar reasons.
11. Opposition. The California Medical Association (CMA) writes in opposition that California’s corporate bar statutes was passed in 1980 to protect patients from corporate involvement or motives in critical decisions about their health and care. CMA states this protection is more important than ever as states begin to erode basic patient protections and companies bow to political pressures, such as to furnish abortion medications and services. According to CMA, care decisions should be made between the patient and the treating physician, and not by a chief financial officer or a hospital board of directors concerned about making a profit. CMA states this bill does away with those patient protections and creates a permanent exemption to the corporate bar by allowing a health care district to employ physicians in their hospitals. CMA states the “safeguards” in this bill are not strong enough to protect physicians from undue influence from a hospital that holds their privileges, credentials and ability to practice medicine. According to CMA, there are a number of methods hospitals, companies and other entities use to influence decisions other than “interference, control or direction” of a physician’s judgment, and these methods are difficult to prove and even harder to arbitrate in court. CMA states that the corporate bar stands as a bulwark against policies and political pressures that would reduce services to, or even hurt, patients and increase costs within the health care delivery system. With current attacks on abortion and gender affirming services and corporation acquiescing to political culture wars, it is more important than ever to defend patients’ ability to get the quality care they need and deserve without unnecessary interference from those with profiteering motives.

SUPPORT AND OPPOSITION:

Support: Association of California Healthcare Districts (co-sponsor)

El Camino Health (co-sponsor)
California Hospital Association
District Hospital Leadership Forum
Washington Township Health Care District

Oppose: California Medical Association

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SENATE COMMITTEE ON

BUSINESS, PROFESSIONS AND ECONOMIC DEVELOPMENT

Senator Richard Roth, Chair

2023 - 2024 Regular

Bill No: SB 784 Hearing Date: April 17, 2023

Subject: Health care districts: employment

SUMMARY:

Authorizes a health care district that owns or controls a general acute care hospital to employ physicians and charge for their services and prohibits a health care district from interfering with, controlling, or otherwise directing the professional judgment of a physician and surgeon.

NOTE:

This measure is double-referred to the Senate Committee on Health, second.

Existing law:

1. Provides for the licensure and regulation of physicians and surgeons by the MBC pursuant to the Medical Practice Act (Act). (Business and Professions Code (BPC) § 2000 et seq.)
2. States that corporations and other artificial legal entities shall have no professional rights, privileges, or powers. Provides that the MBC may in its discretion, and under regulations adopted by it, grant approval of the employment of licensees on a salary basis by licensed charitable institutions, foundations, or clinics, if no charge for professional services rendered patients is made by any such institution, foundation, or clinic. (BPC § 2400)
3. Establishes exceptions to the ban on the corporate practice of medicine (CPM), thereby allowing certain types of facilities to employ physicians, including:
   1. Clinics operated primarily for the purpose of medical education by a public or private nonprofit university medical school, to charge for professional services rendered to teaching patients by licensed physicians who hold academic appointments on the faculty of the university, if the charges are approved by the physician in whose name the charges are made;
   2. Certain nonprofit clinics organized and operated exclusively for scientific and charitable purposes, that have been conducting research since before 1982, and that meet other specified requirements, to employ physicians and charge for professional services. Prohibits, however, these clinics from interfering with, controlling, or otherwise directing a physician’s professional judgment in a manner prohibited by the CPM prohibition or any other provision of law;
   3. A narcotic treatment program regulated by the Department of Alcohol and Drug Programs to employ physicians and charge for professional services rendered by those physicians. Prohibits, however, the narcotic clinic from interfering with, controlling, or otherwise directing a physician’s professional judgment in a manner that is prohibited by the CPM prohibition or any other provision of law; and,
   4. A hospital that is owned and operated by a licensed charitable organization that offers only pediatric subspecialty care, as specified.
   5. A federally certified critical access care hospital, as specified. (BPC § 2401)
4. Establishes the following protections against retaliation for health care practitioners who advocate for appropriate health care for their patients pursuant to Wickline v. State of California (192 Cal. App. 3d 1630):
   1. It is the public policy of the State of California that a health care practitioner be encouraged to advocate for appropriate health care for his or her patients. For purposes of this section, “to advocate for appropriate health care” means to appeal a payer’s decision to deny payment for a service pursuant to the reasonable grievance or appeal procedure established by a medical group, independent practice association, preferred provider organization, foundation, hospital medical staff and governing body, or payer, or to protest a decision, policy, or practice that the health care practitioner, consistent with that degree of learning and skill ordinarily possessed by reputable health care practitioners with the same license or certification and practicing according to the applicable legal standard of care, reasonably believes impairs the health care practitioner’s ability to provide appropriate health care to his or her patients.
   2. The application and rendering by any individual, partnership, corporation, or other organization of a decision to terminate an employment or other contractual relationship with or otherwise penalize a health care practitioner principally for advocating for appropriate health care consistent with that degree of learning and skill ordinarily possessed by reputable health care practitioners with the same license or certification and practicing according to the applicable legal standard of care violates the public policy of this state.
   3. This law shall not be construed to prohibit a payer from making a determination not to pay for a particular medical treatment or service, or the services of a type of health care practitioner, or to prohibit a medical group, independent practice association, preferred provider organization, foundation, hospital medical staff, hospital governing body, or payer from enforcing reasonable peer review or utilization review protocols or determining whether a health care practitioner has complied with those protocols. (BPC § 510)
5. Under the Knox-Keene Health Care Service Plan Act of 1975, authorizes licensed health care service plans to employ or contract with health care professionals, including physicians, to deliver professional services, and requires health plans to demonstrate that medical decisions are rendered by qualified medical providers unhindered by fiscal and administrative management. Provides in regulation that the organization of a health plan must include separation of medical services from fiscal and administrative management. (Health and Safety Code §§ 1340 et seq.)

This bill authorizes a health care district that owns or controls a general acute care hospital to employ physicians and charge for their services and prohibits a health care district from interfering with, controlling, or otherwise directing the professional judgment of a physician and surgeon.

FISCAL EFFECT: Unknown. This bill is keyed fiscal by Legislative Counsel.

COMMENTS:

1. Purpose. This bill is sponsored by El Camino Health and the Association of Healthcare Districts. According to the Author, “The inability for public healthcare districts to directly employ physicians negatively affects their ability to provide services to their patients, which include some of California’s most underserved populations. Public district hospitals are either rural and struggle to recruit physicians, or in urban areas where high costs of living make it more difficult to recruit and retain physicians. Allowing a physician to choose a direct employment model provides additional security and stability as the income risk shifts to the district hospital as the employer. Absent this option, a physician’s income at a medical group is typically dependent on their billings, which can be stressful when relocating to an underserved or high cost of living area.”
2. Background. Prior to 1968, the common practice in California was that professional services could be provided only pursuant to a license and could not be rendered by a professional business organized as a corporation in California. Discussions began in the early 1960's to allow the formation of professional corporations, for a limited number of regulated professions, in order to provide those individuals with some of the same benefits that general corporations received including, tax benefits, health plan benefits, and reduction of personal liability exposure. However, a major underlying concern for the proponents of continuing the prohibition against the corporate practice of licensed professions was that lay shareholders and directors may not be bound by the same ethical standards that professional licensees are, and instead may focus on financial gains rather than consumer protection and professional standards.

A professional corporation is an organization made up of individuals of the same trade or profession. In 1968, the California Legislature enacted the Moscone-Knox Professional Corporation Act (Act), which established the requirements for the practice of professional services in corporate form. When the Act was passed in 1968, some personal service professions already had the legal authority to form corporations. Physicians, attorneys and dentists were not included, and were authorized to establish professional corporations at that time. By 1973, the Act had extended corporate practice to chiropractors, physical therapists, psychologists, optometrists, accountants, and shorthand reporters.

However, as noted in historical information provided by the California Research Bureau (CRB), at the time of the Act, the Department of Finance opposed the legislation, because other professions would want similar authorization, as the Act provided an economic benefit that "allows physicians, lawyers, and dentists to reduce their taxes in a manner that self-employed persons and wage-earners cannot."

Current law specifies which healing arts licensees may be shareholders, officers, directors or professional employees of professional corporations controlled, including by a differing profession so long as the sum of all shares owned by those licensed persons does not exceed 49 percent of the total number of shares of the professional corporation. Corporations Code Section 13401.5 authorizes the formation of various healing arts professional corporations and establishes which healing arts licensees who are not of the same license type as the corporation may be shareholders, officers, and directors of that corporation. Any person licensed under the BPC, the Chiropractic Act, or the Osteopathic Act may be employed by these professional corporations. Thus, the services of professional corporations are not limited to the named profession. For example, a nursing corporation may have a director who is a chiropractor, a shareholder who is an acupuncturist, and employ an accountant, podiatrist, and a marriage and family therapist, none of which would traditionally be seen as providing the professional services of nursing. Current law authorizes a medical corporation to have a number of health licensees as officers, directors, and shareholders.

License holders in a variety of other health professions can also serve as shareholders. Provisions of the Act requiring corporations to be owned by licensees are reflected in the various practice acts within the BPC that govern the licensure and regulation of a number of professions.

Ban on the Corporate Practice of Medicine (CPM). CPM is usually referred to in the context of a prohibition, banning hospitals from employing physicians. The ban on CPM evolved in the early 20th century when mining companies had to hire physicians directly to provide care for their employees in remote areas. However, problems arose when physicians' loyalty to the mining companies conflicted with patients' needs. Eventually, physicians, courts, and legislatures prohibited CPM in an effort to preserve physicians’ autonomy and improve patient care.

Over the years, various state and federal statutes have weakened the CPM prohibition. According to a 2007 California Research Bureau (CRB) report, “California’s CPM doctrine has been defined largely through lawsuits and Attorney General opinions over decades, and then riddled by HMO and other legislation; its power and meaning are now inconsistent…. Although some non-profit clinics may employ physicians, California applies the CPM doctrine to most other entities.... Teaching hospitals may employ physicians, but other hospitals, including most public and non-profit hospitals, may not employ physicians. Professional medical corporations are expressly permitted to engage in the practice of medicine, and may employ physicians. [However, t]hese medical corporations may operate on a for-profit basis, although the profit motive was one of the original rationales of the CPM prohibition.”

A 2016 CRB report notes that “since 2007, the provision of healthcare has undergone changes in California. The Affordable Care Act is responsible for an increase in insured patients across the state. In 2016-2017, 13.5 million Californians are expected to have enrolled in Medi-Cal, up from 7.9 million in 2012-2013, and 1.5 million people will be enrolled in Covered California at the end of 2015-2016. As a result, more insured patients than ever are accessing healthcare services without a commensurate increase in healthcare practitioners.” The report suggested assessing changing financial incentives; considering whether other methods of protecting physician autonomy are sufficient; increasing patient access to data about physician-hospital relationships and hospital metrics; determining whether the current alignment strategies used by physicians and hospitals are more costly than direct employment models; and collecting additional data to better understand the impact of CPM.

California is one of only a small handful of states remaining states that adhere to some form of the ban. The American Medical Association (AMA), historically the driving force behind the CPM prohibition, no longer views physician employment as a violation of medical ethics and has removed the doctrine from its ethical code.

SB 376 Pilot Program. In 2003, the Legislature established a pilot project to allow qualified hospital districts to directly employ physicians (SB 376, Chesbro, Chapter 411, Statutes of 2003). SB 376 was sponsored by the Association of California Healthcare Districts, the Sponsor of this bill, which argued that authorizing the employment of physicians could improve the ability of district hospitals to attract the physicians required to meet the needs of the communities and ensure the continued survival of district hospitals. As the 2016 CRB report notes, hospital districts were established in California in 1945 in an attempt to give rural, low income areas without ready access to hospital facilities a source of tax dollars that could be used to construct and operate community hospitals and healthcare institutions, and, in medically underserved areas, to recruit physicians and support their practices.

SB 376 allowed each hospital district to hire two physicians, for a total of 20 physicians throughout the state. To qualify for the pilot project, a hospital district was required to meet certain criteria, including population numbers and numbers of uninsured patients. During the pilot project, five participating hospital districts recruited and hired six physicians, whose employment contract periods ran three to four years.

SB 376 required MBC to report to the Legislature on the evaluation of the effectiveness of the pilot project in improving access to health care in rural and medically underserved areas and the project’s impact on consumer protection as it relates to intrusions into the practice of medicine. In the report, MBC estimated that a total of 20 physician participants were needed to conduct a valid analysis of the project. Only six physicians were hired by eligible hospitals. Further, MBC had difficulty gathering information from the participants on the success of the plan. Only three of the five participating hospitals and five of the six participating doctors responded to MBC’s inquires. MBC stated that it regrets the lack of participation in the project.

According to the report, MBC held discussions with numerous interested parties, even beyond those participating in the project and found widespread concern over the lack of physicians in rural areas. MBC stated that due to the “limited extent” of participation, it was unable to fully evaluate the project. In the report, MBC stated that it does not support the complete removal of the limitations on the corporate practice of medicine, but concluded that there may be justification to continue the project. MBC stated that it might be appropriate to expand the pilot project to allow more hospitals to participate; but until more information is available it does not recommend amending the statues that govern the corporate practice of medicine.

Efforts have been undertaken since 2003 to further address this issue and allow for direct employment, which is seen as having a number of benefits, including, but not limited to relief from administrative responsibilities, especially those relating to insurance billing; malpractice insurance; greater access and support for healthcare IT tools, facilities, and medical equipment; a predictable work week and; economic stability. The Legislature considered:

• AB 824 (Chesbro, 2011) which was similar language in AB 648 of 2009 below which would have extended the SB 376 pilot project to January 1, 2022. The bill failed passage in the Assembly Committee on Health.)
• AB 926 (Hayashi, 2011) would have reenacted SB 376 pilot project but would have allowed all qualified district hospitals to employ not more than 50 physicians and surgeons until January 1, 2022. The bill failed passage in the Assembly Committee on Business, Professions and Consumer Protection.
• AB 1360 (Swanson, 2011) would have authorized a new pilot project that allowed a healthcare district and a clinic owned or operated by a healthcare district to employ physicians and surgeons if the service area included a medically underserved area or a medically underserved population or had been federally designated as a health professional shortage area. The bill would have provided that a district could extend any employee contracts up to 10 years and would have required a study of the program’s effectiveness and a sunset date of January 1, 2022. The bill failed passage in the Assembly Committee on Health.
• SB 726 (Ashburn, 2009) would have extended the SB 376 pilot project to 2018 and would have revised the pilot to authorize the direct employment by qualified healthcare districts and qualified rural hospitals of an unlimited number of physicians and surgeons, and authorized such hospitals to employ up to five physicians and surgeons at a time with a term of contract not to exceed 10 years. The bill failed passage in this committee.
• AB 646 (Swanson, 2009) was almost identical to AB 1360. The bill failed passage in this committee.
• AB 648 (Chesbro, 2009) would have established a new pilot project that extended the scope of the first pilot and would have authorized a rural hospital to employ up to 10 physicians and surgeons at one time and to retain all or part of the income generated for medical services billed and collected, provided the physician and surgeon in whose name the charges are made approved the charges. The bill would have required a rural hospital to develop and implement a policy regarding the independent medical judgment of the physician and surgeon. This pilot would have expired January 1, 2020. The bill failed passage in this committee.
• SB 1294 (Ducheny, 2008) would have extended the SB 376 pilot project to January 1, 2017 and would have allowed district hospitals to hire an unlimited number of physicians and surgeons, subject to board approval. It would also have changed the definition of a qualified district hospital to a hospital that, among other things, is located in a medically underserved area or a rural hospital that had net losses in the most recent fiscal year. The bill failed passage in the Assembly Appropriations Committee.)
• SB 1640 (Ashburn, 2008) would have extended the SB 376 pilot project to January 1, 2016 and revised it to authorize “general acute care hospitals” in rural or underserved areas, to employ an unlimited number of physicians and surgeons and to charge for professional services rendered by those physicians. The bill failed passage in this committee
• AB 1944 (Swanson, 2008) would have eliminated the SB 376 pilot project and instead would have permanently authorized healthcare districts to employ physicians to primarily treat Medi-Cal patients and bill for the physicians’ services with their approval. It would have prohibited the hospital from interfering with the professional judgment of physicians and surgeons. The bill failed passage in the Senate Committee on Health.

In 2016, AB 2024 (Wood, Chapter 496, Statutes of 2016) authorized a federally certified critical access hospital (CAH) to employ physicians and charge for professional services rendered by those physicians. The measure also required CAHs to report certain information to the former Office of Statewide Health Planning and Development, now the Department of Health Care Access and Information (HCAI). HCAI is mandated to provide a report to the Legislature by July 1, 2023 containing data about the impact of employing licensees and charging professional services on CAHs, and their ability to recruit and retain physicians and surgeons between January 1, 2017, and January 1, 2023.

AB 242 (Wood, 2023) would permanently extend the authority for a CAH to employ physicians directly initially authorized by AB 2024.

1. Arguments in Support. The Association of California Healthcare Districts writes in and sponsorship and support: “SB 784 would in no way prevent or replace relationships with physician groups, but merely offer an additional option. In particular, the ability to employ physicians would allow these districts to attract specialty providers that otherwise may not reach their communities through physician groups, including, OBGYN, cardiologists and behavioral health doctors. Employment or similar models are extremely attractive to graduates coming out of residency. Allowing district hospitals the opportunity to offer set salaries, generous benefits and set schedules, will make serving in public settings more attractive.”

The California Hospital Association writes in support: “The California Hospital Association supports Senate Bill (SB) 784, which would help address the physician shortage by authorizing health care districts, as well as nonprofit corporations with a health care district as its sole corporate member, that own or control a general acute care hospital to directly employ physicians and surgeons. This concept has a successful track record. Assembly Bill 2024, passed in 2016, created a seven-year exemption to California’s ban on the corporate practice of medicine for the state’s 36 critical access hospitals, allowing many to successfully hire and retain physicians.”

District Hospital Leadership Forum writes in support: “SB 784 would allow district hospitals to employ physicians directly with clear guardrails preventing any interference with clinical judgement. This is a modest approach to ensuring public district hospitals can recruit and retain physicians. The ability to employ physicians would allow these districts to attract specialty providers that otherwise may not reach their communities through physician groups. Additionally, hiring physicians allows for a more integrated model of care ensuring physicians and the district hospital are on the same page relative to coordinating care for their shared patients.”

Washington Township Health Care District writes in support: “The ability to employ physician would allow these District hospitals to attract specialty providers that otherwise may not reach their communities through physician groups, including obstetricians/gynecologists, cardiologists and behavioral health specialists. Employment or similar models are extremely attractive to graduates coming out of residency. Allowing district hospitals the opportunity to offer set salaries, generous benefits and set schedules will make serving in public settings more attractive to these early-career physicians.”

1. Arguments in Opposition. The California Medical Association writes in opposition: “California’s Corporate Bar statute was passed in 1980 to protect patients from corporate involvement or motives in critical decisions about their health and care. This protection is more important than ever as states begin to erode basic patient protections and companies bow to political pressures, such as to furnish abortion medications and services. Care decisions should be made between the patient and the treating physician, not a Chief Financial Officer or a hospital Board of Directors concerned about making a profit.

SB 784 does away with those patient protections and creates a permanent exemption to the Corporate Bar by allowing a health care district to employ physicians in their hospitals. The exemption contained in the bill would subject patient care decisions to the whims and pressures of financial or political interests.

The “safeguards” in SB 784 are not strong enough to protect physicians from undue influence from a hospital that holds their privileges, credentials and ability to practice medicine. There are a significant number methods hospitals, companies and other entities use to influence patient care decisions than “interference, control or direction” of a professional’s judgement. These methods are difficult to prove and even harder to arbitrate in court.

The Corporate Bar stands as a bulwark against policies and political pressures that would reduce services to or even hurt patients and increase costs within the health care delivery system. With current attacks on abortion and gender affirming services and corporations acquiescing to political culture wars, it is more important than ever to defend patients’ ability to get the quality care they need and deserve without unnecessary interference from those with profiteering motives.”

SUPPORT AND OPPOSITION:

Support:

The Association of California Healthcare Districts
California Hospital Association
District Hospital Leadership Forum
Washington Township Health Care District

Opposition:

California Medical Association

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