Group Practice Formation in Illinois

Transcription

1 ROBBINS, SALOMON & PATT, LTD. Group Practice Formation in Illinois 25 E. Washington Suite 1000 Chicago, Illinois Phone (312) Fax (312) Chestnut Ave. Suite 101 Glenview, Illinois Phone (847) Fax (847)

2 GROUP PRACTICE FORMATION IN ILLINOIS ABOUT THE AUTHORS Andrés J. Gallegos, Esq., is a corporate and healthcare partner at Robbins, Salomon & Patt, Ltd. Mr. Gallegos serves as corporate counsel and advisor to a number of corporations and healthcare providers and provider groups throughout the United States. Mr. Gallegos regularly counsels healthcare clients on group formation, physician and professional employment matters, governance issues, shareholder matters, physician joint ventures, market expansion, Stark Law, Antikickback Statute, HIPAA and antitrust compliance, acquisitions, and billing and Medicare and Medicaid reimbursement matters. Mr. Gallegos can be reached at (312) or at agallegos@rsplaw.com. Tracey A. Salinski, Esq., is a corporate and healthcare senior associate at Robbins, Salomon & Patt, Ltd. Ms. Salinski regularly advises and provides counsel to healthcare clients on physician and professional employment matters, governance issues, shareholder matters, physician joint ventures, Stark Law, Antikickback Statute and antitrust compliance and asset protection. Ms. Salinski can be reached at (312) or at tsalinski@rsplaw.com. Michael D. Schlesinger, Esq., is a corporate and healthcare partner at Robbins, Salomon & Patt, Ltd. Mr. Schlesinger represents individuals, companies, investors and financial institutions in a wide variety of transactions, including the organization, capital structure and financing of businesses; the acquisition, sale and merger of business entities; the source and structure of financing for the purchase and sale of real estate properties; resolution of internal disputes among business owners; the tactics and strategies employed in litigation matters; and planning for the transfer of business entities from one generation to the next, including estate planning and wealth transfer. Mr. Schlesinger can be reached at (312) or at mschlesinger@rsplaw.com ROBBINS, SALOMON & PATT, LTD

3 Table of Contents Introduction C H A P T E R 1 S E L E C T I N G & C R E A T I N G A L E G A L S T R U C T U R E Stark Group Practice Requirements 1 Partnerships 3 Limited Liability Entities 5 Corporations 7 Comparison Table 10 C H A P T E R 2 R A I S I N G I N V E S T M E N T C A P I T A L Eligible Investors 12 Compliance with Federal & State Securities Laws 14 C H A P T E R 3 REGISTRATION REQUIREMENTS Employer Identification Number 16 Corporation Registration 17 Medicare 17 Medical Assistance Program 18 Controlled Substance Registration 18 Clinical Laboratory Improvement Amendments (CLIA) of 1988 Certification 19 Certificate of Need 19 Potentially Infectious Medical Waste 19 Department of Employment Security Registration 20 C H A P T E R 4 PROFESSIONAL LIABILITY, COMMERCIAL & OTHER INSURANCE i Professional Liability Insurance 21 Commercial Insurance 23 Directors & Officers Insurance 23 Property Insurance 24 Workers Compensation Insurance 24 C H A P T E R 5 GOVERNANCE ISSUES Internal Operating Agreement 26 Medical Staff By-Laws 27 Governing Body 29 Medical Director 29 CHAPTER 6 CREDENTIALING & PEER REVIEW Credentialing 32 Peer Review 33 CHAPTER 7 EMPLOYMENT & MATTERS BETWEEN EQUITY OWNERS Employment Agreements 35 Independent Contractor Agreements 38 More About Compensation 40 Restrictive Covenants 44 Employment Termination 45 Agreements Between Equity Owners 45 ABOUT ROBBINS, SALOMON & PATT, LTD. 47 APPENDIX A State & Federal Laws Affecting Illinois Employers 49 END NOTES ROBBINS, SALOMON & PATT, LTD

4 Introduction The purpose of this guide is to provide physicians with a practical overview of the legal and administrative requirements involved in establishing a for-profit group practice in Illinois, whether the group practice is a single or multi-specialty medical practice, or a healthcare clinic or facility, such as a ambulatory surgery center, diagnostic imaging center, sleep diagnostic center, pain center, end stage renal dialysis facility or immediate (urgent) care facility. The guide presents an overview of the legal structures available to establish a group practice, the process of obtaining investors, the registration requirements with various federal and state agencies, the need for insurance and the types available, governance issues, credentialing and peer review, and finally, employment matters, to include the need for employment and personal services agreements, the use of restrictive covenants and release agreements and an overview of the federal and state laws applicable to employers in the state of Illinois. Throughout the guide are brief references to the regulatory issues facing all group practices, namely, those set forth in the Physician Self Referral Act (commonly known as the "Stark Law"), 42 U.S.C. 1395nn; the Illinois equivalent, the Healthcare Worker Referral Act, 225 ILCS 47/1, et seq.; and the Antikickback Statute ( Antitkickback Statute ) 42 U.S.C. 1320a-7b(b). Those statutes must be analyzed in detail as physicians look to structure a group practice and as the practice develops and contracts with other practitioners, providers and hospitals. The applications of these statutes and the regulations promulgated under them, as well as their application to a specific structure of single or multiple-specialty group medical practice, healthcare clinic or facility are beyond the scope of this practical guide s purpose. The application and impact of the laws and regulations referenced can vary widely based upon specific facts and circumstances involved. Moreover, given the evolving nature of laws, regulations, and administrative requirements and their interpretation, judicially, administratively and by non-governmental parties, such as insurance companies and third party administrators, consultation with legal counsel is advisable before entering into business or legal relationships that implicate federal or state health care laws. Accordingly, the guide is not intended as legal, tax, accounting or insurance advice for a particular transaction nor is the guide a substitute for consultation with professional advisers on the matters discussed herein. The authors would like to thank our litigation, tax and healthcare law partners for their review of this guide and their input. And a special thanks to our research clerks for their assistance. We hope you find this guide helpful. ROBBINS, SALOMON & PATT, LTD. JANUARY ROBBINS, SALOMON & PATT, LTD

5 Chapter 1 Selecting & Creating A Legal Structure Liability Protection, Tax Treatment and Ease of Administration are Key Considerations T here are various ways to structure a business entity to operate a group practice - - by two or more physicians pooling their individual resources, by an existing practice acquiring the stock, membership or partnership interests or assets of another existing practice, or by the merger of two or more practices into one single entity. Determining the legal form the group practice will adopt requires an understanding of the alternatives available. If it is anticipated that the group s physicians will refer Medicare or Medicaid patients to the group for the provision of "designated health services" ( DHS ) an understanding of the requirements of a group practice under the Stark Law is also required. 1 Stark s Group Practice Requirements If the group s physicians intend to refer Medicare or Medicaid patients to the members of the group for the provision of DHS, falling within the Stark Law s group practice definition allows the group to compensate its physicians for ancillary services provided within the practice setting and to implement profit-sharing or productivity compensation formulas. A group practice under the Stark Law must: consist of a single legal entity primarily formed for being a physician group, have at least two physicians -- whether employees or direct or indirect owners -- as group members (independent contractors and leased employees do not count) furnish through the group at least 75% of total patient care services of the group practice member physicians, billed under a group billing 1

6 number, and the amounts received must be treated as receipts of the group; distribute the group s overhead expenses and income according to methods that are determined before the receipt of payment for services (but may be adjusted for productivity bonuses and profit sharing, which are further discussed in Chapter 7), be a unified business, must have centralized decision-making, consolidated billing, accounting and financial reporting not base compensation on volume and value of referrals by the physicians (except pursuant to special rules for productivity bonuses and profit sharing), and group members must personally conduct at least 75% of the physicianpatient encounters of the group practice (measured on a per capita basis) 2 If there will be no continued referrals of Medicare and Medicaid patients for the provision of DHS, then the group practice does not need to meet the group practice definition under the Stark Law. However, compliance with the Antikickback Statute and the Illinois Healthcare Worker Referral Act is still required. 3 Available Legal Structures Selection of the practice s legal structure under which it will conduct business is critical. Liability insulation, tax treatment, and ease and E N T I T Y O P T I O N S Partnerships Limited Liability Entities Corporations convenience of formation and administration are the three most important factors to consider. Of those three factors, liability insulation is perhaps the most paramount factor for physicians. We should point out that none of the structure options will shield an owner against liability for acts of his, her or its own negligence or malpractice, but as we discuss below, most will protect an owner from personal liability for acts or omissions of others. In Illinois, physicians can choose from a general partnership, limited partnership, limited liability partnership, limited liability company, series limited liability company, or a professional service or medical corporation. These structures, their appropriateness for a group practice and their basic characteristics, are discussed next. 2

7 Partnerships GENERAL PARTNERSHIP 4 A general partnership is formed when two or more persons or other legal entities associate for the purpose of operating a business and sharing profits. Liability Protection. Owners (partners) share in the profits and losses of the partnership s business, and are personally liable for all debts and obligations of the partnership, to include liability for the acts or omissions of other partners, agents or employees of the partnership. In this regard, the partners are jointly and severally liable for the partnership s obligations, meaning that each physician partner can be required to pay the entire amount of damages, regardless of their proportionate ownership or fault. Tax Considerations. The partnership structure provides for flow-through taxation to its partners, which means that earnings of a partnership are taxed only once at the owner level, on the owner s income tax return. The partnership itself pays no tax on the partnership s earnings. Administrative/Legal Formalities. No filing is required by the Illinois Secretary of State to form a general partnership. The general partnership may, however, file a Statement of Authority with the Illinois Secretary of State to place the public on notice as to the scope and authority of each of the partners with respect to the partnership s business and property. It is advisable for partners to execute a partnership agreement to govern the operation of the business and the relationship between the partners. If a partnership agreement is not established, or if the agreement is silent on a specific issue, the partnership is governed by the provisions of the Uniform Partnership Act. There are no mandatory administrative formalities that a general partnership must comply with. Other Considerations. Though a general partnership has no formal requirements, unlimited liability of the partners makes the partnership the least desirable of all structures to establish a group practice. The partners assets are most vulnerable to a judgment in excess of malpractice insurance coverage by the use of this organizational structure. LIMITED PARTNERSHIP 5 The limited partnership is similar to the general partnership in many ways. However, one major difference is that a limited partner is generally not personally liable for partnership obligations. Every limited partnership must have at least one general partner and one limited partner. Liability Protection. A principal advantage of a limited partnership over a general partnership is that limited partners of a limited partnership are not liable for partnership obligations. Instead, a limited partner s liability for partnership 3

8 obligations is limited to the amount of the limited partner s capital contribution. In order to obtain the benefit of limited liability, with few exceptions regarding major decisions of the limited partnership, the limited partner may not participate in the management and control of the limited partnership group practice. Failure of a limited partner to refrain from participating in the management and control of the limited partnership can result in the limited partner being deemed to be a general partner of the limited partnership and, thus, being subject to unlimited personal liability. 6 Whereas a limited partner of a limited partnership is not personally liable for the partnership s obligations, a general partner of a limited partnership is personally liable for the liabilities and obligations of the limited partnership. General partners seeking to eliminate personal liability can cause the limited partnership to be reorganized as a limited liability limited partnership under the Uniform Partnership Act (1997) or can organize a corporate or other limited liability entity to be the general partner of the limited partnership. Tax Considerations. Same as those for a general partnership. Administrative/Legal Formalities. To organize a limited partnership, a Certificate of Limited Partnership must be filed with the Illinois Secretary of State. As with a general partnership, it is advisable for partners to execute a limited partnership agreement to govern the operation of the limited partnership s business and the relationship between the partners. If a limited partnership agreement is not in place, or if the agreement is silent on a specific issue, the provisions of the Revised Limited Partnership Act control. There are a few administrative formalities that a limited partnership must adhere to on an ongoing basis, including recordkeeping, such as maintaining a complete and accurate list of all partners, their addresses, the type and agreed value of their contributions to the limited partnership, dates that the partners joined the limited partnership, inter alia. In addition, limited partnerships must also file with the Office of the Secretary of State certificates of amendment to the Certificate of Limited Partnership within 30 days of the admission of a new general partner, the withdrawal of a general partner, or a change in the name or address of the registered agent; and within 90 days after the end of the limited partnership s fiscal year if there has been a material change in the contributions of partners. Other Considerations. Given the fact that limited partners of a limited partnership are effectively precluded from engaging in the management of a group practice structured as a limited partnership, few medical professionals are likely to accept the notion of conducting a practice organized as a limited partnership. Something to Consider... Partnerships should be avoided as legal structures for group practices given their lack of liability protection for partners. In certain circumstances partnerships 4

9 may be appropriate as legal structures for ownership of medical equipment, office buildings or other real estate. Limited Liability Entities LIMITED LIABILITY PARTNERSHIP ( LLP ) 7 Illinois law provides for the creation of an LLP. The LLP is a variation on the basic general partnership model that has evolved mainly in response to partners exposure to personal liability for partnership obligations. The LLP resembles a general partnership in all respects except for the allocation of liability. Liability Protection. In an LLP, each partner is protected from personal liability arising from negligence, malpractice or improper conduct of other partners, agents or employees of the partnership, but not from the partner s own actions of negligence, malpractice or improper conduct. Unlike a limited partnership, each partner may freely engage in the control or management of the group practice without incurring additional liability exposure. Tax Considerations. Same as those for a general partnership. Administrative/Legal Formalities. An LLP is formed by filing a Statement of Qualification with the Illinois Secretary of State. As with the other partnerships, it is advisable for partners to execute a partnership agreement to govern the operation of the business and the relationship between the partners. If a partnership agreement is not established, or if the agreement is silent on a specific issue, the provisions of the Uniform Partnership Act control. There are a few administrative formalities that an LLP must adhere to on an ongoing basis, including the annual filing of a renewal statement with the Illinois Secretary of State's office. Other Considerations. Of all of the available forms of partnership, an LLP has been used as the legal entity of choice for a number of group practices. LIMITED LIABILITY COMPANY ( LLC ) 8 The LLC is a hybrid business organization, which combines the tax advantages of a partnership with the personal liability protection of a corporation. An LLC may have one or more members. Liability Protection. An LLC offers members a high degree of protection against personal liability. Like shareholders of a corporation, a member is not personally liable for the debts, obligations or liabilities of the company or for the acts or omissions of other members, agents or employees of the company, solely by virtue of being a member of the company. The liability of members for the LLC s 5

10 contract obligations are limited only to the assets contributed to the LLC. Each physician remains liable, however, for that member s malpractice. Tax Considerations. The LLC affords its members the benefit of being taxed on the LLC s profits and losses in the same manner as a partnership. Thus, the earnings of an LLC are taxed only once at the member level, on the member s income tax return. The LLC s members are subject to self-employment tax, which can be avoided if the members incorporate and use a Professional Corporation or Medical Corporation taxed as an S Corporation, or organize and use a limited partnership to hold their membership interests in the LLC. Alternatively, the LLC members may opt to have the LLC itself taxed as an S Corporation. In which case, only one class of membership interests can be issued (which may have different voting rights) and all other S Corporation requirements (as discussed below) must be followed. Administrative/Legal Formalities. An LLC is created by filing Articles of Organization with the Illinois Secretary of State. An operating agreement, which governs the internal operations of the LLC, should be prepared. If an operating agreement is not established, or if the operating agreement is silent on a specific issue, the provisions of the Limited Liability Company Act control. There are a few administrative formalities that a LLC must adhere to on an ongoing basis, including recordkeeping, such as maintaining a complete list of each member, their contributions, the agreed value of their contribution, the dates each became a member, and the LLC's tax returns for the three most recent years. In addition, the LLC must file an annual report with the Illinois Secretary of State s office. Other Considerations. The LLC structure affords the greatest flexibility among all other entity choices in terms of management structure, operations and allocation of profit and loss. Profit interests can be separated from voting interests and an LLC may make distributions to members in disproportionate amounts without losing favorable tax treatment (unless an S Corporation election is made for the LLC). SERIES LIMITED LIABILITY COMPANY A variance of an LLC, the Series LLC permits its members to separate certain identifiable sections or series of the entire LLC from one another, without jeopardizing limited liability protection or pass-through tax treatment. Liability Protection. By separating assets into series, the debts, liabilities and obligations that relate to a particular series are enforceable against the assets of that series only. Moreover, a series is not liable for the debts, liabilities or obligations of the Series LLC. Each series is a separate and distinct legal entity and may have a distinct business purpose from each of the other series and the Series LLC. Tax Considerations. A Series LLC provides the identical tax treatment as an LLC as discussed above. However, for ease of administration, although a Series LLC may be structured into different series for liability purposes, all of the series can elect to be taxed as a single taxpayer. 6

11 Administrative/Legal Formalities. A Series LLC is created by filing Articles of Organization with the Illinois Secretary of State. The Articles of Organization must disclose the liability limitations of the series. A separate certificate of designation must be filed for each series. The operating agreement explicitly must create and govern the entity as a Series LLC and should include provisions regarding the limited liability of each series, and the organizational and procedural rules for each of the series (such as ownership, management and voting rights). Separate and distinct records must be maintained for each series. Assets associated with each series must be held and accounted for separately from the other assets of the Series LLC, and any other series therein. Other Considerations. A Series LLC may elect to be treated as a single business for purposes of qualifying to do business in Illinois and in other states. In which case, the Series LLC may qualify as a single supplier under Medicare and thereby utilize one billing number for all series. Like the LLC, the Series LLC structure affords great flexibility in terms of management structure, operations and allocation of profit and loss. Management responsibility may be divided among those members associated with a specific series. Voting rights for each series may be divided among specific members or managers, and the types of issues that can be voted on and the groupings or classes of certain voting parties can be structured as the founding members desire. Likewise, members and managers may be allocated profit and loss for a single series or for all series in proportions not directly correlated to their respective ownership percentages (unless an S Corporation election is made). Corporations PROFESSIONAL SERVICE/MEDICAL CORPORATION In the event a physician group chooses to set up a group practice as a corporation, Illinois law requires that such corporation do business as a medical corporation ( S.C. ) 9 or as a Professional Service Corporation ( P.C. ) 10. The S.C. and P.C. may be structured, for tax purposes, as either a C Corporation or an S Corporation. PROFESSIONAL SERVICE CORPORATION (P.C.) A P.C. is a corporation, which may have one or more shareholders each of whom is licensed to perform the same professional services and is incorporated to perform one specific type of professional service or services ancillary thereto. All of the P.C. s directors, officers, employees and agents (except ancillary personnel) must be licensed by the Illinois Department of Financial & Professional Regulation. Shareholders may hold their shares individually or as an entity qualified under the Medical Corporation Act. 7

12 Liability Protection. A P.C. offers shareholders a high degree of protection against liability. A shareholder is generally not personally liable for the debts, obligations or liabilities of the corporation. The liability of a shareholder is generally limited only to the amount of assets contributed to the corporation. A physician shareholder remains liable, however, for his, her or its own actions of negligence, malpractice or improper conduct and for such actions of individuals working under the direct supervision and control of that shareholder. Tax Considerations. The P.C. may elect to be taxed as a C Corporation or S Corporation. If taxed as a C Corporation, the P.C. must file its own income tax returns and pay tax on its earnings. 11 The corporation may take deductions for certain business expenses, such as physician s compensation, but not for the distribution of dividends to its shareholders. Each shareholder is taxed on any dividend distribution paid from the corporation. This is known as doubletaxation. If an S Corporation election is made, the shareholders have elected to have the corporation taxed as a partnership. Unlike the C Corporation, an S Corporation avoids double taxation. Earnings flow-through to the shareholders, who pay taxes on corporate profits on their individual income tax returns. Accordingly, the corporation itself does not pay tax on its profits. An S Corporation may only have one class of stock with identical distribution and liquidation rights, though it can issue both voting and non-voting stock. Also, an S Corporation is subject to other requirements including a limitation on the number of allowable shareholders (75) and the types of permissible shareholders and all distributions must be proportionately equal to stock ownership. Administrative/Legal Formalities. A P.C. is created by filing Articles of Incorporation with the Illinois Secretary of State and recording the Articles of Incorporation in the county in which the corporation s registered office will be located. Once the Illinois Secretary of State accepts the Articles of Incorporation, the corporation must then obtain a certificate of registration with the Division of Professional Regulation of the Illinois Department of Financial and Professional Regulation. The corporation must also adopt written bylaws, which govern the internal operation of the corporation. The bylaws typically do not govern the relationship between shareholders. Therefore, it is advisable that a shareholders agreement be adopted governing the rights and responsibilities of shareholders. In addition, managing a corporation on a day-to-day basis requires compliance with corporate formalities, such as conducting regularly-scheduled board meetings, preparing accurate minutes of meetings, providing formal notice of meetings; and electing directors. A corporate bank account must also be established. Other Considerations. A distinct advantage of the corporate structure is the existence of a vast body of common law interpreting the Professional Service Corporation Act. Given that, group practices and their professional advisors can readily predict the application of various laws to a number of scenarios that a practice may confront. 8

13 Something to Consider... Professional Corporations taxed as C corporations require careful tax planning as they risk the recharacterization of compensation paid to its physician shareholders based on income to the Corporation from sources such as equipment, non-shareholder physicians and staff, laboratory services, pharmaceuticals, etc Pediatric Surgical Associates v. Commissioner of Internal Revenue, 81 T.C.M. (CCH) 1474 (recharacterizing compensation not directly generated by the shareholder physicians as dividends, nondeductible by the corporation under the Internal Revenues Code Section 162(a)(1)). MEDICAL CORPORATION (S.C.) An S.C. is a corporation whose shareholders are all licensed under the Medical Practice Act of 1987 and is organized for the purpose of practicing medicine. All of the S.C. s directors, officers and physician employees must also be licensed under the Medical Practice Act of Liability Protection. An S.C affords its shareholders the same degree of protection from personal liability as a P.C. Tax Considerations. Same as those as a P.C., the S.C. may elect to be taxed as a C Corporation or as an S Corporation. Administrative/Legal Formalities. Generally, the same as those of a P.C. Other Considerations. Like the P.C., there is a vast body of common law interpreting the Medical Corporation Act and the Illinois Business Corporation Act. The S.C. may have its registration revoked or suspended if the license to practice medicine of any shareholder, director, officer or employee is suspended or revoked and the S.C. does not promptly remove or discharge that individual. Something to Consider... Once the legal structure is established, to avoid personal liability, contracts entered into for the benefit of a group practice must be entered into in the legal name of the group practice and not an individual physician. For instance, the proper signature block in a contract entered into for the benefit of a practice should be: Aurora Medical Associates, Ltd., by John Doe, M.D., its President, instead of simply John Doe, M.D. Many physicians mistakenly execute contracts for the benefit of their group practice in their own individual name and thereby become personally liable for the contract s obligations. 9

14 Table: Comparison of Legal Entity Structures Entity General Partnership Liability Protection No Tax Treatment Disregarded; profits or losses are taxed to partners in accordance with their percentage interest as set forth in the partnership agreement, but if no agreement, partners share equally in profits and losses Admin./Legal Formalities Optional filing of Statement of Authority with Secretary of State, no ongoing formalities Other Considerations Personal liability Limited Partnership Only for the limited partners who do not manage, unless the general partner is a limited liability entity or a corporation Flow-through treatment Initial filing with Secretary of State, recordkeeping and ongoing filing obligations upon a change of partners and material change in partners' contribution. General partners have personal liability and limited partners cannot be actively involved in management Limited Liability Partnership Yes, for all partners Flow-through treatment Initial filing with Secretary of State, and annual filing of renewal statements Partners have no personal liability for acts of the partnership, its partners, employees and agents; but have personal liability from the partner s own actions of negligence, malpractice or improper conduct Limited Liability Company Yes, for all members and managers Flow-through treatment; subject to self-employment tax, but may elect C or S Corporation tax treatment Initial filing of Articles of Organization with the Secretary of State, recordkeeping and ongoing annual filing obligations Voting right and the allocation of profits and losses can be tailored to the practice s requirements 10

15 Entity Series Limited Liability Company Table: Comparison of Legal Entity Structures (Continued) Liability Protection Yes, for all members and managers Tax Treatment Flow-through treatment; may elect C Corporation tax treatment, which then results in double taxation Admin./Legal Formalities Initial filing of Articles of Organization with the Secretary of State, significant recordkeeping obligations for each series Other Considerations Voting rights & the allocation of profits & losses can be tailored to the practice s requirements Professional Services Corporation Yes, for all shareholders May be taxed as(i) C corporation, resulting in double taxation; or (ii) S Corporation, resulting in flowthrough tax treatment Extensive; Initial filing of Articles of Incorporation with Secretary of State, Certificate of Registration with the Division of Professional Regulation of the Illinois Department of Financial & Professional Regulation; shareholder & Board of Directors resolutions & minutes required for special meeting & annual meetings If S Corporation election is made, limited to one class of stock with identical preferences, but voting & non-voting shares may be issued; & no more than 75 eligible shareholders. Allocation of profits & losses must be in relationship to ownership interest. All shareholders, directors, officers, employees & agents (except ancillary personnel) must be licensed by the Illinois Department of Financial & Professional Regulation. Medical Corporation Yes, for all shareholders May be taxed as (i) C corporation, resulting in double taxation, or (ii) S Corporation, resulting in flowthrough tax treatment Extensive; Initial filing of Articles of Incorporation with Illinois Secretary of State, Certificate of Registration with the Division of Professional Regulation of the Illinois Department of Financial & Professional Regulation; shareholder & Board of Directors resolutions & minutes required for special meeting & annual meetings If S Corporation election is made, limited to one class of stock with identical preferences, but voting & non-voting shares may be issued; & no more than 75 eligible shareholders. Allocation of profits & losses must be in relationship to ownership interests. All shareholders, directors, officers and physician employees must be licensed under the Medical Practice Act of

16 Chapter 2 Raising Investment Capital Selecting Physicians & Other Investors to Join the Group Practice D eterming with whom to join forces takes a considerable amount of strategic planning and due diligence. What can a potential partner bring to the table? What doors can be opened as a result of affiliating with a particular physician or group? What critical services can now be provided? What efficiencies can be achieved? How can the physician help the group realize its business objectives? Ultimately, the decision to accept a physician or other investor as a member of a group practice is based upon certain self-defined objective and subjective criteria. However, who can participate as an equity member of a group practice is dictated in large part by Illinois law. And both Illinois and federal law dictate how, when and to whom an offering to join a group practice as an investor may be made. Eligible Investors MEDICAL PRACTICE PHYSICIANS & CHIROPRACTORS Illinois law requires that only individuals licensed under the Medical Practice Act of 1987 may practice medicine in all of its branches in this state. 12 Only individuals licensed under the Medical Practice Act of 1987 may own, operate and maintain in Illinois an establishment for the study, diagnosis and treatment of human ailments and injury, whether physical or mental, and to promote medical, surgical and scientific research and knowledge. 13 Moreover, the law prohibits physicians from sharing fees, commissions, rebates or other forms of compensation for any professional services not actually and personally rendered, with anyone other than physicians with whom the (licensed) physician practices in a partnership, limited liability entity or corporation. 14 As a result, Illinois prohibits passive physician investors in a medical practice. Therefore, all physician investors must provide an actual service, whether as an independent contractor, employee, officer or director of the group practice. 12

17 Accordingly, only those who meet the following licensing requirements may participate as equity members of a medical practice, regardless of whether the practice is structured as a partnership, a limited liability entity or a corporation: any physician or a chiropractic physician licensed in Illinois to treat human ailments without the use of drugs and without operative surgery; provided that: the physician or chiropractor provides services to the group practice pursuant to a written employment or services agreement. Something to Consider... Regardless of entity choice for a medical practice," all equity owners and officers, directors and employees (except ancillary employees) must be Illinois medical professionals duly licensed under the Medical Practice Act of 1987, 15 or entities registered as a medical corporation under the Medical Corporation Act 16 or a professional service corporation under the Professional Service Corporation Act. 17 CLINICS & FACILITIES-NO RESTRICTIONS Illinois does not restrict ownership of certain healthcare clinics and facilities to licensed physicians. Ambulatory surgery centers, diagnostic imaging centers, sleep diagnostic centers, end stage renal dialysis facilities, pain centers and immediate (urgent) care facilities, can be owned, in whole or in part by persons who are not Illinois licensed physicians or chiropractic physicians. However, the rendering of patient care and services in those clinics and facilities must be done by Illinois licensed medical professionals. Something to Consider... The fee splitting prohibition does not extend to employees of a group practice who provide ancillary (administrative and support) services or are licensed and provide services under the supervision of a licensed physician. And, the splitting of fees between physicians for professional services concurrently rendered to a patient is permissible, provided the patient has full knowledge of the fee splitting, and provided the division is made in proportion to the services performed and responsibility assumed by each. 13

18 Compliance with Federal & State Securities Laws The offering of an investment opportunity in an existing or to be formed group practice is subject to federal and state securities laws. Under both the federal and state securities laws, unless the security and the proposed transaction can meet one or more statutory exemptions to registration, all securities must be registered prior to being offered. EXEMPTIONS FROM REGISTRATION Generally, under Illinois law, if the offer or sale of a limited partnership interest, limited liability entity membership interest or corporate stock is not provided to more than 35 eligible investors and no commission or other remuneration is paid on account of the sale, or if commissions are paid, the securities are not offered or sold in Illinois by means of general advertising or general solicitation, then registration of the securities is not required. 18 Under federal law, registration exemptions for securities are available for limited, private offerings provided the offering meets certain conditions as to the amount being raised, the number of purchasers, the type (sophistication) of purchasers and the solicitation means. 19 Rules promulgated under the Securities Act of 1933, Regulation D, provides as follows: Rule 506 provides an exemption for limited offers and sales without regard to the dollar amount of the offering, Rule 505 offerings may not exceed $5 million in any 12-month period, and Rule 504 offerings may not exceed $1 million in any 12-month period. Although exemptions from registration exist, nothing exempts a group practice from the anti-fraud provisions of the federal and Illinois securities laws. Full and complete disclosure is the key to a group practice meeting its legal requirements, and the use of an offering memorandum is essential. OFFERING MEMORANDUM An offering or private placement memorandum distributed to potential eligible investors -- should identify and disclose the material terms and conditions of the offering, including, but not limited to: summary of the offering risk factors (which may include lack of operating history, regulatory environment, dependence on key personnel, risk of capitated contracts, exposure to professional liability, reliance on certain third-party payers, etc.) terms of the offering use of the net proceeds capitalization 14

19 return on investment overview of the group practice s business plan, discussing its business focus, management, personnel, strategy, facilities, conflicts, employment agreements, etc. legal and governance structure, to include copies of all governance documents disclosure of any conflicts federal and state tax considerations impact of the Stark Law, the Antikickback Statute and the Illinois Healthcare Worker Referral Act on the group practice With the private placement memorandum in hand, eligible investors can make informed decisions regarding their participation in the group practice. Something to Consider... The Antikickback Statute s Investments in Group Practices safe harbor protects payments made to a group physician investing in his or her group practice as a return on an investment interest, such as a dividend or interest income, provided the group practice meets the definition of a "group practice under the Stark Law. 15

20 Chapter 3 Registration Requirements State and Federal Registration Requirements A fter forming the legal structure for the group practice, there are a number of different federal and state registration requirements that must be met before the practice may become operational. Employer Identification Number The Internal Revenue Service (IRS) uses an Employer Identification Number (EIN) to keep track of a partnership, limited liability entity or corporation, whether or not it has employees. To obtain an EIN, IRS Form SS-4, Application for Employer Identification Number, must be filed with the IRS by: Telephone: Call the IRS Business & Specialty Tax Line, (800) during standard business hours. Mail the completed form to the EIN Operation, Internal Revenue Service, Cincinnati, Ohio within 5 days of the call. Online: File electronically on the IRS Website: Fax: Download form SS-4 from the IRS website: Fax the completed form to the Cincinnati IRS Center at (859) Mail: Download form SS-4 from the IRS website: Legal counsel for the practice may also file the EIN In Illinois, the entity s EIN is used for state employment tax purposes. 16

21 Corporation Registration A group practice organized as a corporation for the purpose of practicing medicine must register with the Division of Professional Regulation ( DPR ) of the Illinois Department of Financial and Professional Regulation. Registration is mandated under the Medical Corporation Act. 20 A group practice organized as a limited liability entity or any type of partnership for the purpose of practicing medicine is presently not required to register with the DPR. Legal counsel is able to prepare and file the application for registration, otherwise, a registration application can be obtained from the DPR website at Mail the original application along with the filed Articles of Incorporation and $50 registration fee to the Illinois Department of Financial and Professional Regulation, Division of Professional Regulation, P.O. Box 7007, Springfield, Illinois Something to Consider... The failure to properly register as a medical corporation has been used as a sword by parties to attempt to void otherwise legally binding contracts with medical practices. See Chatham Foot Specialists, PC v. Health-care Services Corp. d/b/a Blue Cross Blue Shield of Illinois, 219 Ill.2d 366 (2005) Medicare covered services. Most group practices and their physician employees will elect to participate in the Medicare program. A group practice may determine that all of its physician employees will participate in the Medicare program as a single supplier. In that case, the group practice and its physicians must enroll in the Medicare program to be eligible to receive Medicare payment for To enroll, a physician or the group practice s legal counsel must submit to a Medicare carrier CMS Form 855I, Application for Individual Healthcare Practitioner. A group practice must submit to a Medicare carrier CMS Form 855B, Application for Healthcare Suppliers that will Bill Medicare. Once enrolled, individual physicians must join their group practice for Medicare participation by submitting to a Medicare carrier CMS Form 855R, Individual Reassignment of Benefits. 17

22 Enrollment forms can be obtained on the Centers for Medicare & Medicaid Services website at 01_overview.asp. The Medicare carrier servicing Illinois is Wisconsin Physician Services, Inc. Its customer service department may be reached at (866) , and more information can be found on its website at Medical Assistance Program The Illinois Department of Healthcare and Family Services administers the Illinois Medical Assistance Program (Medicaid). Group practices may require their physician employees who enroll in the program to designate the group practice as an alternate payee. To enroll, a physician must submit a Provider Enrollment Application, Form HFS 2243, to Illinois Department of Healthcare and Family Services, Provider Participation Unit, P.O. Box 19114, Springfield, Illinois To designate the group practice as an alternate payee, both the physician and the group practice must jointly submit a Hospital, Professional School or Group Practice as Alternate Payee application, Form HFS Enrollment forms can be obtained on the Illinois Department of Healthcare and Family Services website at The department may be reached at or Controlled Substance Registration located. A state controlled substance registration is required of all Illinois licensed physicians who prescribe or dispense any controlled substance within the state of Illinois. Registration with the DPR is a prerequisite to a Federal controlled substance registration. A separate application is required for each practice location where controlled substance is stored or State registration forms may be obtained from the DPR s website at The DPR may be reached at (217) Federal controlled substance registration information can be obtained from the U.S. Drug Enforcement Agency, 230 South Dearborn, Suite 1200, Chicago, Illinois 60604, telephone (312)

23 Clinical Laboratory Improvement Amendments (CLIA) of 1988 Certification CLIA requires all entities that perform even one test, including waived test on materials derived from the human body for the purpose of providing information for the diagnosis, prevention or treatment of any disease or impairment of, or the assessment of the health of, human beings to meet certain Federal requirements. 21 If an entity performs tests for these purposes, it is considered under CLIA to be a laboratory and must register with the CLIA program. Application forms, including Form CMS-116, CLIA Application for Certification, may be obtained from the Centers for Medicare & Medicaid Services website, Applications must be submitted to the Illinois Department of Public Health, Division of Health Care Facilities & Programs 525 W. Jefferson St., Fourth Floor, Springfield, Illinois The Division may be reached at (217) Certificate of Need Licensed and state-operated hospitals, long-term care facilities, dialysis centers, ambulatory surgery centers, and alternative health care delivery models are subject to the Illinois Certificate of Need Program. 22 The Illinois Health Facilities Planning Board issues permits ( Certificate of Need ) for construction or modification projects proposed by or on behalf of healthcare facilities, and for approving transactions for the acquisition of major medical equipment. 23 To obtain a Certificate of Need, applicants must justify that a proposed project is needed as well as financially and economically feasible. Additional information may be found at the Illinois Health Facilities Planning Board website, or by contacting the Board at (217) Potentially Infectious Medical Waste All persons who generate, transport, treat, store or dispose of potentially infectious medical waste (PIMW) are subject to the requirements which may include obtaining permits and prohibitions contained in the Illinois Environmental Protection Act

24 Group practices, as generators of PIMW, are subject to the segregation and labeling requirements of Illinois Environmental Protection Act regulations. In addition, if a group practice stores, transfers or treats PIMW, permits issued by the Illinois Environmental Protection Agency are required. For additional information, contact the PIMW Coordinator at the Illinois Environmental Protection Agency; Bureau of Land #33, 1021 North Grand Avenue East, P.O. Box 19276; Springfield, Illinois , or call (217) PIMW regulations can be found at regulations/#pimw. Department of Employment Security Registration The Illinois Unemployment Insurance Act requires every entity, which will serve as an employer, to register with the Illinois Department of Employment Security (IDES) within 30 days of start-up. 25 A group practice may register by filing with IDES a completed Form UI-1, Report to Determine Liability Under the Illinois Unemployment Insurance Act. Employers can also register electronically through the Illinois TaxNet website Employers become liable for paying contributions through their taxable payroll as soon as they have paid $1,500 in wages in a single calendar quarter, or employed one or more persons for at least part of the day in each of 20 weeks in a given calendar year. All employers are required to post the following posters conspicuously in each employment location: Notice to Workers about Unemployment Insurance Benefits (IDES) Illinois Minimum Wage poster Equal Employment Opportunity is the Law Your Rights Under the Family and Medical Leave Act Job Safety and Health Protection Notice: Employee Polygraph Connection Act Notice to Workers with Disabilities Migrant and Seasonal Agricultural Worker Protection Act (MSPA) Your Rights Under the USERRA (Uniformed Services Employment and Reemployment Rights Act) Notice to Employers and Employees Workers' Compensation Notice Posters may be obtained directly from IDES. For more information, contact IDES at (312) or (217) , or visit their web site at 20