In the past few years, we have witnessed a resurgence in the number of corporations and organizations that offer on-site health services for their employees, employees’ family members, and even retirees. This trend is attributable to a number of factors. First and foremost is the employer’s need to control spiraling health care costs, but other incentives include reduced sick time and increased employee productivity; adding a relatively inexpensive benefit that helps enhance employee recruitment and retention; the promotion of healthy life styles; the opportunity to offer primary and preventive care in a convenient location; and projecting an image of corporate good citizenship.

While many employers still limit themselves to having a doctor simply provide pre-employment physical exams, others now operate full service primary care clinics at multiple sites where their employees and their family members can get such services as annual physical exams, screening for breast, prostate and skin cancer, flu shots, treatment for minor ailments or injuries, weight loss and smoking cessation programs, and so on. Some even offer the services of psychiatrists and psychologists for the mental health needs of employees and family members.

A 2011 article in the Los Angeles Times,1 citing a study by the Mercer consulting firm, estimated that 15 percent of companies with 500 employees or more had health centers in 2010, up from 11 percent in 2009. The New York Times and other media2 have reported variously on an international bank that engages nurses, a physician’s assistant and a part-time doctor at its corporate headquarters in Manhattan; a manufacturer with eight on-site health clinics providing pharmaceutical prescriptions, consultations on weight management, diabetes and hypertension, and screenings for osteoporosis, skin, breast and prostate cancer; and a discount retailer with a clinic comprising four examination rooms, a treatment room, a physical therapy center, a pharmacy, and seven full-time staff members including three nurses and an X-ray technician.

The logic is compelling: lower costs, convenience, fewer sick days, healthier employees, families and retirees, and goodwill. Unfortunately, nothing is simple when it comes to health care, particularly in New York. While the employer may have the best intentions in offering these services, it must comply with a variety of laws and regulations, or it could open itself up to serious potential liabilities.

Regulatory Issues

New York’s Education Law Section 6521 broadly defines the practice of medicine as:

…diagnosing, treating, operating, or prescribing for any human disease, pain, injury, deformity or physical condition.

Like most other states, New York has what is referred to as a prohibition on the corporate practice of medicine.3 This stricture, which traces its origins to the late 19th century, basically prohibits general business corporations from offering or providing medical services to the public. Medical services may only be provided by licensed professionals such as physicians, or by licensed entities such as hospitals, clinics, nursing homes, and the like. There are few exceptions to the prohibition. An employer may provide limited medical services and first-aid to its employees.4 For example, an employer may hire or contract with a physician to perform pre-employment physical exams. The logic behind this exception is that the employer is not diagnosing and treating a patient, but rather having a medical professional assess the health of a prospective employee to determine if the person is fit to perform his/her job functions, and does not pose a health threat to other employees. The employer is not holding itself out to the general public as a purveyor of health care services.

Similarly, a large mall or a sporting arena may have a physician or nurse available to handle minor emergencies that may arise. Other recognized exceptions include hiring school nurses to take care of students’ health needs, or offering flu shots to employees. A not-for-profit medical expense indemnity corporation is authorized by statute5 to employ and contract with licensed physicians and other medical professionals to provide services to its policy holders.

The provision of medical services is otherwise limited by law to licensed professionals such as physicians and nurse practitioners (practicing by themselves or in professional corporations or partnerships), or by entities such as hospitals and diagnostic and treatment centers licensed under Public Health Law Article 28. The Business Corporation Law Section 201(c) states that a corporation may not have as or among its purposes “the establishment or operation of a hospital or facility providing health related services…unless its certificate of incorporation shall so state” and such certificate has been approved by the New York State Public Health and Health Planning Council.

The operation of an unlicensed clinic is subject to fines, penalties and injunctive relief.6 Education Law Sec. 6512 makes the unauthorized practice of medicine or aiding or abetting same a Class E felony. Thus, depending upon the scope of services provided, an employer on-site clinic may have to be licensed by the New York State Department of Health.

Other Issues

Another obvious liability for an employer-run clinic is exposure to malpractice suits. The employer must carefully screen each doctor, nurse or other professional to determine whether they are currently licensed, have primary care experience, have medical malpractice suits pending, etc. and to assure that they and the care they provide are properly supervised by a competent medical director. Even highly competent professionals can make mistakes, and if an employee or family member is injured through a misdiagnosis or inappropriate treatment, it is virtually certain that the personal injury lawyer who is retained will name the employer as a defendant under the theory of respondeat superior.

An employer-run clinic would have to comply with state laws and regulations governing the confidentiality of the medical records it keeps on file. An employer-run clinic that submits bills or transmits medical information electronically would have to comply with the privacy rules promulgated pursuant to the federal Health Insurance Portability and Accountability Act,7 the so-called HIPAA rules. These rules set minimum standards for the confidentiality and protection of personal health information, and supersede state laws or regulations if state protections are less than what HIPAA requires.

A company-run clinic must be able to keep its medical records confidential from the employer, and the employer is prohibited by the Americans with Disabilities Act (ADA)8 from using such information in making decisions regarding hiring, promotion or termination. Another law that an employer with on-site health services should be aware of is the Genetic Information Nondiscrimination Act of 2008 (GINA).9 This law strictly limits disclosure of a person’s genetic information, including family medical history. It also prohibits discrimination based on genetic information in any aspect of employment, including hiring, promotions, terminations, salary, fringe benefits, and so on.

Next, a company-run clinic can raise employee benefit issues. If an employer goes beyond providing basic services such as pre-employment physicals and first aid for on-site injuries and illnesses, the higher level services will likely be considered an employee welfare benefit plan under the Employee Retirement Income and Security Act of 1974 (ERISA).10 Accordingly, if an employer provides more comprehensive health care services to its employees, it would be subject to many of the same benefit, reporting and disclosure requirements that are applicable to the employer’s health insurance program for its employees.

Tax

There are also tax issues to be dealt with in connection with the operation of an on-site health center. Generally speaking, the cost of operating such a center is a deductible business expense for the employer, and the services provided are not a taxable benefit for the employees. However, if the on-site health service is only available to senior management and/or highly compensated employees, this can result in a taxable benefit to those employees.11 In addition, if an employer on-site health service provides non-medical services (e.g., cosmetic or grooming), these are generally taxable to the employee.

Conclusion

This inventory of legal issues is by no means complete. Moreover, our purpose in raising these legal issues is not to discourage employers from offering these services. Indeed, employer on-site health centers can offer many benefits and advantages to employers and employees alike. However, the employer must be aware of all of the potential legal issues that arise from the operation of these centers, and structure the arrangement accordingly.

In New York, the easiest way to provide these services would seem to be by outsourcing them. For example, an employer can construct a properly equipped clinic space, and then enter into a landlord-tenant relationship with a physician professional corporation or partnership which would then provide the services to employees. Alternatively, the employer could outsource the operation of the center to a licensed hospital or diagnostic and treatment center, thus obviating the need for the employer itself to be licensed.

Employer on-site health services are proliferating, and can provide cost-effective preventive and primary care to workers. Government should find ways to encourage their development while also responsibly regulating them.

Francis J. Serbaroli is a shareholder in Greenberg Traurig. He is the author of “The Corporate Practice of Medicine Prohibition in the Modern Era of Health Care,” published by Bloomberg BNA.

Endnotes:

1. Helfand, “More Employers Are Offering On-Site Medical Clinics,” Los Angeles Times, July 3, 2011.

2. See, e.g., Freudenheim, “Company Clinics Cut Health Costs,” New York Times, Jan. 14, 2007.

3. See discussion in State v. Abortion Information Agency, 323 N.Y.S.2d 597 (Sup. Ct. New York Co. 1971). See also, Serbaroli, “Corporate Practice of Medicine: A Clean and Present Danger,” New York Law Journal, Sept. 23, 1993.

4. Schorr v. Bernarr MacFadden Foundation, 5 A.D.2d 151 (1st Dept. 1958), app. den. 4 NY2d 677 (1958).

5. New York Education Law Sec. 6527(1).

6. See, e.g., New York Public Health Law Sec. 2801-a(13); Education Law Sec. 6514.

7. Health Insurance Portability and Accountability Act of 1996, Public Law 104-191; the privacy rules are found at 45 CFR Parts 160 and 164.

8. Public Law 101-336.

9. Public Law 110-233. See, Serbaroli, “The Genetic Information Non-Discrimination Act of 2009,” New York Law Journal, Nov. 29, 2009.

10. Public Law 93-406.

11. See, e.g., IRC Section 105(h).