Grateful to be quoted in today’s Boston Globe article examining the legal and regulatory landscape surrounding private equity ownership of medical practices.
The piece discusses the long-standing “friendly physician” model and how recent litigation and legislation are testing its limits.
https://www.bostonglobe.com/2025/07/10/opinion/private-equity-hospitals-steward-health-care/
The loophole that could allow another private equity debacle in Mass.
health care
After the devastating implosion of Steward hospitals, state lawmakers tightened controls on the business of medicine. Yet they failed to address a major flaw.
By Neil Mehta Updated July 10, 2025, 3:00 a.m.
ANDREW HARRER/BLOOMBERG
Neil Mehta is a research assistant at the Center for Advancing Health Policy Through Research at Brown University.
In 1936, a Massachusetts optometrist named Raymond McMurdo sued a rival optometry firm in Worcester.
The rival firm’s owner, Jon Getter, wasn’t an optometrist. But he hired one to examine patients and write eyeglass prescriptions. Other staff members then made the glasses.
By state law, only registered professionals could practice optometry.
McMurdo used this rule to argue that Getter was illegitimately practicing optometry by hiring one to work on his behalf. A Massachusetts judge agreed and, in a landmark decision in 1937, ruled in his favor. The ruling held that a lay corporation of businessmen couldn’t hire licensed professionals to practice for their company.
This was one of the first state decisions establishing a doctrine against the “corporate practice of medicine,” or CPOM. The idea is that an unlicensed corporation, like a private equity firm made up of investors, not physicians, can’t employ doctors, lest it compromise the sanctity of medical practice. Although the Massachusetts judge and others made these decisions long before modern private equity existed, they foresaw that financial interests could pressure doctors to put their patients second. One Illinois judge wrote that corporations, unlike medical providers, lack “a sense of loyalty to clients or patients.”
Similar rulings swept through states in the 1930s. More than half of states eventually adopted CPOM bans through court decisions or statutes.
Over the years, however, this principle was weakened by lax enforcement and exceptions granted by states. That’s a major reason that private equity investors have spent $1 trillion on health care acquisitions in the past decade. Watchdogs warn that these firms prioritize profits over patients, citing takeovers that have raised costs and sometimes compromised urgent procedures.
Now, however, the McMurdo lawsuit and other cases from the 1930s are inspiring a renewed legal movement to take on private equity ownership of health care. Oregon, drawing on this legal tradition, passed unprecedented restrictions on private equity takeovers in medicine this June.
The judges behind CPOM undoubtedly meant to protect medicine from the kinds of financial interests that fueled Steward Health Care’s collapse in 2023, which led to the closure of two hospitals in Dorchester and Ayer. Steward had made risky deals that won its private equity backer $800 million but led to improper care and deaths.
In response, Massachusetts adopted a reform in January. The new law requires investors to report their involvement in health care and severely restricts financial tactics like those behind Steward’s fall, such as selling hospital land to investment trusts.
But it left open a big loophole. The Massachusetts law not only still permits private equity firms to own hospitals, but it also leaves intact their other, more widespread strategy of taking over independent physician practices.
Whittled away
The spirit of CPOM was always clear: Medicine cannot owe its first allegiance to financial interests. But its implementation was spotted with concessions.
For example, back when CPOM cases were first decided, hospitals were mostly charities with democratic governance and didn’t directly employ physicians — a far cry from institutions like Steward. So, many courts offered hospitals CPOM exemptions.
Then in the 1980s, policymakers decided to welcome privatization in health care to control rising costs. As a result, they allowed even more CPOM exemptions, and enforcement weakened.
Today, with large corporations dominating every corner of US health care, it’s hard to imagine that such restrictions ever existed. The insurance conglomerate UnitedHealth is affiliated with 10 percent of all US doctors. TeamHealth, a private equity-backed outsourcing firm, has more than 19,000 affiliated clinicians.
As CPOM gradually weakened, companies have taken over medical practices with simple workarounds. An important one is the “friendly physician” loophole, which is an open secret in the industry.
Here’s how it works: An investor firm technically can’t buy a doctors’ office, so it instead creates a shell company to handle the office’s billing and management, appearing as an outside contractor. Then, the investor installs a “friendly” doctor to run the medical practice, one who carries out the firm’s goals and can be replaced at will. On paper, the doctor is in charge, but the financial firm has taken over.
Starting in the 2000s, this loophole “went into hyperdrive,” as corporations piled money into health care, says David Millstein, a lawyer who’s represented doctors against private equity-backed companies.
Millstein is part of the legal movement reviving CPOM to challenge private equity’s presence in medicine. He was lead counsel in a 2021 lawsuit by the American Academy of Emergency Medicine Physician Group against Envision, a private equity-backed physician group.
The emergency doctors’ lawyers challenged Envision’s takeover of an emergency department under California’s CPOM bans. They argued that Envision’s “friendly physician” wasn’t the true owner of its practices.
The case ended last year, when Envision decided to withdraw from California altogether. The company denies the allegations in the lawsuit and says it had already decided to leave the state for other reasons.
Now lawmakers in states including North Carolina and Vermont have introduced bills to revitalize their CPOM bans. Unlike Massachusetts, which focused its reform bill on making business practices more transparent, these states propose a halt to investor-friendly loopholes and private equity takeovers of medical practices.
In June, Oregon’s bipartisan bill to close this loophole became the first to pass. The law restricts shell company contractors from affecting a practice’s medical and business decisions, and it bans doctors from working for both a shell company and an affiliated medical practice.
“We’re not reinventing the wheel here,” said Republican state representative Cyrus Javadi in a press release when the Oregon House passed the bill. “We’re defending a principle that once made Oregon a leader in protecting patients.”
Oregon’s bill still has cutouts. It permits “friendly” doctors to each own 10 percent or less of a practice. And though CPOM has been used to sue companies like Envision for taking over hospital emergency departments, it’s unclear whether the doctrine as it was created in the 20th century could have anticipated for-profit behemoths like Steward. Oregon decided to continue exempting hospitals entirely.
But Oregon managed what other states couldn’t for decades — to channel the attitudes of courts from the 1930s, now that some of their worst fears have been realized.
In Massachusetts, any legislation resembling Oregon’s bill would have to overcome pushback. Signs of opposition emerged last year, when Massachusetts lawmakers began negotiating details of the health regulation bill that would end up passing in January.
Originally, Massachusetts’ bill could have closed the friendly physician loophole. One early version from the Senate included a section prohibiting shell companies or their friendly doctors from exercising control over any clinical decisions. That would choke off private equity’s main channel to influence medical practices.
But by the time the final bill reached the governor’s desk, the entire section had been struck. Steward was gone from the state’s health care system, but private equity was there to stay.