The Washington State Legislature has reintroduced legislation that, if passed, will substantially impact the state’s healthcare transaction landscape, placing new restrictions on the state’s corporate practice of medicine (CPOM) rules starting Jan. 1, 2027. If Second Substitute Senate Bill 5387 (2SSB 5387) becomes law, healthcare practices operating under private equity ownership, corporate structures or management services organization (MSO) arrangements will need to reassess their compliance strategies.
Ownership and Governance Requirements for Healthcare Practices
2SSB 5387 imposes strict requirements on professional service corporations organized for the purpose of establishing healthcare practices. Healthcare providers licensed in Washington must: (a) hold the majority of each class of voting shares; (b) constitute a majority of the board of directors; and (c) hold all officer positions, except for secretary and treasurer.
Further, licensed healthcare provider shareholders must demonstrate “meaningful ownership” of the practice, which requires being substantially engaged in delivering care or managing the practice. This standard appears to go beyond nominal stock ownership and instead requires active participation in operations. This obligation is likely designed to foreclose passive or purely financial ownership by clinicians while non-clinicians (e.g., an MSO or sponsor) exercise practical control. The bill also requires licensed shareholders who own, lead, work for or help manage a medical practice cannot at the same time own, work for or help manage the MSO that has a contract with that practice, precluding a rollover equity ownership model in MSO-PC transactions.
Targeted Restrictions on MSO Operations
The legislation also directly targets MSO models. Shareholders, directors and officers of a healthcare practice are expressly prohibited from: (a) as noted above, participating in both the healthcare practice and a contracted MSO as an owner, director, officer, employee or independent contractor; (b) receiving substantial compensation or remuneration from an MSO in return for ownership in, or management of, the healthcare practice; and (c) transferring or relinquishing control over the sale or encumbrance of shares or assets, or the issuance of stock and payment of dividends. These provisions appear designed to prevent models in which licensed providers serve as only nominal owners of a healthcare practice.
Enforcement and Penalties
In addition, 2SSB 5387 includes robust enforcement penalties to ensure compliance. Violations of the law could constitute unprofessional conduct for healthcare providers, subjecting them to disciplinary action against their licenses. For unlicensed practice violations, the secretary of health may impose civil fines of up to $1,000 per day and criminal penalties may apply. The first violation is a gross misdemeanor and subsequent violations escalate to Class C felonies.
For practices and investors in Washington, McGuireWoods is available to advise on potential restructuring of ownership and management models. We continue to track and update changes to corporate practice restrictions and states implementing new reporting requirements. For further information on 2SSB 5387 and similar regulations, please contact the authors.