FAQs about Ownership of Medical Corporations

Who in California can own a medical corporation?

As specified in the California Business and Professional Code, the following people may be the shareholders, officers, directors, or professional employees of a medical corporation:

• Licensed doctors of podiatric medicine;
• Licensed psychologists;
• Registered nurses;
• Licensed optometrists;
• Licensed marriage and family therapists;
• Licensed clinical social workers;
• Licensed physician assistants;
• Licensed chiropractors;
• Licensed acupuncturists;
• Naturopathic doctors.

The California Medical Board and California Codes state that an unlicensed person cannot own any shares of a medical corporation. At least 51% of the shares must be owned by a licensed physician and surgeon. The remaining 49% can be owned by the individuals specified above.

What is a Medical Practice?

Since no corporation but a Medical or Professional Corporation can run a medical practice, it is important to understand the definition and scope of that under the law.  According to the California Business and Professional Code, section 2051, the practice of medicine is defined as the:

“use of drugs or devices in or upon human beings and to sever or penetrate the tissues of human beings and to use any and all methods in the treatment of diseases, injuries, deformities, and other physical and mental conditions.”

This is further supplemented by the various sections of the Business and Professions Code, and other California Laws, which delineate the scope of practice for each of the licensees listed above.

Are there any Federal Restrictions?  What is the Stark Law?

What is often called the Stark law is comprised of three separate provisions that regulate physician self-referral to Medicare and Medicaid patients because of the possible conflict of interest. This often limits physicians’ ownership of health care companies, because they cannot refer from their own medical practice.

For example, Physicians may not refer patients to any medical facilities in which they have financial interest including ownership, investment, and a structured compensation arrangement. A physician’s self-referral could possibly encourage over-utilization of services which would increase health care costs. Self-referral could also cause a captive referral system which would limit competition from other providers.

Physicians are also banned from referring patients to immediate family members who include spouses, parents, grandparents, children, grandchildren, brothers, sisters, mothers-in-law, fathers-in-law, brothers-in-law, sisters-in-law, daughters-in-law, sons-in-law, and also adopted and step members of their families. Referring to an immediate family member would also be another conflict of interest. There is no stated regulation in the Stark law against referring to more distant relatives. The physician referring to the distant relative however, still may not have any financial interest or gain from the referral.

What is the History of the Stark Law?

• Stark I- Congress included provisions in the Omnibus Budget Act of 1989 (OBRA 1989) which barred self-referrals for clinical laboratory services under the Medicare program effective January 1, 1992. This provision also included a series of exceptions to the ban in order to accommodate legitimate business arrangements.
• Stark II- (OBRA 1993) expanded restriction to a range of additional health services and applied it to Medicare and Medicaid. This provision also contained some clarifications and modifications to the original law. The Social Security Amendments of 1994 also contained minor technical corrections to these provisions.
• Phase III- The final rule was published on September 5, 2007 and it became effective December 4, 2007. This contains two major changes which are the repeal of the prohibitions based on compensation arrangements and the reduction in the list of services subject to the ban.