If you're a physician, nurse practitioner, investor, or entrepreneur looking to open a healthcare clinic in Texas, there's one legal doctrine that will shape every structural decision you make: the prohibition against the corporate practice of medicine.
The rule itself is simple: Non-physicians may not own a medical practice, employ physicians to provide clinical services, or collect fees generated by the practice of medicine. What's not simple is navigating the structural, regulatory, and financial implications of that rule when setting up or contracting with a medical practice.
Below, we break down the corporate practice of medicine doctrine, explain who can and cannot own a medical clinic in Texas, and outline the legal paths available to physicians and non-physicians alike.
What Is Texas’s Corporate Practice of Medicine Prohibition?
The corporate practice of medicine (CPOM) doctrine prohibits corporations and unlicensed individuals from practicing medicine, employing physicians to treat patients, or collecting fees for medical services in Texas. The prohibition is codified in the Texas Medical Practice Act.
The doctrine reflects a long-standing public policy concern that placing business entities in control of medical practices creates conflicts between profit motives and patient welfare. A physician who participates in such an arrangement – by lending their license to a non-physician-owned entity or allowing that entity to direct their clinical decisions – is in violation of Texas law.
What is the “practice of medicine”? Under Texas law, “practicing medicine” means the diagnosis, treatment, or offer to treat a mental or physical disease, disorder, or physical deformity or injury by any system or method – or the attempt to effect cures – by a person who publicly holds themselves out as a physician or charges money for those services.
Why Does the CPOM Doctrine Exist?
The doctrine exists to protect patients. Its purpose is to preserve the physician-patient relationship and prevent business entities – which may be motivated by profit rather than clinical judgment – from controlling the decisions physicians make about patient care.
Who Can Own a Medical Practice in Texas?
Texas law permits physicians, physician-owned entities, and a narrow set of certified nonprofit organizations to own and operate medical practices.
Permissible medical practice ownership structures are:
Individual Licensed Physicians
A physician licensed by the Texas Medical Board may own and operate a medical practice as a sole proprietor or through a professional entity.
Physician-Owned Professional Entities
Physicians may form professional associations (PAs) or professional limited liability companies (PLLCs) under the Texas Business Organizations Code. These entities must be owned entirely by licensed physicians.
Physician-PA Joint Ownership
Texas Medical Board rules expressly permit a physician and physician assistant to jointly own a practice entity – the only form of non-physician co-ownership expressly recognized under current Texas rules. The physician must maintain majority ownership and control. A PA cannot own a medical practice independently.
Certified Nonprofit Health Organizations
The Texas Medical Board may certify certain nonprofit organizations to operate medical practices, but the exception is narrow and primarily applies to nonprofit research and education organizations, federally qualified health centers, and similar entities.
Who Cannot Own a Medical Practice in Texas?
The following are prohibited from owning a medical practice or clinic that provides clinical medical services in Texas:
- Registered nurses (RNs) and licensed vocational nurses (LVNs)
- Estheticians and cosmetologists
- Business entrepreneurs without a Texas medical license
- Out-of-state physicians without an active Texas Medical Board license
- Corporations, private equity firms, and other non-physician investors (directly)
Arrangements in which a corporation formed by non-physicians employs physicians to provide medical services constitute both unlawful practice of medicine by the corporation and a violation by the participating physician of the Texas Medical Practice Act.
A note on estheticians: Estheticians licensed under Texas cosmetology law are authorized to provide cosmetic skincare services. The moment a clinic offers services that constitute the practice of medicine – Botox injections, laser treatments, chemical peels beyond cosmetic scope, or other medical aesthetic procedures – the clinic requires physician ownership or a compliant structure. Esthetician ownership of a medical aesthetics practice is not legal under Texas law.
A note on Advanced Practice Registered Nurses (APRN): The scope of practice for an APRN includes the ability to order and prescribe prescription drugs and the use of prescriptive medical devices. This ability is, however, subject to physician delegation and oversight. In Texas, many APRNs hire physician for delegation and supervision, while directly owning and operating a professional nursing practice. Texas law does not expressly permit or prohibit this practice set up. With that in mind, ARPNs desiring to directly own and operate their own professional nursing practice should speak with our healthcare attorneys to understand the risks and benefits of this model.
What About Non-Physicians Who Want to Invest in a Healthcare Business?
Non-physician investors are not barred from participating in the healthcare industry – but they cannot do it through direct ownership of the medical practice. The legal path forward is a management services organization (MSO).
Under the MSO model, a non-physician-owned LLC (the MSO) contracts with the physician-owned practice to provide non-clinical services: billing, marketing, staffing, facilities management, IT, and other administrative functions. The physician practice pays the MSO a management fee for those services. The physician retains complete ownership of the practice entity and full control over all clinical decisions.
When structured correctly – with separate entities, a properly drafted management services agreement, and compensation set at fair market value – this arrangement gives non-physicians a legitimate path to invest in and profit from the healthcare industry without violating Texas’s prohibition against the corporate practice of medicine.
For a detailed look at how to structure a compliant MSO, including what a management services agreement must contain, how compensation must be set, and how the arrangement must hold up under Anti-Kickback Statute and Stark Law review, see our page on Management Services Agreements.
Can a Physician Enter into an Independent Contractor Agreement With a Non-Physician?
Except for limited exceptions for relationships with certain licensed healthcare facilities, a physician may not enter into an independent contract agreement with a non-physician for the sale of medical services.
The Texas Business Organizations Code delineates the types of business entities that licensed and unlicensed persons may own, as well as the activities a business entity may engage in. Only a person, not a partnership or any other business entity, may be licensed to practice medicine. Since a business entity cannot be licensed to practice medicine, business entities are generally prohibited from practicing medicine in the same way that an unlicensed person, a nurse, or an attorney cannot engage in the professional practice of medicine.
Therefore, a violation of the corporate practice of medicine doctrine occurs when a non-physician-owned business entity contracts with a physician to practice medicine and the fees for medical services are collected by the non-physician-owned business entity. An independent contractor arrangement is not by itself an exception to the CPOM prohibition.
What Are the Exceptions to the CPOM Prohibition?
Texas law recognizes a narrow set of exceptions that permit certain relationships between physicians and non-physician entities:
- Employment of physicians by certified nonprofit or health-related corporations that meet specific TMB requirements
- Employment by certain rural hospitals, hospital districts, and county entities for care of incarcerated individuals
- Employment involving specific entities such as nonprofit private medical schools and federally qualified health centers
- Physician-PA joint ownership, subject to physician majority control and annual TMB reporting
These exceptions are narrow and conditional. They do not apply to the vast majority of commercial healthcare businesses being structured in Texas today. Whether an exception applies to your situation requires a fact-specific legal analysis by an experienced regulatory compliance attorney.
What Are the Consequences of Violating the CPOM?
CPOM violations carry consequences for every party involved – not just the physician.
For Physicians
A physician who aids or abets the corporate practice of medicine by a lay entity is subject to Texas Medical Board disciplinary action. Consequences range from fines and reprimands to license suspension and revocation.
CPOM violations can also be a criminal offense if a physician is engaged in an arrangement that gives a non-physician control over clinical decisions. If convicted, a physician forfeits all rights and privileges conferred by their medical license.
For Non-Physician Entities
Practicing medicine without a license is a criminal offense in Texas – and the prohibition applies to individuals and entities. A non-physician company that employs physicians to provide clinical services and collects the resulting fees is engaged in the unlawful practice of medicine, punishable as a misdemeanor or a felony (if combined with other violations). Each day the violation continues constitutes a separate offense.
Violations involving physical, psychological, or financial harm to a patient are an additional, separate criminal offense under Texas law.
Contracts May Be Unenforceable
Contracts that facilitate the corporate practice of medicine are illegal and unenforceable in Texas. In T.L. v. Cook Children’s Medical Center – a case involving a treatment dispute at a children’s hospital – a Texas appellate court reaffirmed that the Texas Medical Practice Act prohibits the corporate practice of medicine and that contracts facilitating such practice are illegal. A lay entity cannot sue to enforce a contract built on an illegal CPOM arrangement.
Business Disruption
The Texas Medical Board may revoke or refuse certification of health organizations it determines are operated with intent to violate the Medical Practice Act. An MSO or practice arrangement identified as non-compliant can be unwound – often at significant cost and disruption to the business.
How Do You Ensure CPOM Compliance?
The most effective protection is prevention.
- For physicians, that means carefully evaluating any arrangement that involves a non-physician partner, investor, or management company before entering it.
- For non-physicians, that means forming the MSO structure correctly from the start – not retrofitting compliance onto an arrangement that was never designed with it in mind.
The most common compliance failures we see are not deliberate – they are often the result of MSO arrangements structured without the counsel of a healthcare attorney, management fees that were never subjected to a fair market value analysis, or governance structures that gave the non-physician more control than the law permits.
If your current arrangement has not been reviewed by an attorney experienced in Texas healthcare regulatory compliance, now is the time to seek counsel.
Structuring a Compliant Healthcare Practice in Texas
Hendershot Cowart P.C. represents physicians, non-physician investors, and healthcare entrepreneurs across Texas on CPOM compliance, MSO formation, management services agreements, and medical practice set-up.
If you’re opening a weight loss clinic, med spa, IV hydration clinic, or other healthcare business – or if you’re reviewing an existing arrangement for compliance – speak with our healthcare attorneys before you commit to a structure.
Call (713) 783-3110 or contact us online to schedule a consultation.