The Friendly PC Model

I once asked a physician if he knew what a friendly PC was.  His answer: “Yeah, sure, that’s a computer that’s easy to use.”  Well, not exactly.

The purpose of this article is to give a high-level overview of what a friendly PC is and how it could be helpful to achieve your business goals.

Background on the friendly PC model

Many states, including California, prohibit the corporate practice of medicine.  Generally, this prohibition forbids a non-professional business corporation from practicing medicine or employing a physician to provide professional medical services.  It also prohibits a non-professional entity from holding itself out as providing professional medical services.  The basis for this prohibition is that if a non-professional entity could employ or contract with a physician, such a relationship may lead to commercialization of the medical profession, therefore undermining the physician-patient relationship and the physician’s exercise of independent medical judgment.

As such, the only business entities that are permitted to provide professional (e.g., physician) services in states like California are: professional corporations (or, as they are commonly referred to, a “PC”), general partnerships and limited partnerships, which are owned by licensed individuals.

In states such as California where the corporate practice of medicine is prohibited, non-professional entities frequently engage in contractual arrangements using what is commonly known as the “Friendly PC” model (also known as the “Captive PC” model).  In a Friendly PC model, the PC issues all of its stock to a single physician shareholder who is “friendly” to the management company – i.e., the manager is comfortable with the physician shareholder’s structural, operational, and, financial control over the PC.  The primary security mechanism for the management company is an assignable option agreement (“AOA”) among the management company, PC, and the “friendly” physician, which limits the physician shareholder’s ability to sell the assets or stock of the PC and permits the management company to exercise the option to buy out the physician shareholder at any time by assigning its option to another qualified physician.

Under the Friendly PC model, the physician shareholder has sole control over the professional (clinical) decision-making for the PC. However, the non-clinical aspects of the business are subject to the “indirect” control of the manager, which provides all of the non-clinical infrastructure to the PC on a “turn-key” basis pursuant to the terms of a management services agreement (“MSA”) . The MSA between the management company and the PC also typically includes language which clarifies the independent decision-making authority of the PC with respect to professional medical and some business judgment.  

Despite the seemingly complex structure and front-loaded work that has to get done to set up a Friendly PC, this business model is extremely useful for professionals and non-professionals to collaborate in the healthcare industry.