ALERT: The Corporate Transparency Act (CTA): What Physician Practices and Their Affiliates Need to Know for 2024

As a follow-up to our December 18 Client Alert, entitled “The Corporate Transparency Act (CTA): What Your Business Needs to Know for 2024,” the Dilworth Paxson Healthcare Practice Group would like to share some additional considerations for physician practices, as well as any entities that are affiliated with physician practices.  As we reported in our previous Client Alert, companies created in the United States by the filing of a document with a secretary of state or similar office under the law of a State or Indian Tribe (e.g., corporations and limited liability companies), will likely be “reporting companies” for purposes of the Beneficial Ownership Information Reporting Rule that implements Section 6403 of the CTA (the “Reporting Rule”) unless the company qualifies for an exemption.

This Client Alert will focus on exemptions that may be applicable to:

• large and small independent physician practices
• physician practices that are affiliated with health systems (whether wholly-owned, “captive”/”friendly”) or private equity/investor entities;
• physician entities that have been formed to hold interests in other healthcare entities (e.g., holding companies for interests in ambulatory surgery centers (“ASCs”));

How “big” is the physician practice?

More precisely, how many full-time employees does the physician practice have and what are its gross revenues?  The answer to this question may allow the physician practice to meet the catch-all Large Operating Company exemption, but, particularly as it relates to how the Reporting Rule defines full-time employee, this exemption can be a bit more challenging to meet than expected.

The Large Operating Company exemption is available for any business entity that meets all three of the following thresholds: (1) operates from a physical commercial street address in the U.S., (2) has 21 or more full-time U.S. employees, and (3) generates more than $5 million in annual U.S. gross receipts as reported on the business entity’s prior year’s federal tax filing.  With respect to employees, only full-time, W-2 employees of the entity itself qualify.  In addition, there are special rules that can result in physician owners not being counted toward the practice’s employee tally.  Furthermore, physician practices that rely on another entity to staff its operations may be unable to qualify for the exemption due to prohibitions on consolidating employee headcount across affiliated entities and possible attribution of such employees to the staffing entity.

Is the physician practice the subsidiary of an exempt entity?

The exempt entity being referred to here is an entity exempt from reporting under the Reporting Rule (as opposed to a tax-exempt entity for purposes of Section 501(c)(3) of the Internal Revenue Code – although 501(c)(3) organizations may also be exempt from reporting under the Reporting Rule).   Some of the most common types of exempt entity-physician practice subsidiary relationships that could qualify the physician practice for exemption from the reporting requirement are listed below.  At a minimum, the physician practice’s ownership interests must controlled or wholly owned, directly or indirectly, by the below-listed exempt entity:

• entities registered under the Securities Exchange Act (note that while entities in which private equity, venture capital, and hedge funds (collectively, “Private Funds”) invest may be registered, the Private Funds themselves are not subject to registration);
• tax-exempt entities (generally, 501(c)(3) organizations);
• large operating companies

Of particular importance when considering whether the physician practice is a subsidiary of an exempt entity is that the exemption only applies if the physician practice is wholly owned/controlled by the exempt entity.  Accordingly, if the exempt entity cannot own the physician practice’s ownership interests (e.g., due to corporate practice prohibitions) or does not own the physician practice’s ownership interests (due to a joint venture-type of relationship), the physician practice entity will not qualify for this particular subsidiary exemption.   

In addition, and with particular application to physician entities that are formed not as physician practices but as holding entities for ownership interests in other healthcare entities (such as ASCs, etc.) (“Physician Interest Holdco”) — this exemption does not apply to upstream entities, meaning that if Physician Interest Holdco does not qualify for another exemption (such as the Large Operating Company exemption), it would not qualify for exemption because of its investment in an exempt entity (assuming, for example, that the ASC entity in which Physician Interest Holdco invested qualified).  For these same reasons, exempt entities having affiliations with physician practices, such as 501(c)(3) health systems, will need to consider each affiliation to determine its unique ownership/control characteristics.   

What else should be considered?

As many commenters have noted, because reports that are filed in connection with the Reporting Rule will be available to state and federal agencies, including but not limited to State licensing agencies and the Centers for Medicare and Medicaid Services (“CMS”), physician practices and their affiliates should consider how reporting and disclosures might trigger regulatory issues if reports to these various authorities do not match, especially given differing definitions of ownership, control, and management.  This may be particularly challenging in the captive PC/friendly PC setting, where a non-owner entity (such as a health system or manager) may not have the ability to directly acquire/succeed to a physician practice’s ownership interests but may have the ability to identify an appropriately-licensed provider to acquire/succeed to a physician practice’s ownership interests.

We are poised to assist healthcare entities and their affiliates with reporting compliance, to determine if a statutory exemption is available, and to respond to other CTA-related questions. Please contact your Dilworth attorney or Karen Palestini, Chair of Dilworth Paxson LLP’s Healthcare Practice.