Health Services Alert

July 24, 2015

Last month, the New York State Attorney General (“AG”) reached a settlement with Aspen Dental Management, Inc. (“ADMI”) after an investigation revealed that ADMI violated New York laws prohibiting the unauthorized practice of dentistry and dental hygiene, fee splitting and deceptive trade practices.  ADMI’s story is a cautionary tale to which investors and management companies doing business in New York State should pay heed, as it illustrates the risks associated with behavior that crosses the line separating legitimate medical management services from clinical care.

ADMI is a company that provides business support and administrative services to seven independently owned dental practices that maintain 40 offices in New York State.  The AG concluded, however, that ADMI did much more than provide “back-end and administrative support” to the dental practices.  The AG charged that ADMI essentially developed a chain of dental practices that, although nominally owned by individual dentists, were actually controlled to a large degree by ADMI and operated under the trade name “Aspen Dental.”

According to the AG, ADMI’s control was evidenced by circumstances including:

  • ADMI shared in dental office profits – 40% to 50% of the monthly gross profits of each dental practice office — and bonuses paid to office managers employed by ADMI also were calculated as a percentage of office’s profits;
  • ADMI marketed the dental practices under the “Aspen Dental” trade name and the ADMI website did not adequately differentiate between the independently owned dental practices and ADMI;
  • ADMI routinely made business decisions that directly impacted clinical care, including incentivizing and pressuring staff to increase sales of services and products, implementing patient scheduling systems designed to enhance revenue, and hiring and supervising clinical staff;
  • ADMI trained non-licensed office managers on ways to talk to patients about their treatment plans and assist them in choosing among treatment alternatives;
  • ADMI wielded undue influence over the finances of the dental clinics by controlling virtually all the bank accounts through one consolidated account to which even the dental practice owners did not have access;
  • ADMI imposed non-competition and non-solicitation agreements on the dental practices that prevented the practices from competing with any other dental practice affiliated with ADMI;
  • ADMI developed approximately 150 policies, guidance documents and forms that were used by or that concerned the operations of the dental practices, and that included clinical information and protocols.

The AG concluded that ADMI control was excessive, implicating statutory prohibitions against the unauthorized corporate practice of medicine.  In addition, the AG found that ADMI’s sharing of profits violated New York law prohibiting fee splitting, and created an incentive for ADMI to pressure staff in the dental offices to generate revenue.  The AG also concluded that ADMI’s marketing practices were deceptive because its use of the “Aspen Dental” trade name could mislead consumers into thinking that all Aspen Dental-branded offices were subject to common ownership and control by a central corporate office responsible for the care provided at each independently owned dental office.

Under the terms of the settlement, ADMI must pay a $450,000 civil penalty and retain an independent monitor to oversee the implementation of the settlement over a three-year period.  Other parts of the settlement include provisions:

  • prohibiting ADMI from exercising any control over dental practice clinical decision-making or communicating directly with clinical staff concerning the provision of dental care, sales of services or products to patients or the amount of revenue generated by services or products;
  • barring ADMI from employing any clinical staff or placing any limitations on how the dental practice owners practice dentistry;
  • prohibiting ADMI from receiving any compensation from the dental practice offices that is in any way dependent on the offices’ profits, revenues, deposits, or any other income or earnings or otherwise share in the offices’ fees for professional services rendered;
  • requiring ADMI to keep the dental practice offices’ finances separate from its own and allow the dental practices to have full and complete control over their own finances;
  • requiring ADMI to reform its marketing practices and make clear that ADMI provides only administrative and business support services to dental practices that are independently owned and operated by licensed dentists;
  • requiring ADMI to ensure that each dental practice posts its own legal name in a manner that is conspicuous to patients entering the practice;
  • requiring that ADMI provide copies of all written policies and related documents authored by ADMI that impact clinical and administrative operations and that are made available to patients or govern staff to the practice owners for their independent review, revision, approval or disapproval.

New York State is known for having one of the most restrictive corporate practice of medicine and fee splitting rules in the Union.  N.Y. Educ. Law §6522, which prohibits the unlicensed practice of medicine, is the foundation of the corporate practice of Medicine doctrine in New York.  The first case addressing the corporate practice of medicine restrictions in New York was People v. Woodbury Dermatological Inst., 192 N.Y. 454, 85 N.E. 697 (N.Y. 1908), which stands for the proposition that a corporation may not practice medicine without express legislative authority.   Similarly, in Stern v. Flynn, 154 Misc. 609, 278 N.Y.S. 598 (N.Y. Sup. Ct. 1935), the court held that a corporation may not practice optometry.  In State v. Abortion Information Agency, Inc., 69 Misc. 2d 825, 323 N.Y.S.2d 597 (N.Y. Sup. Ct. 1971), aff’d, 37 A.D.2d 142 , aff’d, 30 N.Y.2d 779 (1972), the court held that an abortion referral agency which hired and paid doctors to perform abortions violated public policy prohibiting a corporation from practicing medicine by hiring doctors.  However, in Albany Medical College v. McShane, 66 N.Y.2d 982, 489 N.E.2d 1278, 499 N.Y.S.2d 376 (1985), the court concluded that a medical college could share in fees generated by physicians who are faculty members because the college had a corporate charter empowering it to promote medical science and instruction, its treatment of patients did not constitute the illegal corporate practice of medicine or illegal fee splitting.

The case of ADMI should be viewed as a warning to other medical management companies which are either contemplating or already operating under business arrangements with clinical practice groups in New York State.  There are legal limits to the control such companies may exercise over the daily operations of such practices, the kinds of compensation arrangements that may be struck, and the manner in which the management companies market their services.  New York laws prohibiting the unauthorized corporate practice of medicine, fee splitting and deceptive trade practices can create significant regulatory risk for such companies if the business structures under which they operate are not designed appropriately.

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