Introduction: The Challenge of Scaling Up
Your digital health company has achieved a major milestone: after perfecting your care model in one state, you're ready for national expansion. You have a team of excellent, multi-licensed clinicians ready to see patients across the country. But as you begin the expansion process, you hit a wall of state-by-state legal requirements, most notably the Corporate Practice of Medicine (CPOM) doctrine.
This often means creating new, legally distinct clinical entities in each new state of operation. This immediately raises a critical question: How do you staff these new entities with your existing clinical team without creating a logistical and HR nightmare? And more importantly, how do you ensure the financial arrangements between these related companies are compliant?
The Problem: Staffing Across Siloed Legal Entities
Because of CPOM rules, a typical multi-state telehealth company might operate with a central management company supporting multiple, state-specific Professional Corporations (PCs). A clinician licensed in both Florida and California might be a W-2 employee of "Florida PC," but the revenue generated from their services to California patients must legally flow to "California PC."
This creates an operational puzzle. How does "California PC" compensate "Florida PC" for the clinician's time? Making the clinician an employee of every PC is often administratively unworkable. A more elegant solution is needed.
The Solution: The Provider Lease Agreement
A Provider Lease Agreement is a common and effective structure designed to solve this exact problem. The mechanics are straightforward:
- One entity, the "Leasing PC," acts as the central employer for the clinical staff. It handles payroll, benefits, HR, and all other employment functions.
- This Leasing PC then "leases" its clinical professionals to other affiliated entities, the "Recipient PCs," as needed.
- The Recipient PC pays the Leasing PC a fee for the use of its professional staff, allowing the Recipient PC to generate revenue and cover its expenses compliantly.
This model provides immense operational flexibility and centralizes the human resources function, allowing clinicians to be deployed across multiple state lines seamlessly.
The Valuation Imperative: Beyond a Simple Pass-Through
While a provider lease agreement is an internal arrangement, it is not exempt from regulatory scrutiny. The fee paid by the Recipient PC to the Leasing PC must represent Fair Market Value (FMV).
A common mistake is to simply treat this as a pass-through, where the Recipient PC reimburses the Leasing PC for the exact salary cost of the employee for the hours they worked. This approach is not compliant. In a true, arm's-length transaction, a professional staffing or leasing company would never provide its employees at cost. It would charge a rate that covers not only the employee's direct salary but also:
- The cost of employee benefits and payroll taxes.
- An allocation for corporate overhead and administrative support.
- A reasonable profit margin.
The arrangement between affiliated PCs must replicate this arm's-length standard. Failure to do so could be viewed by regulators as an improper shifting of profits between entities, potentially creating tax liabilities or other compliance issues.
Conclusion: Building a Foundation for Growth
As digital health companies scale, operational tools like provider lease agreements become essential for efficient and compliant growth. While convenient, these internal arrangements must be structured with the same rigor as any third-party transaction. A disciplined analysis is the critical step to ensure that your staffing solution is not only efficient but also fully compliant with Fair Market Value requirements.
If your organization is scaling across state lines and needs to structure intercompany agreements, our experts at Cabra Consulting can help. Contact us today to ensure your arrangements are built on a solid and defensible Fair Market Value foundation.