Dental Service Organizations: Beware of New Jersey’s Enhanced Restrictions

This article is a guest post written by Michael F.  Schaff, Esq. and Peter Greenbaum, Esq., Wilentz, Goldman & Spitzer, P.A.

Organizations that provide support to dental practices need to be keenly aware of whether the state they are providing support services has corporate practice of dentistry (“CPOD”) restrictions. CPOD restrictions are state specific and prior to providing dental support services,  dental service organizations (“DSO”) should be fully versed in any state specific limitations of their relationship with the dental practices they will be contracting with.  New Jersey law has a strict definition of “dentistry” which specifically provides that “[n]o corporation shall practice or continue to practice, offer or undertake to practice, or hold itself out as practicing dentistry.  No person shall practice or continue to practice dentistry as an officer, agent or employee of any corporation, or under the name of any corporation.” [1]  Further, “practicing dentistry” is broadly defined in New Jersey to include “a manager, proprietor, operator, or conductor of a place where dental operations are performed.” [2]   The terms manager, proprietor, operator or conductor are defined to include any person who “(1) [e]mploys operators or assistants; or (2) [p]laces in the possession of any operator, assistant, or other agent 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 office; or (3) [r]etains the ownership or control of dental material, equipment or office and makes the same available in any manner for the use by operators, assistants or other agents….”[3]

 The New Jersey Board of Dentistry regulations also prohibit fee-splitting.  “Dentists shall not participate in any arrangement or agreement, with any person other than an associate, whereby any remuneration received by that person in payment for the provision of space, professional services, facilities, equipment, personnel, marketing or management services used by the dentist is to be determined or calculated as a fixed percentage of, or otherwise dependent upon, the income or receipts derived from the practice of dentistry.”[4]

These definitions create broad prohibitions on the types of services that can be provided by DSOs, including prohibitions on leasing space to provide dental services, leasing dental equipment to a practice and providing dental supplies, as well as the structure of remuneration for the services provided.  Understanding where the line of what the DSO can provide and what the dental practices needs to control sometimes appears blurry, and should be carefully focused on by the DSO prior to providing dental support services in New Jersey.

In May 2017, New Jersey’s CPOD statutory framework was expanded with heightened scrutiny when the New Jersey Supreme Court issued its decision in Allstate Ins. Co. v. Northfield Med. Ctr., P.C.[5] (“Allstate”). Although Allstate did not involve a dental practice, its reach extends to all licensed professions.  In the wake of Allstate, DSOs which operate in New Jersey need to reexamine the services they provide and how their relationship is structured to insure compliance with the New Jersey CPOD laws.

The Allstate Court found that a New Jersey medical practice was controlled by a management company (which was owned by a chiropractor with a more limited license), notwithstanding the fact that one hundred percent of the ownership interests of the medical practice were held by a New Jersey licensed physician. The Court held the management company impinged on the professional control of the physician and was an illegal sham when it looked past the form of the relationship to the subjective intention of the parties and determined that the arrangement was formulated in such a way as to make it appear that a medical doctor was “in charge” of the medical practice, while in substance the owner of the management company was. According to the Court, there was an abundance of proof that the contracts and penalties imposed on the nominal doctor owner placed control of the medical practice in the hands of the owner of the management company. Of the many issues learned from Allstate was the Court’s crystallization of the concept that control of the clinical decisions and the practice must be made by licensed practitioners and that “sham ownership” is not permitted.

Allstate does not set out specific guidance on what “control” means or on which factors create a “sham”.  The Court did, however, consider various “factors” in its determination that the arrangement was a sham, resulting in the medical doctor only having bare legal ownership and the management company controlling the practice.

Factors that will be considered when determining if the structure of a DSO’s relationship with a dental practice is not in compliance with the New Jersey CPOD law include:

1. the dentist owner was not present or involved in the practice;
2. the use of terminator (ownership transfers or option) agreements enabling the DSO to terminate the dentist’s ownership in the practice;
3. the dentist’s compensation was calculated entirely by the management company;
4. only the management company could cancel the arrangement;
5. the owner of the practice had no signature authority over the bank account(s) of the practice;
6. the owner of the practice did not invest any money or make any capital contribution;
7. the management company held a security interest in the practice assets;
8. there were multiple interlocking agreements;
9. there was a lease breakage fee (not based on fair market value); and
10. there were signed undated resignations of the dentist owner.           

In the wake of  Allstate, we would recommend that DSOs in New Jersey refrain from the use of Ownership Transfer and Option Agreements (referred to in the Allstate case as “terminator agreements”).  The use of these types of agreements raises the issue of DSO control over the practice. The Administrative Service Agreement should be carefully reviewed so as not to cross the line of control of the practice or clinical activities. Specifically, the inclusion of the DSO with decision authority over the following could be viewed to cross the line:  

1. Control over dentist hiring and the form of dentist employment agreements;
2. Payments of excess damages to the DSO upon termination;
3. Powers of attorney from the dentist owner to the DSO;
4. Control over dental malpractice insurance;
5. Establishment of fees charged to patients;
6. The deposit of practice income into DSO accounts;
7. Daily bank account sweeps from the practice accounts into DSO accounts;
8. Non-compete provisions with the dentist which limit their practice of dentistry;
9. Management fee determined based on a percentage of collections or equal to collections over expenses;
10. Non-mutual termination rights;
11. Prohibition on dividends or distributions to dentist-owners;
12. Provision of all space, dental equipment, or dental supplies;
13. Control over professional standards;
14. Security interest in the practice’s assets; or
15. Excessive term of the relationship with no ability of the practice to terminate.

Simply stated, to comply with the New Jersey CPOD laws, the dental practice and its dentist-owner(s) must be in control of the practice and all clinical aspects of the practice. Although there is no specific guidance in New Jersey as to a what actions are required of a dentist-owner, the following are suggest actions dentist-owners should take when contracting with a DSO in connection with his/her dental practice:

1. Receive and review statements for the bank account(s);
2. Receive and review periodic reports regarding the practice’s operations;
3. Approve annual budgets;
4. Have full access to the practice’s bank accounts;
5. Have the authority to sign checks drawn on the practice’s bank account;
6. Have final say over the hiring, firing and compensation decisions concerning the practice’s employees;
7. Observe corporate formalities;
8. Inform all practice employees in writing that they may consult directly with the owner if they have any questions or concerns;
9. Approve clinical policies;
10. Approve the practice’s fee schedule;
11. Approve advertising;
12. Conduct quality of care assessments at least annually;
13. Approve and sign payor agreements; and
14. Approve electronic medical records system, if applicable, or other record retention policies.

The intent of New Jersey’s CPOD prohibitions is to ensure that licensed dentists render appropriate care to their patients, without the influence of non-licensees.  DSOs should ensure that their arrangements with dental practices are structured so that the DSO doesn’t cross the line and run afoul of such prohibitions.

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[1] N.J.S.A. 45:6-12.

[2] N.J.S.A. 45:6-19.

[3] N.J.S.A. 45:6-19.

[4] N.J.A.C. 13:30-8.13(e)

[5] Allstate Insurance Company v. Northfield Medical Center PC (076069) (Morris County & statewide). Docket no. A-27-15 (N.J. 2017); Supreme Court of New Jersey: filed May 4, 2017