IN THE
SUPREME COURT OF ILLINOIS
RICHARD B. BERLIN, JR., M.D.,
Plaintiff-Respondent,
vs.
SARAH BUSH LINCOLN HEALTH CENTER,
Defendant-petitioner.


Brief Amicus Curiae of the American Hospital Association
in Support of Petition for the Leave to Appeal from the Appellate Court
of Illinois, Fourth District, No. 4-95-0569. There Heard
on appeal from the Circuit Court of the Fifth
Judicial Circuit, Coles County, Illinois, No. 95-MR-7.
The Honorable Dale A. Cini, Judge Presiding.

AMICUS CURIAE BRIEF OF THE
AMERICAN HOSPITAL ASSOCIATION
IN SUPPORT OF
SARAH BUSH LINCOLN HEALTH CENTER'S
PETITION FOR LEAVE TO APPEAL

Fredric J. Entin
James A. Henderson
Tracey L. Fletcher
American Hospital Association
1 North Franklin
Chicago, Illinois 60606
(312) 422-2777
Attorneys for the American Hospital Association

POINTS AND AUTHORITIES
Page
INTEREST OF AMICUS CURIAE................................................................................. 1
ARGUMENT................................................................................................................... 1
I. THE CORPORATE PRACTICE DOCTRINE NO LONGER SERVES THE
PURPOSE FOR WHICH IT WAS ADOPTED..................................................... 1
Dr. Allison, Dentist v. Allison, 300 Ill. 638; 196 N.E. 799, 800 (1935).................. 2
James v. Commissioner, 25 T.C. 1296 (1956)....................................................... 3
Jeffrey F. Chase-Lubitz, Note, The Corporate Practice of Medicine Doctrine:
An Anachronism in the Modern Health Care Industry, 40 Vand. L. Rev. 445
(1987)................................................................................................................... 2, 3, 4
Michael A. Dowell, The Corporate Practice of Medicine Prohibition: A
Dinosaur Awaiting Extinction, 27 J. Health & Hosp. L. (1994)............................. 4
Jerry A. Bell, Jr. and Cyndi M. Jewell, The Corporate Practice of Medicine
Prohibition: Past, Present, and Future, in Health Care Mergers and
Acquisitions 161, 166 (ABA Health Law Forum 1995)......................................... 2
John Wiorek, The Corporate Practice of Medicine Doctrine: An
Outmoded Theory in Need of Modification, 8 J. Legal Med.465 (1987)................ 4
II. THE CORPORATE PRACTICE OF MEDICINE DOCTRINE IS
INCONSISTENT WITH TRENDS IN THE MARKETPLACE........................... 4
American Academy of Hospital Attorneys, Hospital-Affiliated
Integrated Delivery Systems: Formation, Operation, and Contracts
Handbook 2 (1995).............................................................................................. 5, 6
Physicians Earning Less, Moving Toward Employed Positions,
AMA Survey Finds, BNA Health Care Daily, January 4, 1996.............................. 4
Michael A. Dowell, The Corporate Practice of Medicine Prohibition: A
Dinosaur Awaiting Extinction, 27 J. Health & Hosp. L. (1994)............................. 6
American Hospital Association, Hospital Statistics, vii (1994-95 Ed.)................... 5
American Hospital Association, Health Care Fact File, 3A (Nov. 1995)................ 5
III. THE CORPORATE PRACTICE OF MEDICINE IS CONTRARY TO
TRENDS IN FEDERAL LAW............................................................................. 6
42 U.S.C.§ 1320a-7b(b)....................................................................................... 7
42 U.S.C. § 1395nn.............................................................................................. 7, 8
In re: American Medical Ass'n, 94 F.T.C. 701 (1979), aff'd 455 U.S.
676 (1982)........................................................................................................... 10
California State Bd. of Optometry v. Federal Trade Commission, 910 F.2d
976 (D.C. Cir. 1990) reh'g denied 924 F.2d 243 (D.C. Cir. 1991)......................... 9
42 C.F.R. § 1001.952(d)....................................................................................... 7
54 Fed. Reg. 10285 (March 13, 1989).................................................................. 9, 10
57 Fed. Reg. 18822 (May 1, 1992)....................................................................... 9
Tech. Adv. Mem. 9535001 (Mar. 14, 1995)......................................................... 8
Tech. Adv. Mem. 9535002 (Mar. 29, 1995)......................................................... 8
Daniel Oliver, Remarks before the National Health Lawyers Association
(Jan. 29, 1987) in Health Care & Antitrust Law, App.E2...................................... 9
S. 1757, 103rd Cong., 1st Sess. § 1407 (1993)..................................................... 10
H.R. 1912, 104th Congress, 1st. Sess. (1995)....................................................... 10
Michael A. Dowell, The Corporate Practice of Medicine Prohibition: A
Dinosaur Awaiting Extinction, 27 J. Health & Hosp. L. 369 (1994)...................... 10


BRIEF AMICUS CURIAE OF THE AMERICAN HOSPITAL ASSOCIATION
IN SUPPORT OF DEFENDANT'S PETITION FOR LEAVE TO APPEAL

INTEREST OF AMICUS CURIAE


Amicus curiae American Hospital Association ("AHA") is an Illinois nonprofit corporation. Founded in 1898, the AHA is the primary organization of hospitals and health systems in the United States. Its membership includes 5,000 hospitals, health care systems, networks, and other providers of care. Most Illinois hospitals are members of the AHA.
The AHA's corporate mission is to advance the health of individuals and communities. The AHA leads, represents, and serves health care provider organizations that are accountable to the community and committed to health improvement. To fulfill this mission, the AHA regularly participates in the judicial and legislative arenas to address important health care issues. The AHA's members believe that the option to employ physicians has been, and will continue to be, essential to the delivery of health care in Illinois and across the nation.

The Appellate Court's decision will have ramifications far beyond the plaintiff's and defendant's relationship. By prohibiting employment of physicians, the decision below will stifle innovative delivery systems and create costly inefficiencies. It is also contrary to trends in both the marketplace and federal law. Accordingly, the AHA asks this Court to review the lower court's opinion and abolish the judicially-created bar on the corporate practice of medicine.

ARGUMENT

I. THE CORPORATE PRACTICE DOCTRINE NO LONGER SERVES THE PURPOSE FOR WHICH IT WAS ADOPTED

Few state statutes expressly bar the corporate practice of medicine. Instead, in the early part of this century, some state courts interpreted medical licensure statutes to prohibit corporations from practicing medicine or employing physicians to practice on their staffs. Although these decisions were grounded in state licensing laws, their primary impetus was public policy. The policy concerns most frequently articulated by the courts include:

  • lay control over the physician's professional judgment; 
  • commercialization of medical practice;
  • division of the physician's loyalty between patient and employer; and

destruction of patients' faith in their doctors. Jerry A. Bell, Jr. and Cyndi M. Jewell, The Corporate Practice of Medicine Prohibition: Past, Present and Future, in Health Care Mergers and Acquisitions 161, 166 (ABA Health Law Forum 1995)("Bell and Jewell"). In 1935, this Court cited some of these concerns in establishing Illinois' corporate practice doctrine:

To practice a profession requires something more than the financial ability to hire competent persons to do the actual work. It can be done only by a duly qualified human being, and to qualify something more than mere knowledge or skill is essential. The qualifications include personal characteristics, such as honesty, guided by an upright conscience and a sense of loyalty to clients or patients, even to the extent of sacrificing pecuniary profit. These requirements are spoken of generically as that good moral character which is a pre-requisite to the licensing of any professional man. No corporation can qualify. It can have neither honesty nor conscience, and its loyalty must, in the very nature of its being, be yielded to its managing officers, its directors and its stockholders. Its employees must owe their first allegiance to their corporate employer and cannot give the patient anything better than a secondary or divided loyalty. Dr. Allison, Dentist v. Allison, 300 Ill. 638; 196 N.E. 799, 800 (1935).

The primary purpose of the corporate practice prohibition, therefore, was to protect against interference in the doctor-patient relationship. In today's medical marketplace, however, barring corporate practice no longer makes sense. The policy concerns that generated the doctrine may have been valid at a time when physicians were struggling to distance themselves from "irregular" practitioners and to gain respect and prestige for the practice of medicine. The corporate practice of medicine was distrusted because it seemed similar to the blatant commercialism practiced by medical charlatans. Jeffrey F. Chase-Lubitz, Note, The Corporate Practice of Medicine Doctrine: An Anachronism in the Modern Health Care Industry, 40 Vand. L. Rev. 445, 448-64 (1987)("Chase-Lubitz"). Organized medicine viewed corporate practice suspiciously because it "threatened physicians' status, financial security, and professional autonomy." Id. at 463.
Today, there are numerous restraints on physicians' professional autonomy, including utilization review and quality assurance processes, clinical guidelines, and prior authorization requirements. Perhaps most significant has been the introduction of new reimbursement mechanisms, such as capitation, that provide strong financial incentives to limit utilization. These and similar practices, if appropriately used, can result in the delivery of high quality care at lower prices. These "restraints," much more than employment status, have had a significant impact on how physicians practice medicine.

Clinical decisions, however, should be made by clinicians--not administrators, managers, or business personnel. Physician employment does not compromise this objective. For example, in James v. Commissioner, 25 T.C. 1296 (1956), the Tax Court held that, for tax purposes, a physician was employed by a hospital even though the hospital exercised very little, if any, control over the manner in which he performed his services. The Court noted:

The methods by which professional men work are prescribed by the techniques and standards of their professions. No layman should dictate to a lawyer how to try a case or to a doctor how to diagnose a disease. Therefore, the control of an employer over the manner in which professional employees shall conduct the duties of their positions must necessarily be more tenuous and general than the control over the nonprofessional employees. Yet, despite this absence of direct control over the manner in which professional men shall conduct their professional activities, it cannot be doubted that many professional men are employees. Id. at 1301.

Employed physicians do not relinquish control over clinical decisions to their employers.

Physicians, hospitals, payors, and regulators all have a responsibility to ensure that patients receive appropriate care. Prohibiting Illinois hospitals from employing physicians will do nothing to further this goal. Prior to the Appellate Court's decision in this case, "only five states--California, Colorado, Iowa, Ohio, and Texas--clearly prohibit[ed] hospitals from employing physicians." Bell and Jewell at 181. Illinois has now become the sixth. It is absurd to suggest that health care in the remaining 44 states is somehow deficient.

The corporate practice of medicine doctrine no longer protects any significant public interest. For this reason, legal commentators have labeled the doctrine an "anachronism," a "dinosaur awaiting extinction," and an "outmoded theory." Chase-Lubitz at 445; Michael A. Dowell, The Corporate Practice of Medicine Prohibition: A Dinosaur Awaiting Extinction, 27 J. Health & Hosp. L. 369 (1994)("Dowell"); John Wiorek, The Corporate Practice of Medicine Doctrine: An Outmoded Theory in Need of Modification, 8 J. Legal Med. 465 (1987).

II. THE CORPORATE PRACTICE OF MEDICINE DOCTRINE IS INCONSISTENT WITH TRENDS IN THE MARKETPLACE

With increasing frequency, physicians are seeking employed positions, both in Illinois and across the country. A recent survey of 4,000 physicians by the American Medical Association's Center for Health Policy Research found that 39 percent were employees in 1994, up from 36 percent a year earlier. During the same period, the ranks of the self-employed physicians dropped from 58 percent to 55 percent. Physicians Earning Less, Moving Toward Employed Positions, AMA Survey Finds, BNA Health Care Daily, January 4, 1996.

Data from AHA's Annual Survey of Hospitals are consistent with the AMA study. These data indicate that community hospitals across the country employed 52,250 Full-time Equivalent (FTE) physicians and dentists in 1994, up 17 percent over 1993, when 44,682 physician and dentist FTEs were employed, and up 90%, from 27,494, a decade earlier. The same data reveal even more dramatic changes in Illinois. In one year, between 1993 and 1994, the number of physician and dentist FTEs employed by Illinois community hospitals rose over 32 percent, from 2,558 to 3,385. These figures are all the more remarkable because they do not include the many physicians employed by non-community hospitals or other health care organizations, and because they run counter to general employment trends at community hospitals. For instance, from January to June 1995, total FTEs at community hospitals declined 1.7 percent. American Hospital Association, Health Care Fact File, 3A (Nov. 1995).

The growing numbers of employed physicians reflect a larger trend in health care--the movement toward integrated care. Integrated delivery systems ("IDS") do not follow any single organizational model. One source has defined an IDS as "any organization or system of relationships among providers that involves the coordinated delivery of health care by hospitals, physicians and other providers. The system may, or may not, include a financing or insurance component." American Academy of Hospital Attorneys, Hospital-Affiliated Integrated Delivery Systems: Formation, Operation, and Contracts Handbook 2 (1995)("AAHA Guide").

In states with the corporate practice of medicine doctrine, "the doctrine may pose a major hurdle in the formation of an IDS." AAHA Guide at 181. In most states, depending on the extent of the corporate practice prohibition, the doctrine is not an insurmountable obstacle. In fact, health care attorneys have spent much time and effort inventing elaborate legal structures and relationships that enable providers to "get around" the doctrine. See, e.g., Dowell at 371-72; AAHA Guide at 183-86. However, maintaining these legal fictions for the sole purpose of circumventing the doctrine's prohibitions is expensive and wasteful.

Not only are the present variations in the doctrine difficult to keep track of and comply with, but they are also costly. In those states that require a separate legal entity to house the medical component of an IDS, the additional costs associated with creating and maintaining the additional administrative layer are certainly passed on to consumers, increasing the cost of health care services. AAHA Guide at 187.

The money and administrative effort spent avoiding the corporate practice doctrine would be better spent delivering care to patients. At a time when health care resources are becoming strained, and private and government payors are demanding greater value for the funds they pay, it is foolish to a perpetuate a doctrine that adds cost without any corresponding improvement in quality.

III. THE CORPORATE PRACTICE OF MEDICINE IS CONTRARY TO TRENDS IN FEDERAL LAW

Federal laws governing Medicare fraud, physician self-referrals, and income tax withholding all accommodate, and sometimes encourage, the employment of physicians by hospitals. The Federal Trade Commission, which enforces antitrust and trade regulation laws, goes even farther, and actively discourages corporate practice prohibitions.

Fraud and Abuse
Section 1128B(b) of the Social Security Act (commonly referred to as the "Fraud and Abuse" statute) provides for the imposition of criminal penalties on persons found guilty of paying or accepting "illegal remunerations." The Statute applies to anyone who solicits, receives, offers, or pays any remuneration, directly or indirectly, overtly or covertly, in return for or to induce referrals for the furnishing or arranging the furnishing of any item or service for which payment might be made by Medicare or a State health care program. 42 U.S.C.§ 1320a-7b(b). Because this prohibition is so broad, and would encompass many legitimate arrangements, Congress provided statutory exceptions for certain relationships that by their nature are unlikely to be abusive, including:

...any amount paid by an employer to an employee (who has a bona fide employment relationship with such employer) for employment in the provision of covered items or services. 42 U.S.C. § 1320a-7b(b)(3).
The "Safe Harbor" regulations promulgated pursuant to the Fraud and Abuse statute by the Department of Health and Human Services, Office of the Inspector General (OIG), contain a similar exception. 42 C.F.R. § 1001.952(d).

Physician Self-referrals

Concerned that physicians were ordering unnecessary ancillary tests and services from entities in which they had a financial interest, Congress enacted Section 1877 of the Social Security Act (the "Stark" statute). 42 U.S.C. § 1395nn. The Stark statute prohibits a physician from making referrals to certain entities if the physician or an immediate family member has an ownership or investment interest in or a compensation arrangement with the entities. Stark originally applied to clinical laboratory services, but was later expanded to apply to ten other "designated health services," including physical and occupational therapy, radiology, radiation therapy, durable medical equipment and supplies, home health services, outpatient prescription drugs, and inpatient and outpatient hospital services. 42 U.S.C. § 1395nn(h)(6).
Stark provides a statutory exception for employed physicians. As long as specified criteria are met, the statute excludes from the definition of a compensation arrangement, "[a]ny amount paid by an employer to a physician (or an immediate family member of such physician) who has a bona fide employment relationship with the employer for the provision of services..." 42 U.S.C. §1395nn(e)(2). Like the Fraud and Abuse Statute, the Stark statute clearly accommodates the employment of physicians by corporate entities such as hospitals.

Tax Law

The Internal Revenue Service has ruled that some physicians previously considered independent contractors must be reclassified as employees for purposes of the Federal Insurance Contributions Act (FICA) and federal income tax withholding. In 1995, the IRS ruled that physicians who interpreted EKGs for a hospital on an irregular but recurring basis were employees, not independent contractors, despite the hospital's lack of control over the physicians' clinical decisions. Tech. Adv. Mem. 9535001 (Mar. 14, 1995); Tech. Adv. Mem. 9535002 (Mar. 29, 1995). The IRS reached this conclusion, in part, because the EKG interpretations were an integral part of the hospital's services and because the physicians did not have a financial investment in the venture--they were compensated on a fixed-fee basis regardless of the amount collected by the hospital. Id. The IRS' expansive interpretation of tax law, therefore, has resulted in hospitals classifying certain physicians as employees, even when the hospital considers the physician to be an independent contractor.

Antitrust and Trade Regulation

The Federal Trade Commission ("Commission") not only recognizes the legitimacy of employing physicians, it has suggested that the corporate practice doctrine violates federal antitrust and trade regulation laws.
In 1987, then Chairman Daniel Oliver noted that:

[a] harmful effect of government regulation in health care has been to retard innovation in furnishing health services and products. The Commission will continue to oppose health care regulations likely to injure health care consumers by stifling innovative forms of competition.... You can expect us to scrutinize closely ... state regulations that frustrate the competitive impulses of the creative health care entrepreneur. Daniel Oliver, Remarks before the National Health Lawyers Association (Jan. 29, 1987) reprinted in Health Care & Antitrust Law App.E2, App. E2-8, 9.

Two years later, the Commission directly challenged as an unfair trade practice state laws prohibiting the corporate practice of optometry. On March 13, 1989, the Commission promulgated a final trade regulation rule removing restraints imposed by state law on certain forms of commercial ophthalmic practice, including restrictions on employment of optometrists by business corporations or non-optometrists. 54 Fed. Reg. 10285 (Mar. 13, 1989).

Although the rules were later withdrawn after a federal appeals court found that the Commission lacked statutory authority to regulate the sovereign acts of the States, see California State Bd. of Optometry v. Federal Trade Commission, 910 F.2d 976 (D.C. Cir. 1990) reh'g denied 924 F.2d 243 (D.C. Cir. 1991); 57 Fed. Reg. 18822 (May 1, 1992), the Commission had compelling reasons for challenging the state laws. In the preamble to the rule, the Commission noted that the results of two empirical studies indicated that the state restrictions raised prices to consumers, reduced the frequency with which consumers obtained vision care, and did not provide any offsetting quality-related consumer benefits. 54 Fed. Reg. 10285, 10286 (Mar. 13, 1989).

The Commission had been more successful challenging ethical prohibitions against the corporate practice of medicine. In 1979, the Commission required the American Medical Association to cease enforcing an ethical principle that had been interpreted to prohibit physicians from working for corporations owned or managed by non-physicians. In re: American Medical Ass'n, 94 F.T.C. 701 (1979), aff'd 455 U.S. 676 (1982). The AMA later revised the ethical principle to state that "a physician shall ... be free to choose whom to serve, with whom to associate, and the environment in which to provide medical services." Dowell at 370, quoting American Medical Association, Revised Principles of Medical Ethics, § 6 (1980).

Proposed Health Reform Legislation

The Federal Trade Commission is not alone in questioning the wisdom of state laws barring the corporate practice of medicine. Over the past several years, many health reform bills have explicitly preempted state laws prohibiting the corporate practice of medicine. See, e.g., President Clinton's Health Security Act, S. 1757, 103rd Cong., 1st Sess § 1407 (1993); Rep. Stark's H.R. 1912, 104th Congress, 1st. Sess. (1995).

Congress and federal agencies have long recognized that hospitals and other corporate entities can and should legitimately employ physicians. Some federal legislators have recognized the threat posed by the corporate practice doctrine, and have proposed its abolition. In this state, the judicially created doctrine has long outlived its utility. Instead of protecting patients, it will make the delivery of health care less efficient and more costly. The Appellate Court's resurrection of the corporate practice doctrine will adversely affect Illinois hospitals, doctors, and patients. For these reasons, the American Hospital Association respectfully urges this Court to grant Sarah Bush Lincoln Medical Center's Petition for Leave to Appeal.

Respectfully submitted,

Fredric J. Entin
One of the attorneys for
Amicus Curiae
American Hospital Association

May 17, 1996 Fredric J. Entin
James A. Henderson
Tracey L. Fletcher
AMERICAN HOSPITAL ASSOCIATION
1 North Franklin
Chicago, Illinois 60606
(312) 422-2777

 

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