Will the (Medical) Foundations Hold?

Nossaman Health Law Ticker

Nearly two decades ago, the plucky Palo Alto Medical Clinic won legislation in California that enabled it to align more closely its interests and those of its practicing doctors.   It midwived the creation of "medical foundations", through the passage of what became Health & Safety Code Section 1206(l).    It is a terse, tightly packed one-sentence provision that exempts from state licensure as a "clinic":

A clinic operated by a nonprofit corporation exempt from federal income taxation under paragraph (3) of subsection (c) of Section 501 of the Internal Revenue Code of 1954 ……that conducts medical research and health education and provides health care to its patients through a group of 40 or more physicians and surgeons, who are independent contractors representing not less than 10 board-certified specialties, and not less than two-thirds of whom practice on a full-time basis at the clinic.

Pretty pithy stuff, but it has been the font of that distinctly California phenomenon, the medical foundation.  Foundations have gradually emerged over the ensuing years as a robust alternative for some hospitals, health systems and medical groups seeking a closer and more interdependent modus vivendi in the environment of California's prohibition on the "corporate practice of medicine" (Business & Professions Code Sections 2052, 2400).  Simplistically put, in a typical structure a hospital or medical center is the sole corporate "member" of the foundation, which in turn contracts with one or more medical groups to provide services at the hospital, sometimes even acquiring the assets of the medical group(s).   Operationalizing this construct is of course enormously challenging, but it can be an effective mechanism for the delivery of quality, cost-contained care.

Such prestigious non-profit entities as the Sutter Health System, Cedars Sinai Medical Center, Catholic Healthcare West, Children's Hospital Oakland, Scripps Health and others have established or collaborated with foundations as their approach to the integrated "delivery" of healthcare.  The foundation movement has generally been institution-specific or geographically limited.  

The California Medical Association (CMA), focused on individual doctors, has long groused from the sidelines that foundations are merely a gimmick to evade the California prohibition on the corporate practice of medicine, a charge it has leveled for years also against HMO's.   The California Association of Practice Groups (CAPG), representing doctors in groups, has been more benign towards foundations.

But with the exploding costs of healthcare the attractiveness of the medical foundation model to align interests of quality, affordability and accessibility has grown rapidly.    It is even in current vogue touted as a form of "accountable care organization."   However, the yeast is rising.  A bitter struggle at the venerable City of Hope in Duarte, CA. over the establishment of a foundation has spilled over into passionate litigation.  The Hospital Association of Southern California is proposing a "master medical foundation" to be established by numerous hospitals that would contract with numerous medical groups.  That departure of scale has caught the curious eye of no less a purveyor of the scene than The Wall Street Journal.   The same consultant/law firm combo that promoted the SoCal master foundation is currently advancing the notion in Northern and Central California.   Stanford medical entities are reportedly developing a foundation for non-academic physicians.

A medical-political question will be whether the CMA will stay on the sidelines and behold in grim awe this sudden spurt of foundations, on such a scale, or whether it will finally take up the cudgels in the Legislature or the courts to defend the ban on the corporate practice of medicine.    A core interpretive divination will be whether H&S 1206(l) encompasses "master medical foundations."   Lawyers and public policy makers will ruminate about the efficacy of the issue coming to be masticated by the courts.

The current campaign to form huge "master medical foundations", albeit in the good name of cost-containment, may prove to be what mother warned us about: "too much of a good thing."

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