Hello, this is attorney Kim Kwang-sik from Cheongchul Law Firm.

In this article, we will organize the principle of prohibition on profit distribution in medical corporations and cases that violate it, particularly focusing on the legal issues of indirect profit transfer through MSO (Management Services Organization) based on case law.

[Question]

What are the grounds for the prohibition of profit distribution in medical corporations and illegal MSO circumvention cases?

[Answer]

1.     Legal nature of medical corporations and prohibition on profit distribution

According to Article 33, Paragraph 2, Item 4 of the "Medical Law," "Medical professionals must report or obtain permission based on the classification of the following items to open a medical institution. (omitted) 4. If a corporation intends to open, it must obtain the permission of the competent authority as prescribed by the Ministry of Health and Welfare. In this case, the relevant corporation must be a non-profit corporation." Therefore, medical corporations are established with the permission of the competent authority in the form of a non-profit corporation.

In other words, medical corporations must be established as non-profit entities and cannot distribute profits for profit-making purposes. This is a legal measure to maintain the public and non-profit nature of healthcare, and the purpose of establishing a medical corporation is 'to improve public health.' In this regard, the court has clarified this principle by stating, "The defendant, as a non-profit corporation established with the permission of the competent authority in accordance with Article 33, Paragraph 2, Item 4 of the Medical Act, cannot distribute profits generated from medical business to executives or members associated with the defendant, hence there is no claim for profit distribution rights." (Jeonju District Court 2018 Gahap 3310 ruling)

Accordingly, executives or members of a medical corporation cannot claim profit distribution against the medical corporation, and their creditors are also not recognized for seizure or collection based on this. This principle of prohibition on profit distribution means that the profits of medical corporations must necessarily be reinvested for public purposes such as hospital operation and expansion of medical facilities.

2.     Legal issues of indirect profit transfer through MSO

Recently, there have been attempts to transfer the profits of hospitals to private companies through contracts with MSOs of some medical corporations, but there have been cases judged to be illegal acts under Article 33 of the Medical Law, necessitating caution. We will examine the specifics of related case law and the court's judgments.

n   Incheon District Court's ruling 2024 Na 12819

In this case, the plaintiff was a hospital operating a medical corporation, and the defendant was a private corporation acting as an MSO. Both parties entered into an MSO contract whereby the defendant would be responsible for overall management support work of the hospital in exchange for a certain percentage of the hospital's profits being paid to the defendant.

The issue lay within the substantive content of the MSO contract. The defendant MSO performed roles beyond simple management support, including actual management of the hospital's personnel, finances, marketing, as well as substantial management of medical personnel and interference in treatment methods. For instance, they played a leading role in major operational matters of the hospital, including recruitment and placement of hospital staff, preparation of treatment manuals, and establishment of profit management criteria.

The court found that this structure violated Article 33, Paragraph 8 of the Medical Law (prohibition of non-medical personnel from opening and operating medical institutions). In other words, the structure where a non-medical person (the defendant) substantively operates the hospital and receives benefits is a violation of mandatory laws, and the relevant MSO contract was deemed invalid.

n   Changwon District Court Jinju Branch’s ruling 2023 Go Dan 1295

Defendant A, a dentist, opened several dental clinics under different names and established multiple companies under the pretext of financial support for each clinic. These companies were substantively involved in the management of the hospitals, while the nominal hospital directors were in employment positions receiving only fixed salaries.

The court pointed out that defendant A had indeed established and operated multiple medical institutions and ruled that this violated the principle that 'medical professionals can only open one medical institution' as per Article 33, Paragraph 8 of the Medical Law. Accordingly, a prison sentence and probation were imposed.

n   Incheon District Court ruling 2023 Ga Dan 215759

The plaintiff, an acupuncturist, entered into a franchise contract with a company acting as an MSO to operate the hospital, wherein the defendant MSO led the hospital’s major operational matters and intervened in treatment standards, staff personnel, profit distribution, etc.

The court ruled that this structure violated Article 33, Paragraph 2 of the Medical Law, rendering the contract itself invalid. In particular, the fact that the MSO received a certain percentage of the sales and that the plaintiff did not substantially participate in personnel and administration within the hospital formed the decisive basis for the judgment of illegality.

3.     Conclusion

As confirmed through the above reviewed cases, the court focuses on the substantive operational structure rather than the formal contractual content when determining the legality of MSO contracts. Even if a contract simply states 'management support,' if the MSO becomes the substantive operator of the medical institution and is receiving profit distribution in that structure, it could be judged as a violation of the Medical Law.

Therefore, when entering into MSO contracts, the following matters need to be thoroughly considered:

• MSOs should not be involved directly or indirectly in patient treatment.

• Decisions regarding the hospital's personnel, treatment manuals, and the operation of medical personnel should be led by medical professionals.

• The contract should limit the scope to simple administrative and accounting, marketing, facility management, etc., and the remuneration for this should also be at a reasonable level.

• Distributing a certain percentage of profits to the MSO is legally risky, and contracts focused on fixed service remuneration are preferable.

The court's consistent position is that if an MSO contract is designed to effectively replace hospital operations or transfer hospital profits indirectly, it is deemed invalid due to a violation of the Medical Law and may lead to civil and criminal liability. Therefore, it is necessary to pay attention to these aspects when establishing the relationship between medical corporations and MSOs.

Cheongchul Law Firm provides professional legal consulting based on rich experience in the design of medical corporation structures, MSO contract advice, response to violations of medical laws, etc. Please feel free to request a consultation whenever needed.