SANTÉ HEALTH SYSTEM: Depiction of Business of Medicine in the Shades of Grey.

Open Letter to Mr. Scott Wells, CEO of the Santé Health System Inc. and the registered agent of record for Santé Health Foundation Inc., Fresno CA.

WRITTEN on Thursday, October 8, 2015

Sante Health System

Depiction of Business of Medicine in the Shades of Grey.

Mr. Wells, you may not be aware but present conversation started a with a medical office visit by a pregnant patient who also happened to be a member of Community Care Health Plan (CCHP). This “out-of-network” encounter forced me to spend my entire weekend to conduct a subsequent research into the operation of the administrators of CCHP. [Trust me when I say that] the reasonable basis of my request to get copies of documents [from the Internal Revenue Service] traces its roots in a document authored by, none other than, you. It was titled “Health Care Reform: A Work in Progress” and was presented by you to Santé Health Foundation (in your official capacity as CEO of Santé Health System Inc.) on or about February 27, 2015, during a scheduled winter symposium.

In my humble opinion, your portrayal of 1206(l) medical foundation is very different from my years of understanding. It is my understanding that a medical foundation is defined by reference to the requirements necessary for exemption from licensure by the Department of Public Health. In particular, Section 1206(l) of the Health & Safety Code exempts from the clinic licensure laws:

A clinic operated by a nonprofit corporation exempt from federal income taxation under paragraph (3) of subsection (c) of Section 501 of the Internal Revenue Code of 1954, as amended, or a statutory successor thereof, that conducts medical research and health education and provides health care to its patients through a group of 40 or more physicians and surgeons, who are independent contractors representing not less than10 board-certified specialties, and not less than two-thirds of whom practice on a full-time basis at the clinic. In short, a medical foundation is a clinic operated by a nonprofit corporation that:

· is exempt from taxation in accordance with Section 501(c)(3) of the Internal Revenue Code;

· conducts medical research and health education; and

· provides health care to its patients through a group of:

o 40 or more physicians and surgeons who are independent contractors,

o representing not less than 10 board-certified specialties, and

o at least two-thirds of whom practice full-time at the clinic.

[Emphasis added.]

I reviewed your 2015 Winter Symposium presentation (in-depth) in light of the Santé Health Foundation’s publically available IRS 990 forms for the years 2012, 2013 and 2014. I must admit that information on those forms does not make any sense to me. I found that under Section 501(c) (3) tax-exempt, nonprofit acute care hospital cannot operate a medical foundation as a separate product line or division of the hospital entity. Nevertheless, a few California hospitals and health systems like Santé have taken a diametrically different approach and ventured in the so called “restricted territory”. Some have gone even farther into the “forbidden domain” and take the position that a hospital-based outpatient clinic that otherwise meets the requirements of Health & Safety Code §1206(l) can qualify as a medical foundation. This activity is inconsistent with the letter and spirit of Section 1206(l) and, further, would render Health & Safety Code §1206(d) meaningless and/or useless.

Section 1206(l) was intended to exempt from the clinic licensure laws large, multispecialty physician medical group that organizes as a tax-exempt entity in order to raise funds for clinical care, medical research, and health education programs. The law defines a "clinic" as an organized outpatient facility which provides direct medical, surgical, dental, optometric, or podiatric advice, services, or treatment to patients who remain less than 24 hours, and which may also provide diagnostic or therapeutic services to patients in the home as an incident to care provided at the clinic facility. (See Health & Safety Code §1200).

Mr. Wells, first, an acute care hospital is not a "clinic" and, therefore, does not need any statutory exemption from the clinic licensure laws. Second, an acute care hospital can operate an outpatient clinic without having to comply with the clinic licensure laws. Specifically, Health & Safety Code §1206(d) provides an exemption for any clinic operated by an acute care hospital under its health care facility license. To extend the benefit of Section 1206(l) to an acute care hospital would render nugatory the existing exemption for outpatient hospital clinics, a result that the California Legislature would not have intended and which a California court would not support under principles of statutory construction.

The California Legislature intended to create a very limited exemption from clinic licensure laws for the physicians who practice medicine through a nonprofit entity in order to raise funds for medical research and health education activities. The Legislature did not intend to provide an esoteric pathway for tax-exempt hospitals to attempt to organize and control a large group of physicians in the outpatient setting and, in doing so, circumvent the corporate practice of medicine prohibition. In your presentation, specifically your summary work plan (as outlined in slide # 7), your descriptions of Hospital-based versus Physician-based Medical Foundation (Slides 14, 15, 16,17,18,24 & 25) and foundation flow of funds (slide # 14) you essentially tend to ignore three well recognized concerns about the incongruity of a profit motive in such models, division of physician loyalty between employer and patient, and lay control over individual physicians.

By its plain meaning, and given the purpose underlying the exemption from clinic licensure (i.e., to benefit a multispecialty group of physicians), the statute contemplates that a medical foundation would contract with a single medical group that, in turn, would make available the requisite number of primary care and specialist physicians to furnish professional services to clinic patients. This interpretation is consistent with the type of integration and coordination necessary for the physicians to conduct medical research and health education through the medical foundation. Moreover, this interpretation is also consistent with the principles underlying the corporate practice of medicine prohibition. Unquestionably, the governing board of the nonprofit corporation has less ability to influence the professional judgment of physicians who affiliate with the medical foundation and its patients through an integrated medical group.

In California, hospitals may not employ physicians to provide professional services. Although this prohibition is not explicitly stated in statute, a 1971 California Attorney General’s Opinion, written in response to a request from the Medical Board of California, clearly stated that hospitals could not practice medicine and therefore could not employ physicians, even for emergency rooms. Locum tenens agencies, which arrange temporary placements for physicians, may contract with physicians but may not employ physicians or determine the physicians’ pay or hours of work. Some revenue-sharing agreements between physicians and hospitals are permissible. For example, gross income sharing is generally considered acceptable where the hospital’s portion of fees is proportional to the expenses it incurs in furnishing facilities for the physician. Net-revenue sharing agreements, however, are generally not permissible, as they are seen as more prone to fraud and abuse.

According to the Medical Board of California, each of the following activities is defined as practicing medicine and is therefore restricted to licensed physicians:

1. Decisions concerning diagnostic tests for a particular condition.

2. Determining whether to refer to or consult with another physician/specialist.

3. Assuming responsibility for the overall care of the patient, including available treatment options.

4. Determining how many patients a physician must see or how many hours a physician must work in a given period.

5. In addition, only licensed physicians may make business or management decisions and engage in activities that result in control over a physician's practice of medicine.

Examples of these restricted activities include, but are not limited to:

1. Ownership and control over patient medical records and their contents.

2. Making clinical competency or proficiency determinations for selecting, hiring, and firing physicians, allied health staff, and medical assistants.

3. Setting the parameters under which physicians contract with third-party payers.

4. Decisions regarding coding and billing procedures.

5. Selecting medical equipment, EMR and medical supplies.

Above types of decisions and activities may not be delegated to an unlicensed person, including management service organizations. Although a physician may consult with unlicensed persons in making such business or management decisions, the physician must retain the ultimate responsibility for those decisions.

Thus, the following examples of medical practice ownership and operating structures are prohibited in California:

1. Non-physicians operating business advertising, offering, and/or providing patient evaluation, diagnosis, care, and/or treatment. Only licensed physicians may offer or provide these services.

2. Physician(s) operating a medical practice as a limited liability company, a limited liability partnership, or a general corporation.

3. Management Service Organizations (MSOs) arranging for, advertising, or providing medical services, even where physicians own and operate the business (MSOs may only provide administrative staff and services for a physician’s medical office).

4. A physician acting as “medical director” when the physician does not own the practice. An example is a business offering medical spa treatments that include medical procedures such as Botox injections, laser hair removal, and medical microdermabrasion, that “officially” contracts with or hires a physician as its “medical director.”

I must state (and it is my understanding) that California does allow several exceptions to the corporate practice of medicine bar through professional medical corporations and allowances for employment of physicians by specific entities (mainly medical schools and non-profit teaching hospitals), health maintenance organizations (under 1973 Federal Health Maintenance Organization Act), Narcotic Treatment Programs and Non-profit Research Clinics, Pilot Program for County Hospitals in Underserved Areas. Additionally, Medi-Cal managed mental health plans may contract with hospitals for per diem reimbursement for psychiatric inpatient services, including a mental health professional’s daily visit fee.

Mr. Wells, I have reviewed your slide # 19 where you have provided a partial list of the foundation board members namely,

1. Mateo F. De Soto, M.D – Santé Community Physicians

2. Grant Nakamura, M.D. – Community Medical Providers

3. Karl Van Gundy, M.D. – Central California Faculty Medical Group

4. Tim Joslin, CEO – Community Medical Centers

5. Flo Dunn, Chairperson – Community Medical Centers

6. Kevin Follansbee – Former CMC Board Chair & former SHS CFO

7. Pat Wymore – No affiliation reported.

I fundamentally believe that the non-profit medical foundation entity should be governed by individuals who are independent and should not be governed by the identical board or management officials that govern the sponsoring organization(s) i.e., hospital and/or health system, or a very friendly PC or it’s tightly affiliated downstream IPA or a partially owned MSO. It is well established that governing board members are fiduciaries and must exercise independent judgment when addressing the financial and clinical issues relating or pertaining to the medical foundation. The judgment of an individual serving on the governing board of the nonprofit corporation that operates the medical foundation could be impermissibly compromised if that individual also serves on the governing board of (or in an executive leadership position with) the sponsoring hospital or its affiliated health system. Undeniably, membership should be determined by reference to the state law, rules applicable to the governance of nonprofit corporations and, in particular, to the fiduciary duties that such governing board members owe to the organization.

This activity – the engagement of a so-called "friendly" PC or "Professional Corporation” (in Santé’s case Community Medical Foundation Group Inc.) – raises serious questions under the corporate practice of medicine prohibition. The legislative history is unmistakably clear that Section 1206(l) is intended to benefit a multispecialty group of physicians who, for fund raising reasons, organize and operate their clinic through a tax-exempt, nonprofit corporation. Correspondingly, the public policy underlying Section 1206(l) would be frustrated if a sponsoring hospital or health system could effectively co-opt the professional judgment of the physicians who render services to clinic patients, which is precisely the risk that presents when the medical group is controlled by a physician whose decision making is not independent due to the sponsoring hospital or health system.

California Legislature enacted Section 1206(l) to benefit the large multi-specialty medical group that sought to raise funds for medical research and related activities through charitable donation and through the issue of tax-exempt bonds. That noted, federal tax laws limit the term of a service contract between a nonprofit corporation and a vendor, where the nonprofit corporation issues tax-exempt bonds to finance its operations. (See Rev. Proc. 93-19). Specifically, medical foundations enter into professional service agreements ("PSA"). The PSA constitutes a service contract to which the limitations on term would apply if the nonprofit corporation issues tax-exempt bonds to finance the operations of the medical foundation. As such, each physician on Santé Health Foundation’s board must be mindful that factors separate and apart from their individual written agreement with the medical group could significantly affect the term of his or her affiliation with the medical foundation.

In summary, it is my assessment that Santé Health Foundation’s "success" depends upon the following:

  • Use of non-medical agendas to drive medical policies and practice;
  • Collapsing of the rights of individuals for purported greater collectivist goals;
  • Supersession of the care of the individual by the care of the collective;
  • Creation of ill relations between professional ambitions and the absence of moral inhibitions;
  • Reliance upon righteous ideologies about reform and societal benefits coupled with brutal cost-cutting policies;
  • Disparagement of the "weaker" (aka “costly”) groups within society;
  • Linkage of economic imperatives and professional self-interest;
  • Direction of medical professionals by parameters set by health care and financial administrators;
  • Establishment internal processes for control with little regard for the physical and psychological cost of their effects;
  • Selection of professionals who are ideological converts and "good" practitioners of “Santé’s” goals;
  • Enticement of physicians as agents of an organization, such that organizational goals are supplied with medical validation;
  • Facilitation of unethical professional practice by financial rewards and bonuses, as well as job security and advancement;
  • Generation of moral void by use of propaganda;
  • Degradation of moral expressions of compassion and sympathy for persons who have been designated costly or needy;
  • Induction of guilt into those who are made to feel a drain on resources or a threat to the collectivist goals.

The list could go on, and of course, each of these would be passionately contested by the Santé Health “System”. Why? – Well the answer is simple. The control of patients and doctors practically depends upon unethical practices. Manipulation and exploitation for any reason, even beneficence, is unethical and deeply destructive to social good. Mr. Wells, if I am incorrect, Santé Health should have had no reservations about supporting transparent and publicly accountable activities including, but not limited to, expeditiously providing copies of exemption application and related documents, at its principal place of business, as mandated under the Federal Law governing public disclosures/inspection requirements for the non-profits.

I would like to close by saying, that I am a simply a physician with an overarching duty to care for my patients, not bring harm to them. For me, the ethical issues were born in the trenches. I have come to realize the pain health “systems” cause. Although I continue to have several opportunities, I have resolved not to spend my time behind a desk structuring (and restructuring) Health Plans’ investigational language exclusion and then use it every day to deny almost anything that is expensive (particularly out-of-network requests). And if I am writing to you today, it is because I know how managed care kills, literally. I contend that managed care, as it has become today, can exist only through serious ethical transgressions. The reluctance of Santé Health Foundation in supporting publicly accountable activities has raised countless serious questions in my mind - questions not only about Santé’s organization but questions also about its operation most of which I find beyond the scope discussion in this brief seven page letter.


Kanwar Partap S. Gill MD

1. Office of The Attorney General of the State of California. Opinion No. 71-20; July 27, 1971.

2. California Medical Association Legal Counsel. Corporate Practice of Medicine Bar (Document #0280). California Medical Association; January 2007.

3. Medical Board of California. Corporate Practice of Medicine; 2007.

4. Medical Practice Act, Statutes of 1980, Chapter 1313 Section 2. Business and Professions Code, Chapter 5, Article 18, Section 2052(b) (Deering 2007).

5. Moscone-Knox Professional Corporation Act, Statutes of 1968, Chapter 1375. California Corporations Code, Section 13401(b) (Deering 2007).

6. Moscone-Knox Professional Corporation Act, Statutes of 1968, Chapter 1375. California Corporations Code, Section 13406 (Deering 2007).

7. Moscone-Knox Professional Corporation Act, Statutes of 1968, Chapter 1375. California Corporations Code, Section 13401.5(a) (Deering 2007).

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10. California Codes, Business and Professions Code, Chapter 5, Article 18, Section 2401(b) (Deering 2007).

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12. California Codes, Health and Safety Code Section 1206(p) (Deering 2007).

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14. SB 376, Statutes of 2003, Chapter 411. California Codes, Business and Professions Code, Sections 2401(a) and 2401.1 (Deering 2007).

15. Medical Practice Act, Statutes of 1980, Chapter 1313 Section 2. California Codes, Business and Professions Code, Chapter 5, Article 18, Section 2400 (Deering 2007).

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20. The Medical Staff Self Governance Act (SB 1325, Chapter 699 Statutes of 2004) Business and Professions Code, Section 2282.5.

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