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California’s SB-642 Targets Hospitals and Management Services Organizations

On May 3, 2021, the California Senate Health Committee approved SB-642 “Health care: facilities: medical privileges.” The bill is currently pending in the California Senate. AB-705, which is substantially similar to SB-642, is also pending in the California Assembly.  If passed, the law will curtail hospital governing bodies’ ability to make decisions about the medical services provided at the facility without medical staff approval, impose new limitations on arrangements between management services organizations and professional corporations, and add additional factors to the Attorney General’s review and approval of nonprofit health care facility transactions.

The author of the bills appears to be responding to the existence of Ethical and Religious Directives (ERDs) that have been put into place by hospitals owned and operated by some religious institutions that (among other things) prohibit abortion, in-vitro fertilization, medical aid-in-dying, and the “direct sterilization of either men or women, unless their direct effect is the cure or alleviation of a present and serious pathology and a simpler treatment is not available.”

While the primary goal seems to be ensuring access to treatment and procedures prohibited by ERDs, the bill analysis further notes that “CEOs can impose policies that prohibit physicians from delivering evidence-based medical services to patients, even when their health facilities are equipped and staffed to deliver these services…To maximize profits, companies also often cut unprofitable medical procedures, set billing quotas, require internal referrals for medical services, and pressure providers to perform unnecessary but lucrative procedure.”

SB-642 takes aim at hospital control over the medical staff by prohibiting hospitals from requiring a physician or surgeon, as a condition of obtaining or maintaining clinical privileges, “to agree to comply with criteria, rules, regulations, or other policies or procedures that are not knowingly and explicitly ratified, issued, or promulgated by the medical staff, that directly or indirectly prohibit, limit, or restrict the ability of the physician or surgeon to provide a particular medical treatment or service that falls within the scope of their privileges, or from requiring a physician or surgeon to obtain permission from a non-physician or non-surgeon to perform a particular medical treatment or service for which consent has been obtained from the patient or the patient’s representative” unless an exception applies. Additionally, health facility corporate bylaws, policies, rules, contracts, or other institutional requirements that conflict with the above prohibition may not be applied to directly or indirectly affect a physician’s clinical privileges or rights, or privileges of membership on the medical staff, except as required by federal or state law.  Finally, SB-642 adds that the Attorney General must consider these additional factors before consenting to certain nonprofit health facility transactions:

  • Reducing or limiting the availability or accessibility of the full range of health care services to any group of individuals based on any characteristic listed or defined in the Unruh Civil Rights Act; and

  • Resulting in undue interference in patients’ access to medical care due to improper or unlawful motives, including, but not limited to, discrimination, profit at the cost of patient care, or unlawful or unfair competitive motives.

The above changes are already a significant departure from current law with respect to a hospital’s ability to make decisions about the services it offers, but SB-642 does not stop there! Management companies are also under fire and the management services organization (MSO) – “friendly” professional corporation (PC) model that has been utilized in California for decades could take a direct hit.  MSOs (unlike PCs) may be owned by non-licensed individuals and provide administrative support services to a medical practice pursuant to a written services agreement. Generally MSOs can provide everything that does not involve the “practice of medicine,” including space, supplies, equipment, non-professional staff, accounting, billing and collection, and payables management. In some cases, MSOs offer a significant amount of technology and technical assistance, for example in connection with telehealth services.  As currently used there are many potential benefits to this model, from allowing physicians to focus on patients, not paperwork, to various financial benefits including providing a vehicle for investors who are not physicians. 

The Medical Board of California (Board) has issued a substantial amount of guidance in connection with what they consider to be inappropriate control over the practice of medicine, and up until this point a carefully drafted arrangement between the MSO and the PC could protect the interests of MSO investors while ensuring that the PC maintained control over the practice of medicine. It is unclear whether arrangements that have been carefully drafted in accordance with the Board’s corporate practice guidance will be permissible if SB-642 is enacted.

SB-642 adds Section 2408.5 to the Business and Professions Code, as follows:

2408.5. (a) The shareholders, directors, and officers of a medical corporation as set forth in Section 2408 shall manage and have ultimate control over the assets and business operations of the medical corporation and shall not be replaced, removed, or otherwise controlled by any lay entity or individual, including, without limitation, through stock transfer restriction agreements or other contractual agreements and arrangements.

(b) For purposes of this section, "ultimate control" shall mean and be consistent with the definition provided by generally accepted accounting principles.

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Lara Compton