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How DSOs get in Trouble in the US (Part 1)…

By July 5, 2017November 5th, 2019Dental Service Organizations

There’s no denying that Dental Service Organizations (DSOs) will continue to “affiliate” with dental practices in Canada much faster than ever before.  David Mayzel and I just returned from the definitive DSO conference in the US (New Orleans) a few weeks back and we want to share our knowledge on the topic with Canadian dentists.  We are neither for or against DSOs.  It’s up to dentists if they want to work for or sell their practices to DSOs.  We just want to make sure that all parties understand the legal framework that currently exists for dentists and DSOs so that we can avoid the mishaps and pitfalls that have plagued our US neighbours.

So with that said, I figured it would be a good idea to start talking about how DSOs have gotten into trouble in the US.  Let’s start with Colorado, shall we?   And let’s take a look at some court decisions that came out over a decade ago in Colorado.

Colorado (2007): Illegal

In Mason v. Orthodontic Centers of Colorado, Inc., 516 F. Supp. 2d 1205, 2007 US Dist. LEXIS 68121 (decided September 14, 2007), Dr. James H. Mason sought to have the Colorado District Court declare a BSA invalid and unenforceable under Colorado law because it was contrary to public policy.   Pursuant to the BSA, a non-dentist management company – OCA, Inc. and its wholly owned subsidiaries (“OCA”) – provided various dental office management services (e.g. hiring and managing staff, leasing office space and equipment, providing bookkeeping, collections and other administrative services) in exchange for a certain percentage of the office’s monthly fees.  Dr. Mason argued that this constitutes illegal sharing of fees.  OCA responded by saying that the law only prohibited the sharing of referral fees, that the fees payable are for marketing services as permitted by law, and that any professional discipline imposed on Dr. Mason for improperly sharing fees should not void the BSA.

The Court rejected all three of OCA’s arguments.

First, interpreting fee sharing to only prohibiting the sharing of referral fees was not grounded in any authority, was at odds with the dictionary definition of “fee splitting”, and was nonsensical (if permitted, it could allow a dentist to enter into an agreement to share patient fees with their landlord, barber, etc. so long as it was not based on patient referrals – which was not the object of the statue).

Second, OCA’s claim that the fees payable were for marketing services (which was an exception to the fee-splitting prohibition) was rejected because OCA received monthly service fees for other categories of service not related to marketing.  As per the court: “The marketing services the Defendants provide are a relatively small component of the overall package for which they are compensated, particularly compared to such services as office rent and equipment leasing. Thus, even if some portion of the Plaintiffs’ fees are devoted to advertising, the bulk of the monthly service fee is impermissible fee sharing.”

Finally, the Court noted that, although the laws against fee-sharing affect Dr. Mason, it would be contrary to public policy to enforce an illegal contract.  First, disciplining a dentist for fee sharing was not an exclusive remedy (i.e. voiding a contract could be a further penalty).  The Court conducted a thorough analysis of when public policy could void private contracts.  After weighing all the factors (e.g. the parties’ justified expectations, any forfeiture that would result if enforcement were denied, any special public interest in the enforcement of a particular term, the strength of the public policy at issue, the likelihood that refusal to enforce will further that interest, the seriousness of the misconduct involved and its willfulness, and the directness of the connection between the misconduct and the agreement).  Based on these factors, the Court found that: OCI had some justifiable expectation that the BSA would be enforced, OCI could however seek an equitable claim for unjust enrichment if the BSA was voided, public policy dictates that non-dentists not interfere in professional decision-making (which could result in a significant penalty to the dentist involved), the BSA does allow fee-splitting and voiding the BSA would promote the public policy of prohibiting fee-splitting, and the legislature never intended agreements such as the BSA to be enforceable (logically, OCI cannot seek to enforce the BSA into the future, as doing so would force Dr. Mason to continuously violate state law.  As such, public policy would permit the BSA to be voided retrospectively).  Accordingly, upon full consideration of all the relevant factors, the Court finds that the public interest prohibiting fee  splitting outweighs any private interests OCI might have in enforcing the payment term of the Agreement. The public interest is a strong one, and the conduct contemplated by the Agreement directly contravenes the purposes that the public policy advances. Although voiding the contract works some degree of inequity upon OCI, they are not unreasonably prejudiced, as the law likely permits them to recover the reasonable value of the services they have provided to Dr. Mason. Thus, the Court finds that the portion of the agreement that permits fee splitting — namely, the formula for calculating the monthly service fee — is void as against public policy.

The Court then went on to discuss whether OCI was a “proprietor of a place where dental…services are performed”, and therefore illegally engaged in the practice of dentistry, contrary to Colorado law.  A “proprietor” is defined as someone who “places in possession of a dentist… such dental material or equipment as may be necessary for the management of a dental office on the basis of a lease or any other agreement for compensation for the use of such material, equipment or offices”.   A “proprietor” is also someone who “retains ownership or control of dental equipment or material or a dental office and makes the same available in any manner for use by dentists”.  Based on this prohibition and definitions of “proprietor”, the Court found that OCI was engaged in the practice of dentistry as “proprietors” of a dental office.  Among other things, the BSA required OCA to acquire equipment reasonably required for the operation of the practice and then lease the equipment back to the dentist.  The BSA also stated OCI owned the equipment at all times.  Finally, OCI leased or otherwise arranged for the offices and premises of Dr. Mason’s practice and subleased the offices to Dr. Mason. As such, OCI was considered “proprietors” of a dental practice”.  The Court was somewhat sympathetic to the poorly drafted definition of proprietor (which could include a landlord as someone who could be engaged in the practice of dentistry), but the Court suggested that any such drafting problems were better directed at the legislature, not the Court.

For these reasons, certain portions of the BSA were deemed void as against Colorado public policy (e.g. the fee splitting formula and the provisions that require OCI to lease all the furniture and equipment, and to obtain and sublease offices, to Dr. Mason and his professional corporation), leaving it to the parties to determine the appropriate course of conduct to follow as a result.

Colorado (2007): Illegal

In Theresa L. Shaver, D.D.S., et al. v. Orthodontic Centers of Colorado, Inc., et al., 2007 US Dist. Lexis 71615 (September 26, 2007), Dr. Shaver asked the Colorado District Court to declare a BSA illegal under Colorado law.  The Court noted that other Colorado courts have both issued orders in favour of dentists like Dr. Shaver in almost identical circumstances: namely, Mason v. Orthodontic Centers of Colorado, Inc. and Weinbach v. Orthodontic Centers of Colorado Inc.  The Court found that the opinions and orders issued in those cases are “thorough and sound, and that the reasoning in those Orders applies equally to the BSA at issue in this case. Accordingly, I adopt the reasoning in those Orders and find that portions of the BSA at issue (those portions which can be interpreted to require fee sharing or which provide for maintenance of a dental proprietorship by the defendants) are illegal as against Colorado public policy.”

Colorado (2007): Illegal

In Jonathan R. Weinbach, D.D.S., M.S. et al. v. Orthodontic Centers of Colorado, Inc., et al., 2007 US Dist. LEXIS 70614 (September 24, 2007).  Dr. Jonathan Weinbach asked the Colorado District Court to declare a business management agreement (“BMA”) invalid and unenforceable under Colorado law.  Pursuant to the BMA, a non-dentist management corporation, Orthodontic Centers of Colorado (“OCC”) was obligated to provide business and administrative support services reasonably required for the day-to-day operations of Dr. Weinbach’s practice.  Those services included: (1) marketing support, (2) employment and training of all office staff, (3) providing and maintaining all necessary equipment and supplies (including dental equipment and dental supplies), (4) billing, collection, bookkeeping and other financial services, (5) processing and payment of accounts receivable and trade receivables, (6) preparation of statistical analyses and financial statements and (7) consulting advice.   Under the BMA, Dr. Weinbach and his professional corporation appointed OCC as their “sole business manager” for the provision of the foregoing services.  Furtheremore, OCC was appointed as Dr. Weinbach’s “true and lawful attorney-in-fact” to collect all payments made by Dr. Weinbach’s patients and all payments made by insurance companies.  Such funds were deposited into an “Orthodontic Entity Account”, which OCC had signing authority over the and the exclusive right to make disbursements from.  In exchange for its services, OCC was paid a monthly management fee that included, but was not limited to, fifty percent (50%) of Dr. Weinbach’s Net Operating Margin.

The Colorado District Court found that the BMA was illegal under Colorado law because it violated the fee-sharing prohibition of the Colorado Dental Practice Law.   Under that Law, the State Board of Dental Examiners may discipline a dentist, among other things, for “sharing any professional fees” with anyone other than a dentist, except that a dentist may pay independent advertising agents for marketing services [see: Colo. Rev. Stat. § 12-35-129(1)(v)]. The Court held that the BMA creates an arrangement by which, for at least 20 years, OCC would be entitled to receive approximately fifty percent (50%) of Dr. Weinbach’s profits.  In response, OCC argued that (1) the legislative history of that Law suggests it was intended to prohibit the sharing of referral fees and (2) OCN fit within the exception for entities providing marketing services to dentists.  To the Court, however, neither of those arguments was convincing.

As in Mason v. Orthodontic Centers of Colorado Inc., 516 F. Supp. 2d 1205, 2007 US Dist. LEXIS 68121., the Court in this case held that fees included “any professional fees” (not just referral fees), and that sharing fees of any kind is prohibited unless the dentist is sharing the fees with other dentists.  With respect to the exception for paying independent advertising agents for marketing services, the Court simply referred back to the BMA to point out that OCC was obliged to do much more than just that (see above).  As per the Court: “A small portion of the services specified in the BMA may fall within this exception, but the vast bulk of the services specified in the BMA do not fall within this exception.”  As such, the BMA violated the fee-sharing prohibition of the Law.

Interestingly, OCC tried to argue that the Law does not declare agreements to share fees void or illegal, but merely unethical for the dentist.  Here, the Court concluded that the public interest in preventing conflicts of interest between dentists and unlicensed entities such as OCC substantially outweighs OCC’s private interests in enforcing the payment terms of the BMA.  To support this view, the Court adopting the ruling in James H. Mason, D.D.S., et al. v. Orthodontic Centers of Colorado, Inc., et al. 

516 F. Supp. 2d 1205, 2007 US Dist. LEXIS 68121, which involved similar facts and which had been decided a few days earlier.  In that case, the Colorado District Court found that: (1) the rationale behind fee splitting includes the need for dentists to avoid financial conflicts of interest, the need for informed consent by the patient, and the necessity of avoiding non-professional interference in professional decision making, (2) voiding the BMA would further the public policy of prohibiting fee splitting, (3) the fact that the statute only proposed discipline against the dentist is not persuasive evidence that the legislature intended such agreements to be enforceable against the dentist and (4) any unfairness that results to OCC from voiding the BMA is largely mitigated by the available remedy of a claim for unjust enrichment (which could exist beyond the BMA).

Worth mentioning is that the Court found that the BSA was illegal because OCC was engaged in the illegal practice of dentistry, contrary to the Colorado Dental Practice Law.  That Law only allows dentists to practice dentistry.  It goes on to say that a “person shall be deemed to be practicing dentistry if such person… [i]s a proprietor of a place where dental operation, oral surgery, or dental diagnostic or therapeutic services are performed” [see: Colo. Rev. Stat. § 12-35-112(1).].  Here, a “proprietor” means someone who leases dental equipment to a dentist or someone who retains ownership or control of dental equipment and makes the same available in any manner for use by dentists.  The Court reviewed the aforementioned terms of the BMA and concluded that OCC was a “proprietor” within the meaning of the Law.  The BMA provided that OCC would lease equipment back to Dr. Weinbach but would still retain ownership of all the equipment and supplies used in the dental practice while making same available for use to Dr. Weinbach.   The Court concluded that OCC had practiced dentistry, contrary to the Law.

Based on the above, the Court found the provisions of the BMA that require fee sharing and those portions that provided for the maintenance of a dental proprietorship by OCC were voided for being contrary to the public policy of the state of Colorado.   As such, the BMA was declared to be illegal.

Colorado (2007): Illegal

In John Gentile, D.D.S., et al v. Orthodontic Centers of North Dakota, Inc. et al, 2007 US Dist. LEXIS 72322 (September 27, 2007), Dr. John Gentile asked the Colorado District Court to declare a BSA invalid and enforceable under Colorado law.  Pursuant to the BSA, a non-dentist management corporation, Orthodontic Centers of North Dakota Inc. (“OCN”) was obligated to provide business and administrative support services reasonably required for the day-to-day operations of Dr. Gentile’s practice.  Those services included (1) marketing support, (2) employment and training of all staff (except dentists), (3) billing, collection, bookkeeping and other financial services, (4) consulting advice, (5) legal services, and (6) payment of taxes.  The BSA also required OCN to sublease the office to Dr. Gentile’s professional corporation at the full lease price and acquire or otherwise arrange for all furniture and fixtures and equipment required by Dr. Gentile’s professional corporation.  In return for its services, OCN was to be paid a “service fee” consisting of: (1) being reimbursed all expenses incurred for running the office, (2) a flat fee of twenty two dollars and twenty two cents ($22.22) for each hour or operating during which patients are being treated, and (3) a performance fee equal to fifty percent (50%) of the practice’s gross revenues, less the cost of running the office, the flat fee per patient hour, Dr. Gentile’s base compensation and fifty percent (50%) of the cost of any new fixed assets. The BSA states that the parties acknowledge that the fees provided for in the BSA “in no way represent a division, splitting or other allocation of fees”.  The BSA accords Dr. Gentile’s professional corporation with complete control and sole responsibility for all professional aspects of the practice and provides that OCN is not authorized or qualified to practice dentistry under the applicable laws.  Finally, the BSA states that it is OCN’s intention to act and perform as an independent contractor of Dr. Gentile and his professional corporation, and the BSA did not intend to create a partnership or employment relationship between them.

The Colorado District Court found that the BSA was illegal under Colorado law because it violated various provisions of the Colorado Dental Practice Law.  That Law only allows dentists to practice dentistry.  And it goes on to say that a “person shall be deemed to be practicing dentistry if such person… [i]s a proprietor of a place where dental operation, oral surgery, or dental diagnostic or therapeutic services are performed” [see Colo. Rev. Stat. § 12-35-112(1).].  Here, a “proprietor” means someone who leases dental equipment to a dentist or someone who retains ownership or control of dental equipment and makes the same available in any manner for use by dentists.  The Court reviewed the aforementioned terms of the BSA and concluded that OCN was a “proprietor” within the meaning of the Law.  The Court noted that the law did not restrict landlords from renting space (so long as it’s not space outfitted as a dental office) or prohibit dentists from purchasing equipment themselves.  The Court concluded that OCN had practiced dentistry, contrary to the Dental Practice Law and irrespective of the fact that the BSA expressly and repeatedly provided that OCN will not practice dentistry.  “Call itself what it will, a space is a space”.  The Court further noted that the Dental Practice Law prohibits the unlicensed practice of dentistry by corporate entities.

Worth mentioning is that Dr. Gentile sought to void the BSA on the basis that it created a profit-sharing arrangement, contrary to the Dental Practice Law.  Under that Law, the State Board of Dental Examiners may discipline a dentist, among other things, for “sharing any professional fees” with anyone other than a dentist, except that a dentist may pay independent advertising agents for marketing services [See Colo. Rev. Stat. § 12-35-129(1)(v)]  In response, OCN argued that (1) the legislative history of that Law suggests it was intended to prohibit the sharing of referral fees and (2) OCN fit within the exception for entities providing marketing services to dentists.  To the Court, however, neither of those arguments was “even marginally available”.

The Court used Webster’s dictionary to define “share” as “to divide and distribute in portions” and “fee” as “compensation often in the form of affixed charge for a professional service”.  As such, the Colorado Legislative Assembly, in enacting the Law, sought to deter dentists from dividing their professional compensation with non-dentists.  The Court concluded that there was nothing in the statute to suggest that the sharing of fees ought to be limited only to referral fees; if the Colorado General Assembly had intended to bar only referral fees, it would have written the statute to reflect such intent (because it had done so with other regulated health professionals).  The historical changes of the Law also revealed how it went from specifically prohibiting dentists from making referral fees to broadly barring a dentist from sharing any professional fees with non-dentists.

With respect to the argument that OCN fit within the exception for entities providing marketing services to dentists, the Court simply referred back to the BSA to point out that OCN was obliged to do much more than just that (see above).  As per the Court: “While one small aspect of [OCN’s] obligations under the BSA might fit into that narrow exception, [OCN] cannot cram the myriad other aspects of the BSA into the exception like so many clowns into a Volkswagen Beetle.”  As such, the BSA violated the Law’s fee-sharing prohibition.

Interestingly, OCN tried to argue that the Law does not declare agreements to share fees void or illegal, but merely unethical for the dentist.  OCN further noted that it would be unfair to reward Dr. Gentile’s unethical conduct with the recision of the agreement.  The Court acknowledged that the Law deals with conduct which dentists (rather than their contractual counterparties) may be professional disciplined.  But it does not mean that a court must enforce a contract that requires conduct expressly barred by statute. And even if the BSA merely mandates unprofessional (as opposed to “squarely illegal”) conduct, the Court held that public policy warranted voiding the BSA: a contractual provision is void if the interest in enforcing it is clearly outweighed by a contrary public policy.  In this situation, the Court concluded that the public interest in “preventing conflicts of interest between dentists and unlicensed entities such as [OCN] heavily outweighs [OCN’s] expectations under the BSA.”  To support this view, the Court cited the ruling in James H. Mason, D.D.S., et al. v. Orthodontic Centers of Colorado, Inc., et al.

In the end, the Court would not save the BSA by severing the offending “fee sharing” provisions because doing so would, in effect, “eviscerate the core bargain” between the parties.