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No Private Right to Recoup Funds Based on Corporate Practice of Medicine Violation

Written by: Rachel Irving Pitts

The United States District Court for the Western District of Washington ruled recently that the state’s corporate practice of medicine doctrine does not provide a private right of action, either express or implied, and dismissed claims brought by State Farm Mutual Automobile Insurance Company and State Farm Fire and Casualty Company. State Farm sued two entities and their owners to recoup over $800,000 in payments it had made on behalf of patients receiving physical and massage therapy services from the entities. State Farm claimed that it was entitled to recoup these payments because the entities’ owners were not professionals licensed to perform all of the services the entities were providing, in violation of Washington’s corporate practice of medicine prohibition. The defendants sought dismissal, asserting that even if State Farm’s allegations were true and they were violating Washington’s corporate practice of medicine doctrine, Washington law does not provide insurance companies with a private right of action to collect a refund on that basis. The court agreed. 

Although Washington does not have an explicit statute prohibiting corporate entities from employing medical professionals, Washington courts have interpreted the state’s statutory scheme to prohibit corporate entities from employing medical professionals absent some statutory authorization. One explicit statutory authorization is Washington’s Professional Services Corporation Act (PSCA), which permits professional service corporations to employ medical professionals and provide professional services. These entities must be owned by licensed professionals, and professional services must always be rendered by duly licensed individuals. Many states that recognize the corporate practice of medicine doctrine similarly authorize professional services corporations. 

The parties agreed that Washington’s PSCA does not provide an express right of action to private parties, and the court did not find an implied right for State Farm to assert its claims. In determining that there was no implied private right of action, the court used a three-prong test, asking if:

  1. the plaintiff falls within the class for whose benefit the statute was enacted;
  2. the legislative intent behind the statute supports recognizing a private cause of action as a remedy for violations of it; and
  3. implying a private cause of action as a remedy is consistent with the legislation's underlying purpose. 

The court found that State Farm did not fall within the class intended to benefit from the corporate practice of medicine, stating:

[The PSCA] was designed primarily to protect patients (and the doctor-patient relationship) from the “evils” of lay participation in the practice of medicine. [ . . . ] No Washington case suggests that an insurance company is “within the class of persons” that the prohibition was intended to protect.

The court also found that the remedy State Farm sought was not consistent with legislative intent, and that the PSCA expressly provides that it must be enforced by the state. Prior cases in Washington highlight that individuals and entities face certain obstacles when structuring business relationships in states with an active corporate practice of medicine doctrine. Washington courts have voided contracts based on noncompliance with the PSCA - but those decisions were made in the context of disputes between business partners who had entered an arrangement the court would not uphold. The prior cases did not involve an outside party seeking to avoid financial obligations to an improperly formed entity, and Washington courts have not extended such a remedy to a true third party. Ultimately, the court found that the law does not support the insurer's desired outcome, simply stating that:

Permitting an insurance company to seek a refund for fees already paid on behalf of a presumably satisfied patient does nothing to advance the purpose of the statute, and is not consistent with it.

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