On September 19, 2002, the Illinois Supreme Court decided the case of Carter-Shields v. Alton Health Institute [No. 90767, September 19, 2002], a case involving the corporate practice of medicine doctrine and the enforceability of a non-competition clause in a physician’s employment agreement. The Court held that the employment agreement between Dr. Carter-Shields, a board-certified family practice physician, and Alton Health Institute (“AHI”) violated the corporate practice of medicine doctrine and was, therefore, void and unenforceable, including the non-compete provision. What was critical to the holding was the fact that AHI is a non-licensed Illinois not-for-profit corporation.

The corporate practice of medicine doctrine prohibits corporations from providing professional medical services. Because the actions of an employed physician can be attributable to the employer corporation, a corporation employing physicians is engaging in the practice of medicine. This is prohibited due to concerns with non-professional (or corporate) control over professional medical judgment.

The Court has recognized a narrow exception to this prohibition when the corporation is a licensed hospital. Because a hospital is licensed by the state to provide health care to the public, it has an independent duty to provide quality medical care through its staff of licensed physicians. [Berlin v. Sarah Bush Lincoln Health Center, 168 Ill.App.3d 447 (1996)]. The Hospital Licensing Act has been amended to allow “hospital affiliates” as well as a licensed hospital to employ licensed physicians. A hospital affiliate is an entity that “directly or indirectly controls, is controlled by, or is under common control of a hospital.” [210 ILCS§85/10.8(a)(3)].

The Court in Carter-Shields declined to extend the exception beyond that already recognized. Therefore, Dr. Carter-Shields’ agreement with AHI was declared void and unenforceable. Because the entire agreement between Dr. Carter-Shields and AHI was held to be void and unenforceable, the Court did not address the issue of the validity of restrictive covenants in physician agreements and vacated the portion of the Appellate Court decision addressing this issue.

Client Recommended Action

As a result of this holding, we would advise our Illinois clients that are not licensed hospitals or affiliates of hospitals to examine their relationships with physicians to confirm that they are not improperly employing physicians or engaging in the corporate practice of medicine. Any physician who is performing licensed services on behalf of an Illinois corporation should be an independent contractor and have an agreement appropriately reflecting an independent contractor relationship in compliance with IRS standards.

If you would like assistance with this, please contact the firm.

AHI is owned by two entities: St. Anthony’s Health System, a tax-exempt not-for-profit corporation wholly owned by the Sisters of St. Francis of the Martyr St. George and Alton Health Care Partnership, composed primarily of physician groups but with at least one non-physician member. St. Anthony’s is not licensed as a hospital and its president does not have a medical license.