How Recent Decisions and Enforcement Actions Affect PE-Backed Platforms, MSOs, and Healthcare Organizations Navigating Today’s Regulatory Landscape
Experienced healthcare regulatory attorneys generally counsel clients that well-drafted agreements, supported by fair market value opinions and commercial reasonableness analyses, form the backbone of a defensible compliance posture. While that advice remains sound, a cluster of recent federal court decisions makes one thing unmistakably clear: documentation alone no longer satisfies regulators, relators, or the courts. Increasingly, enforcement authorities are pulling back the curtain to examine whether operational realities match the written agreements.
For private equity investors, Management Services Organizations (MSOs), digital health platforms, laboratories, and physician groups, the takeaway is clear and urgent. The arrangements that were standard three years ago may now carry materially higher risk, and the compliance infrastructure surrounding those arrangements deserves immediate attention.
Below is a summary of recent cases, what they signal for the enforcement landscape, and the steps healthcare organizations should take now to protect their operations.
Friendly PC Structures Under the Microscope
The Friendly PC model remains one of the most prevalent structures in states with corporate practice of medicine prohibitions. A non-physician entity provides management services to a professional corporation nominally owned by a physician who, in practice, has little day-to-day operational involvement. The physician’s ownership satisfies the letter of state law. The MSO’s management agreement captures substantially all of the economic benefits.
In Art Center Holdings, Inc. v. WCE CA Art, LLC, the arrangement at issue included a continuity agreement that permitted the MSO to replace the physician shareholder with a physician of the MSO’s choosing if the physician failed to meet specified conditions. The trial court concluded that this provision effectively gave the MSO de facto control over the professional entity, essentially rendering the physician-owner a figurehead rather than a genuine decision-maker.
The decision does not invalidate Friendly PC structures categorically. Courts continue to recognize that non-physician management of administrative functions is permissible. However, the opinion makes clear that judges will look past the four corners of the governance documents to evaluate whether the physician retains substantive authority over the professional practice, including clinical operations, hiring, credentialing, and patient care protocols.
For PE-backed platforms operating across multiple states with dozens of Friendly PC entities, this decision should trigger a comprehensive governance review. Questions include, but are not limited to:
- Do agreements grant the MSO unilateral power to replace the physician-owner, or do they require a bona fide triggering event (death, disability, loss of licensure) with physician involvement in successor selection?
- Does the physician-owner exercise genuine authority over clinical hiring, termination, and oversight?
- Are board minutes, employment decisions, and clinical governance records consistent with physician control, or do they reflect MSO directives?
- Does the management services agreement carve out clinical decision-making with sufficient specificity, or does “administrative services” extend into territory that functionally constitutes the practice of medicine?
Organizations operating APC (Administrative Professional Corporation) or DPC (Direct Primary Care) structures face similar exposure. Where the economic relationship between the management entity and the professional corporation leaves the physician with negligible economic interest and no operational independence, the structural rationale for the arrangement weakens considerably.
Beware of EKRA: An AKS Safe Harbor Does Not Necessarily Protect the Arrangement
The Eliminating Kickbacks in Recovery Act (EKRA) was enacted in 2018 as part of the SUPPORT Act, targeted initially at substance abuse treatment referrals, but its reach includes laboratories, clinical treatment facilities, and recovery homes. EKRA prohibits the payment of remuneration to induce or reward referrals of any healthcare program business, i.e., unlike the Anti-Kickback Statute, EKRA applies to referrals covered by any payor.
The Ninth Circuit’s decision in United States v. Schena represents one of the first appellate-level interpretations of EKRA. The case involved a laboratory that allegedly paid third-party marketing intermediaries to generate allergy testing referrals. The court affirmed criminal convictions, emphasizing that payments to marketing intermediaries structured to induce patient referrals fall squarely within EKRA’s prohibitions.
There are several noteworthy takeaways:
- Percentage-based compensation is not per se unlawful, but when tied to referral volume or structured to incentivize referral generation, it remains highly problematic under EKRA.
- EKRA’s limited safe harbors do not necessarily mirror the AKS safe harbors that many organizations have historically relied upon. Arrangements that are defensible under the AKS may nonetheless violate EKRA.
- Third-party marketing intermediaries, lead generators, independent sales organizations, and patient aggregation platforms all present EKRA exposure that merit separate review.
Physician Compensation: Still the Single Greatest Area of FCA Exposure
Two active cases underscore how relentlessly the government and qui tam relators continue to target physician compensation.
In United States ex rel. Murphy v. TriHealth, the relator alleged that a health system transferred more than $500 million in subsidies to affiliated physician groups, paid compensation exceeding productivity benchmarks, utilized sham management fees, and set compensation with reference to anticipated referral value. The district court denied dismissal of Murphy’s FCA claims, and the Sixth Circuit later denied permission to take an interlocutory appeal on the constitutional qui tam challenge.
Separately, the Department of Justice’s intervention in the FCA action against Erlanger Health System involves allegations of physician compensation influenced by referral metrics, excessive pay, and internal compliance warnings allegedly disregarded by leadership.
Taken together, these cases confirm that enforcement authorities will probe:
- Whether physician compensation exceeds fair market value, particularly at the higher percentiles of benchmark surveys;
- Whether productivity-based formulas, when layered with sign-on bonuses, retention payments, quality incentives, and administrative stipends, effectively reward referral activity;
- Whether medical directorships reflect bona fide services or serve as vehicles for supplemental payments linked to referral value;
- Whether internal communications (e.g., board materials, compensation committee minutes, emails between executives) reveal that leadership discussed physician compensation in terms of expected financial return from downstream referrals; and
- Whether compliance concerns raised internally were addressed or ignored.
Organizations should ensure that deal models, board presentations, and internal financial analyses are drafted with an awareness that these documents may be subject to discovery in a future FCA investigation.
Important Limits: Courts Continue to Police Weak FCA Theories
Not every recent decision has favored enforcement. In United States ex rel. Kyer v. Thomas Health System, the Fourth Circuit affirmed dismissal of FCA claims premised on Stark Law and Anti-Kickback theories. The court rejected allegations that attempted to infer fraud from productivity-based compensation, financial support of physician practices, and compensation at relatively high survey percentiles.
Emphasizing that common healthcare business practices, standing alone, do not establish fraud, the court used a metaphor to describe the attenuation between an allegation and a violation: “each allegation is smoke,” but “the complaint must identify the fire.” This represents a meaningful constraint on expansive pleading theories. A relator must identify specific false claims and connect them to an actual violation.
Action Items to Implement Immediately
To weather the current enforcement landscape, healthcare organizations should prioritize internal audits to verify proper legal structuring and operational compliance. Prudent steps include, but are not necessarily limited to the following:
Governance and Structural Review
- Audit all written agreements, including management services agreements and corporate governance provisions. Ensure that physician-owners retain genuine independence and that replacement provisions, if any, are narrowly tailored to legitimate triggering events.
- For MSO-managed platforms, confirm that clinical decision-making authority rests unambiguously with the physician entity.
- Document physician governance through board minutes, clinical committee records, and credentialing decisions that affirmatively demonstrate physician control.
Physician Compensation Review
- Obtain updated fair market value opinions for all physician compensation arrangements.
- Conduct a commercial reasonableness analysis that evaluates whether each arrangement makes business sense independent of referral volume.
- Review medical directorships, administrative stipends, and on-call arrangements for bona fide service requirements and time documentation.
EKRA-Specific Marketing Review
- Conduct a discrete EKRA analysis of all third-party marketing, lead generation, and patient acquisition arrangements (separate from the Anti-Kickback Statute review).
- Evaluate whether marketing compensation is structured on a per-referral or percentage basis that could be characterized as inducement.
- For digital health platforms and laboratories, assess relationships with independent sales organizations, affiliate networks, and patient aggregation services.
Internal Communications
- Train leadership and board members to avoid language in internal communications that characterizes physician compensation or operational decisions in terms of referral generation or expected downstream revenue.
- Audit existing board materials, compensation committee analyses, and deal memos for language that could be misconstrued as linking financial support to referral expectations.
- Ensure that compliance concerns raised internally are documented, addressed, and resolved.
Overall Operational Compliance Verification
- Confirm that the operational reality of each arrangement matches its legal documentation by conducting periodic “operational audits” that test whether written governance structures are reflected in day-to-day practice, including who makes hiring decisions, who sets clinical protocols, and who directs patient care.
The Enforcement Landscape Going Forward
The current enforcement environment is simultaneously aggressive and nuanced. Regulators and relators are pressing harder on the operational substance of healthcare arrangements beyond their formal legal structures. At the same time, federal appellate courts are maintaining meaningful limits on expansive FCA theories, requiring relators to plead fraud with the particularity that Rule 9(b) demands.
Organizations that can demonstrate genuine operational compliance should be well-positioned to weather the heightened enforcement environment. Those that cannot should act now, before a relator or an enforcement agency asks the question first.
How Frier Levitt Can Help
If you have questions about how these developments affect your organization, or if you would like assistance conducting a governance, compensation, or structural compliance review, please contact the attorneys in Frier Levitt’s Healthcare Regulatory and Transactional Practice Groups.
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